AI startups are putting their cash into . . . AI startups.
What’s new: Young AI companies flush with venture capital are purchasing startups to expand the range of services they can offer, The Wall Street Journal reported.
Feeding frenzy: Venture-funded companies spent $8 billion on AI startups in 2021, up from $942 million in 2020 and $82 million in 2019, according to market analyst 451 Research. The number of acquisitions jumped from 48 to 72 in that period. The Journal focused on two chatbot deals: Gupshup’s purchase of Active.ai and Observe.AI’s acquisition of Scope.AI.
- Snapping up other companies may be a way for the acquirers to attract further investment at a time when venture funding is becoming scarce. Total investment in startups dropped by 19 percent between January 2022 and March 2022, according to CB Insights. Initial public offerings and fundraising by special-purpose acquisition companies tumbled 45 percent in the same period.
- AI startups make a ready source of engineering talent for companies looking to beef up their technical capabilities, said Jonathan Lehr, co-founder and general partner of Work-Bench, a venture investor. Startups are facing a worldwide shortage of AI engineers.
- The wave of acquisitions is also affecting startup finance departments. Early-stage companies are hiring investment bankers and corporate development specialists, according to Andrew Gazdecki, chief executive of MicroAcquire, which specializes in helping startups buy other startups.
Behind the news: All told, investors are spending more than ever on AI. Private investments in AI more than doubled to $93 billion in 2021 from $42 billion in 2019, according to the Stanford AI Index. However, they’re also becoming choosier about where they put their money. The number of newly funded AI companies worldwide fell from 1,200 to 746 between 2018 and 2021.
Why it matters: AI continues to be hot in the startup world — so hot that startups themselves want more of it. The current wave of purchases suggests that startups not only want to expand their AI holdings, they consider purchasing AI companies a strategic way to broaden their markets.
We’re thinking: Ultimately, young companies have to make money by creating long-term value, but the route may not be direct. For instance, we’ve seen self-driving car startups that have little in the way of products or revenue thrive by serving other self-driving car startups. This is part of the value of venture capital: It gives companies the time and resources they need to (hopefully) create massive value.