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Interest in generative artificial intelligence is driving startup acquisitions in that space as big tech vendors rush to find a suddenly attractive market.
Interest in generative artificial intelligence is driving startup acquisitions in that space as big tech vendors rush to find a suddenly attractive market.
But the merger could help revive the mergers and acquisitions business in the startup universe, analysts say. Despite a sharp decline in venture capital and public market startups, the number of mergers remains low—conditions that generally prompt many startups to seek cash from life-buying buyers.
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But the merger could help revive the mergers and acquisitions business in the startup universe, analysts say. Despite a sharp decline in venture capital and public market startups, the number of mergers remains low—conditions that generally prompt many startups to seek cash from life-buying buyers.
Among US tech companies, there were 425 M&A deals worth $31.9 billion in the first quarter of 2023, down from 563 deals worth $173.3 billion in the same period last year, according to PricewaterhouseCoopers.
A pair of high-priced acquisitions of generative AI startups announced last week could signal the start of a turnaround, some investors and analysts say.
Databricks, a data storage and management company, said on Monday that it has agreed to buy MosaicML, a San Francisco-based language modeling platform developer, for $1.3 billion.
On the same day, Canadian media and publishing company Thomson Reuters said it would buy Casetext, a San Francisco startup developing an AI-powered legal assistant, in a $650 million all-cash deal.
In May, Snowflake said it bought a cloud data warehouse company, a Nevada, Mountain View, Calif.-based startup that uses generative AI to search data. Terms of the deal were not disclosed.
While access to AI skills and talent has long been a key driver of M&A activity in the cloud and big data, “the explosion of generative AI services and the rapid pace at which the technology is advancing has really upped the ante,” Dan said. Ridsdale, global head of technology, media and telecom at Edison Investment Research, said fear of being left behind — when companies snap up generative AI startups — may have played a role in recent deals, among other factors, he said.
The majority of tech startup acquisitions in the coming year will be generative AI developers, Ridsdale said, with buyers paying higher prices for more advanced technology and better strategic fit. Higher valuations, however, could eventually put pressure on purchases, he added.
Talia Goldberg, a partner at Bessemer Venture Partners, said venture capital for generative AI could eventually spill over into the broader startup ecosystem, with fresh capital pouring into the market.
“Additional successes and exits inspire future founders to innovate and dive into entrepreneurship, which can lead to great innovation, growth and development,” Goldberg said.
In addition to buying generative AI startups outright, many companies are raising billions of dollars in venture funds for early AI startups, she said.
Of the total $22.7 billion raised by AI startups since the start of the year, $12.7 billion has gone to AI startups, according to market analytics firm Pitchbook Data. Consumers include technology sector leaders such as Microsoft and Salesforce.
“Given the current buzz around generative AI, the expectation of global impact and the seemingly endless applications for the technology, many investors can’t afford not to get involved in some capacity,” said Pitchbook analyst Vincent Harrison.
Microsoft has said it plans to make a multi-billion-dollar investment in Chat GPT maker OpenAI over several years. On Thursday, the software giant joined forces with Nvidia and a group of tech sector veterans including Bill Gates, Eric Schmidt and Reid Hoffman in the $1.3 billion AI startup Inflectional.
Salesforce Ventures, the enterprise software company, doubled its funding to generative AI startups in June to $500 million — a move analysts say is aimed at nurturing their future goals. Last week, Salesforce Ventures led a $100 million Series B funding round for Tyface, a San Francisco-based AI platform for enterprise content creation.
“They’re looking to get these devices into customers’ hands as quickly as possible,” said Andy Champagne, senior vice president and chief technology officer at Akamai Technologies.
According to Erin Price-Wright, a partner at Index Ventures, recent acquisitions of generative AI startups “are not fire sales of struggling companies.” Most startups already have strong revenue growth — a key difference from past market downturns, she said. Beyond the sector, the same is expected of tech start-up growth companies.
For companies that aren’t moving now, “it’s going to be a lot harder and more expensive over the next few years,” she said.
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