Big Tech's AI Startup Acquisitions Reshape Venture Capital Landscape

AI Startup Deal-Making Gaining Momentum -- Is That Good?

This has not been the year many in the deal-making industry were hoping for when it came to M&A activity, as deal flow remains tepid at best and investors search for liquidity. However, tech's current darling -- AI -- may be offering hope with notable deals (as well as some "non-deals") being made and more big-name startups being bandied about as targets for the warming acquisitive nature of Big Tech. The numbers bear out the rising M&A interest and chatter. Deal activity involving AI startups kicked up pretty significantly in Q2. The quarter saw 65 AI-related startups bought -- per Crunchbase data -- a jump of 55% from Q2 last year and a 15% increase from Q1 which saw 55 deals. What's more, the current quarter has already seen more than two dozen deals consummated -- of course not even counting the "non-exclusive licensing agreement" Google announced with AI chatbot startup Character.ai. That agreement included buying out its investors and bringing its co-founders back to Google. It wasn't an acquisition (so we're told), something we are seeing more and more in the tech world and could portend difficult times ahead for AI. While M&A is starting to show more signs of life for VC-backed startups, this year has not seen the avalanche of deals many expected after a slow 2023 due to a variety of factors ranging from interest rates to regulations. AI-related startups seem to be bucking that trend -- just as they did the declining venture funding trend previously. This year has already seen 145 M&A deals involving VC-backed startups, a pace that is easily ahead of last year's which saw only 189 total deals. The second quarter saw the year's largest AI deals, including Nvidia buying Run:AI for $700 million, as well as Deci AI for $300 million within a day of each other. The quarter also included JFrog buying AI management platform Qwak for $230 million. However, the reasons for the surge in deal-making may be varied and not entirely positive for the generative AI sector specifically. There's no denying many deals are getting completed for strategic purposes as large companies strive to get ahead in the AI race. There's a solid case to be made that some startups could be running into a cash crunch as the expense to create large language models and other AI-related platforms mounts and revenue is slow to grow. While not technically M&A deals (mainly for regulatory reasons) there clearly has been an uptick in big tech swallowing up both the technology and employees of some good-sized startups Finally, just last month Google also came to a "non-exclusive" licensing agreement with AI chatbot startup Character.ai for its LLM technology, and also brought the company's co-founders back to Google -- where they were before starting Character.ai. The Google deal came about after it was reported that Elon Musk's xAI was considering buying Character.AI to help with its Grok AI models. While it was reported that Character's staff was told investors would be bought out at a $2.5 billion valuation -- an uptick from the $1 billion the company was valued at after closing a $150 million Series A led by Andreessen Horowitz -- and all the deals saw money distributed back to investors, it was far from the 10x-or-more return most probably were hoping for when they invested just a year or two ago. That's likely because many seem to be coming to the realization that the resources and infrastructure costs associated with being a leader in the AI space are too much to overcome to generate meaningful revenue -- especially competing against the bottomless pockets of big tech -- and are now looking for an exit. As more investors come to such realizations, expect more M&A deals (and those specifically structured to not look like M&A deals) to happen as larger tech players look to add tech and talent to their growing AI ambitions.

AI Firms' Big Tech Deals Leave VC Investors in the Cold

This year has seen three fledgling AI firms swallowed up by Big Tech companies. As the Financial Times (FT) notes in a report Wednesday (Aug. 14), it is a pattern that threatens to leave venture capitalists (VCs) on the outside looking in at the artificial intelligence (AI) boom. AI companies Adept, Character.AI and Inflection had, combined, raised upwards of $2 billion before their top executives and many of their workers were hired away by Amazon, Google and Microsoft, respectively. The FT report points out that the tech giants gained these startups expertise and talent, along with the licenses to their products, while VC firms are essentially back where they started. It's a situation, the report argues, that suggests trouble ahead for other startups trying to develop their own AI large language models. These deals also fuel a worry in the VC world that it can't compete with massive tech companies, which can much more easily afford to invest in multibillion-dollar AI systems, the FT adds. A separate report last week by The Wall Street Journal (WSJ) also explored this trend, with investors telling that newspaper that other, similar deals are in play as the generative AI bubble seems ready to peak, and startups are discovering they don't have the funds to develop AI large language models. "There were a lot of companies that raised on a big vision, but not tangible examples and actual detail," Shaun Johnson, a founding partner at AIX Ventures, told the WSJ. Meanwhile, recent research by PYMNTS Intelligence finds that -- in spite of big budgets and bold ambitions -- most large companies are struggling to employ AI in meaningful ways. The findings in "The Impact of GenAI on a COO's Priorities," the third edition of PYMNTS Intelligence's "2024 CAIO Project," present a sobering reality check for the AI revolution. Based on surveys of chief operating officers from companies with at least $1 billion in yearly revenue, the report shows a significant gap between the perceived potential of generative AI and the way it is actually being applied in the corporate world. "Seventy percent of COOs from firms surveyed -- all with at least $1 billion in revenue -- agree that GenAI is a critical part of strategic planning," the report stated. "Nonetheless, there is a gulf between aspiration and reality." For example, instead of using AI for high-level decision-making or innovative product development, many companies deploy the technology for more routine tasks, with 58% of COOs saying their businesses use GenAI for accessing information, while half of the executives say it powers their customer service chatbots.