Artificial intelligence Business M&A Startups

AI Venture Funding May Be Hot, But M&A Remains Slow

Illustration of M&A block letters.

To say investors seem bullish on AI may be the understatement of the decade, as venture funding in the space topped $50 billion last year and is again going full bore with huge rounds for the likes of Figure and Lambda.

Public market investors have also been in on the act, as chip giant Nvidia has battled Apple recently for the title of the world’s second-most-valuable company, and earlier in the month chip startup Astera Labs — riding the AI surge — filed to raise up to $534 million in an IPO that would value the startup at up to $4.5 billion. The value is a nice uptick from the $3.2 billion the company was valued at during its last private raise in late 2022.

But M&A remains the most common exit path for venture-backed startups. Most AI startups are unlikely to take the same route as Astera to the public market, and would instead look to a merger or acquisition as the most likely exit path for investors to get the big returns they’re clearly counting on when dishing out cash at the current sky-high valuations.

That path, though, has been relatively slow for VC-backed AI startups, Crunchbase data shows

Last year — despite all the hoopla and headlines concerning AI — actually saw M&A dealmaking in the sector decline 31% from 2022, with only 190 deals consummated compared to 276.

Cool market for AI M&A

In fact, dealmaking hit its slowest pace since the first quarter of 2019 to end last year, with only 39 deals announced in Q4, per the data.

Artificial intelligence seemed poised to have a big M&A year last year after Databricks — the data storage and management startup last valued at $38 billion — acquired OpenAI competitor MosaicML for $1.3 billion last June.

That deal, however, proved to be the high-watermark dollar wise for any AI-related startup getting bought in 2023.

There were several other big AI M&A deals last year — including Thomson Reuters buying San Francisco-based Casetext, an AI legal research technology for litigators, for $650 million, and Travelers Insurance acquiring Boston-based Corvus Insurance, which uses AI to help brokers predict and prevent complex cyber risks, for $435 million. 

Still, dealmaking in AI seemed to stagnate as the year wore on.

So far this year, dealmaking seems to be picking up a little. While no big transactions have been announced — the largest has been Veradigm’s acquisition of Boston-based ScienceIO, which develops a biomedical language platform to transform medical text into data and insights, for $140 million — there have been 43 deals in the first quarter with still a few weeks left. That means it likely will be the most active quarter in at least a year.

Where’s the money?

While it is easy to be mesmerized by the huge valuations many AI startups are currently pulling off, it also is important to remember the startup marketplace for dealmaking is crucial — as it is the main way venture capitalists and other investors get liquidity from placing those big bets.

In recent months, even as well-known AI startups such as Aleph Alpha and Anthropic raised mega rounds, investors have spoken openly about the AI market and how it could be difficult to get a five-to-tenfold return at those current valuations.

That could explain the slow market, with startups holding to those high valuations, and potential suitors waiting for the market to cool. Buyers in any market are turned off by peak valuations, and that still seems to be what the market is experiencing.

Perhaps more worrisome to investors is the concern among some that the big winners in certain areas of AI infrastructure and applications likely will be well-established tech players like Google and Microsoft. That could leave startups — and their investors — scrambling for an exit in a market where there is no legitimate chance to compete. 

Most investors — especially those focused on generative AI — likely are not concentrating on an exit quite yet. The market is still young and likely many aspects around value, regulations and competition need to shake out before anyone can reasonably forecast how it will play out.

Nevertheless, the M&A market indicates what investors can reasonably expect as a return, and right now returns are slow.

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Illustration: Dom Guzman


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