Cash-strapped tech startups facing a financing crunch are increasingly seeking to sell themselves to larger companies, launching a wave of takeovers of popular artificial intelligence companies that has revived Silicon Valley investment activity.
Databricks recently announced a $1.3 billion mostly stock deal to acquire AI start-up MosaicML, providing software tools designed to lower the cost of AI work, while Typeface was valued at $1 billion after an oversubscribed Series B funding round led by Salesforce’s investment arm.
Meanwhile, this year has seen Thomson Reuters pay $650 million for legal services AI group Casetext, Robinhood purchase credit card start-up X1 for $95 million, and finance automation company Ramp acquire Cohere.io, a startup that built an AI-powered customer support tool.
The flurry of takeovers has been boosted by an estimated 1,000 tech startups valued at more than $1 billion that are now “stuck without a clear path to liquidity,” Ryan Nolan, Goldman Sachs global co-head of software investment banking, told the Financial Times.
He said, “There is a wave of consolidation coming in tech and particularly software.”
Josh Wolfe, co-founder of venture fund Lux Capital, adds: “I think that wave is just beginning.”
Arjun Kapur, managing director at Forecast Labs, explains that “a lot of these acquisitions… are about two individual organizations lacking certain value that can be merged to create a more valuable business.”
Large tech groups, such as Microsoft, Broadcom, and Adobe, have all been looking to buy out smaller, powerful startups this year, while Salesforce has doubled the funds earmarked for investments in AI startups to $500 million.
While acquisitions can deliver economic advantages for diverse teams, the outcome of big tech deals such as Microsoft’s $75 billion purchase of Activision Blizzard, Broadcom’s $61 billion acquisition of VMware, and Adobe’s $20 billion takeover of Figma is under heightened regulatory scrutiny for antitrust concerns.
Meanwhile, there is additional pressure due to interest rates driving debt capital to become more expensive, while venture capital investment for startups this year is down from $246 billion last year to $80 billion.
Valuations of tech startups have begun to fall more closely in line with their publicly listed counterparts while venture-backed preferred equity in startups has plunged by a quarter since early 2022.
PYMNTS reporting says early-stage tech startups in the US are experiencing a significant drop in venture capital spending.
In the second quarter of 2023, American investors backed 3,011 startup deals, which is a third fewer than the same period in 2022. Venture capital firms also spent less, with the total amount just shy of $40 billion, close to half of what was spent last year. The largest drop in funding occurred in angel or seed deals for startups in the concept phase.
However, some experts argue that the lower numbers may not necessarily be a bad thing, as there were likely too many startups raising funds during the pandemic, and a slower pace of starting companies could be healthier for the market.
Founders, investors and venture capitalists alike fear the current crunch may ultimately be as brutal as the dotcom bust of the early 2000s.