Y Combinator CEO Garry Tan Says 'Do Nothing' on AI Distillation, Breaking With U.S. Agencies and AI Giants

Distillation is the process of using the outputs of a more capable AI model to train a smaller or less capable one, sometimes illicitly. It has been a major point of concern for frontier model developers, namely OpenAI and Anthropic. Anthropic has accused Chinese companies such as Moonshot AI, DeepSeek and MiniMax of the practice, while OpenAI believes DeepSeek's V3 and R1 model architectures were distilled from its own GPT-4 and GPT-4o models. On Tuesday, the U.S. National Security Agency, Cybersecurity and Infrastructure Security Agency and Federal Bureau of Investigation released an official cybersecurity advisory warning on the topic.

Tan rejected calls for action. 'I would do nothing' about distillation, he told CNBC. 'We could argue that there should be an American distillation regime.' But he indicated that regulators should focus less on curbing distillation and more on creating an equilibrium between open weight models and frontier models, as long as frontier models retain a price premium that allows their business model to remain feasible. 'This is actually the ideal case. You want open weight models to give people freedom and access,' he said. 'If I were a regulator, that's what I would go after.' Tan acknowledged that this is a hard balance to strike, calling it 'a tightrope.' Nevertheless, he said it is a balance worth pursuing and that it 'could result in the best possible outcome.'

Critics have pushed back on Anthropic and OpenAI's distillation complaints because much of the data used to train these AI models may be covered under copyright law, which Tan highlighted. That controversy is currently the subject of U.S. legal battles including The New York Times suing OpenAI and Microsoft in 2023 for unauthorized use of its articles in model training data, and a consortium of book authors settling a lawsuit with Anthropic in 2025 for a similar claim.

Tan also touted a more restrained approach to AI safety, after recent doomsday headlines tied to the resignation of Anthropic researcher Jacob Coxon led to record-high fears from the public over the existential risks of AI. 'We need to be focused on science fact, not science fiction,' he said. 'We need to be responding to what is happening right now. If there was a breach and a coordinated attempt by agents to take over our infrastructure, what do we do about it?'

Cybersecurity is a risk that Tan sees as imminent. There are other risks that are both near-term and existential. On Thursday, Anthropic reported that it blocked Claude access for five cases of scientists in unspecified foreign countries who were using the models to do research on dangerous pathogens. Anthropic feared that these researchers were covertly using Claude to create bioweapons.

Other risks, however, have a longer timeline. Tan believes that AI-related job loss and economic transformation will not have an immediate impact. Rather, he foresees that over time, people will transition toward automating rote tasks and spending more of their working hours on creative pursuits. 'It will take decades for this to actually percolate into society, and that's not a bad thing,' he said.

That longer timeline has not stopped Y Combinator from investing in AI right now. Of the 196 startups presenting at Demo Day, 149 were categorized as machine-learning and AI ventures.

Editor's Summary

Garry Tan, CEO of Y Combinator, told CNBC he would do nothing about AI model distillation, even as OpenAI, Anthropic and U.S. agencies warn about Chinese copying. He urged regulators to balance open-weight and frontier models and emphasized near-term cybersecurity and science-based safety over speculative risks. Y Combinator's Demo Day reflected continued AI investment, with 149 of 196 presenting startups classified as machine-learning or AI ventures.