FOMO on Generative AI Breathes Life Into Listless Tech M&A

But the upswing could also help rekindle merger-and-acquisition business across the startup universe, analysts say. The number of tie-ups has remained low despite sharp drops in venture investing and public-market debuts—conditions that generally prompt more startups to seek the lifeblood of cash from potential buyers.

Among U.S. tech firms, there were 425 M&A deals with a total value of $31.9 billion in the first quarter of 2023, down from 563 deals valued at $173.3 billion over the same period last year, according to PricewaterhouseCoopers

A pair of high-price acquisitions of generative AI startups announced last week may signal the start of a turnaround, some investors and analysts say.

Databricks, a data storage and management company, last Monday said it agreed to buy MosaicML, a San Francisco-based language model platform developer, in a deal valued at $1.3 billion.

On the same day, Thomson Reuters, a Canadian media and publishing company, said it would acquire Casetext, a San Francisco startup developing an AI-powered legal assistant, in a $650 million all-cash deal.

In May, Snowflake, a cloud-data warehouse company, said it bought Neeva, a Mountain View, Calif., startup that uses generative AI to search data. Terms of the deal weren’t disclosed.

While access to AI capabilities and talent has long been a key driver of M&A activity by cloud and data giants, “the explosion of generative AI services, and the rapid pace at which the technology is advancing, has certainly upped the ante,” said Dan Ridsdale, global head of technology, media and telecoms at Edison Investment Research. A growing fear of being left behind—as companies snatch up generative AI startups—likely played a role in recent deals, among other factors, he said.

Most tech startup acquisitions in the year ahead will be of generative AI developers, Ridsdale said, with buyers paying steep prices for the most advanced tech and the best strategic fit. Higher valuations, however, may eventually put a damper on acquisitions, he added.

A shopping spree for generative AI ventures could eventually spill over to the broader startup ecosystem, with fresh capital rippling through the market, said Talia Goldberg, partner at Bessemer Venture Partners.

“More successes and exits inspire future founders to innovate and take the plunge into entrepreneurship, fueling a virtuous cycle of innovation, progress and growth,” Goldberg said.

In addition to acquirers buying generative AI startups outright, many companies are pumping billions of dollars into generative AI startups in venture funding, she said.

Of a total $22.7 billion raised by AI startups since the start of the year, $12.7 billion has gone to generative AI startups, according to market analytics firm PitchBook Data. Shoppers include tech-sector leaders like Microsoft and Salesforce.

“Given the current hype around generative AI, the expectation of its global impact and the seemingly endless applications for the technology, many investors simply cannot afford to not be involved in some capacity,” said PitchBook analyst Vincent Harrison.

Microsoft has already said it plans to make a multibillion-dollar investment over several years in ChatGPT maker OpenAI. On Thursday, the software giant joined Nvidia and a group of tech-sector veterans—including Bill Gates, Eric Schmidt and Reid Hoffman—in a $1.3 billion investment in Inflection AI, a generative AI startup.

Salesforce Ventures, the venture arm of the enterprise software giant, in June doubled the size of its fund dedicated to generative AI startups to $500 million—a move analysts say is squarely aimed at nurturing their future acquisition targets. Last week, Salesforce Ventures led a $100 million Series B funding round for Typeface, a San Francisco-based generative AI platform for enterprise content creation.

“They’re looking to get these tools in the hands of the customers as fast as possible to gain a competitive advantage,” said Andy Champagne, a senior vice president and chief technology officer at Akamai Technologies.

Erin Price-Wright, a partner at Index Ventures, said recent generative AI startup acquisitions “aren’t fire sales at companies that were struggling.” Many of the startups already have strong revenue growth—a key difference from past market slumps, she said, when similar expectations of tech-startup growth lifting companies beyond the sector didn’t pan out.

For companies that don’t make a move now, she said, “it’s going to be much harder and more expensive in the next few years.”