This is not the yr many in the dealmaking industry were hoping for for M&A, as deal flow stays moderate at best and investors seek liquidity.
But there could also be some hope for the tech industry’s current darling—AI—as significant deals (and some “non-deals”) have been struck and more high-profile startups are being named as targets of Big Tech’s warming, acquisition-oriented nature.
The numbers confirm the growing M&A interest and rumors. AI startup deal activity increased significantly in Q2. 65 AI startups were acquired during the quarter, in keeping with Crunchbase data — an increase of 55% in comparison with the second quarter of last yr and an increase of 15% in comparison with the first quarter, in which 55 transactions were concluded.
What’s more, greater than twenty agreements have already been concluded in the current quarter – in fact, not counting the “non-exclusive license agreement” Google announced with AI chatbot startup Character.ai. That deal involved buying out investors and bringing the co-founders back to Google. It wasn’t an acquisition (or so we were told), which is something we’re seeing more and more of in the tech world, and which could spell trouble for AI.
The pace of transactions is accelerating
While mergers and acquisitions are starting to point out signs of a revival for VC-backed startups, this yr hasn’t seen the avalanche of deals many expected after a slow 2023, as a consequence of a range of things from rates of interest to regulations.
AI startups seem like bucking the trend—just as they did when enterprise capital funding declined—with 145 M&A deals involving VC-backed startups so far this yr, a pace far ahead of last yr’s 189 deals.
The second quarter saw the largest AI deals of the yr, including: Nvidia Buying Run: AI for 700 million dollars, and also So artificial intelligence for $300 million in the span of one day. The quarter also included Frog purchase of AI management platform quack for $230 million.
Financial problems?
However, the reasons for the sharp increase in the variety of transactions could also be different and not necessarily useful for the generative AI sector.
There’s no denying that many deals are being made for strategic purposes as large corporations attempt to outdo their competitors in the AI race. It’s also arguable that some startups could also be struggling with money as the costs of building large language models and other AI platforms rise while revenues grow slowly.
While these aren’t technically M&A deals (mostly as a consequence of regulations), there’s clearly been an increase in the number of huge tech corporations acquiring each the technology and employees of some of the larger startups
It all began in March when Microsoft agreed to pay AI Variation about $650 million in a licensing deal and hired most of its staff while buying out investors.
In June Amazon concluded a similar agreement with AI supporter for about $330 million. ( Federal Trade Commission Is sounding (Microsoft and Amazon deals were analyzed to see if they were arranged to avoid government approval.)
Finally, just last month Google It also entered into a “non-exclusive” licensing agreement with an AI chatbot startup Character.ai for LLM technology, and also brought the company’s co-founders back to Google — where they worked before founding Character.ai.
The agreement with Google was concluded after reported This Elon Musk‘S xAI was considering purchasing Character.AI to assist develop Grok AI models.
While it was reported that Character’s employees were told that investors can be bought out at a valuation of $2.5 billion — up from the $1 billion the company was valued at after closing a $150 million Series A round led by Andreessen Horowitz — and all of the trades resulted in money being paid back to investors, but the returns were a far cry from the 10x or more returns most investors were hoping for when investing just a yr or two ago.
That’s likely because many seem to comprehend that the resources and infrastructure costs associated with being a leader in the AI industry are too great to generate significant revenue — especially in the face of competition from the deep pockets of massive tech corporations — and are now looking for a way out.
As more investors come to this conclusion, we are able to expect to see more M&A deals (even those specifically designed to not appear to be M&A deals) as larger tech corporations look so as to add technology and talent to their growing AI ambitions.