ChatGPT frenzy yet to generate rise in AI dealmaking

Data InsightDealspeak 9 June

ChatGPT frenzy yet to generate rise in AI dealmaking

Artificial intelligence may be humanity’s gravest threat, but dealmakers have yet to act as if there is no tomorrow.

Transactions for North America-based AI companies peaked at 296 deals totaling USD 35.9bn in 2021 but have since tailed off, according to Mergermarket data.

In the year to date, there have been 103 transactions worth a disclosed USD 3.8bn, although Microsoft’s  [NASDAQ:MSFT] multibillion-dollar investment in OpenAI this January  – for a reported USD 10bn – is not reflected because no figure was disclosed.

At this point last year, there were 124 deals worth USD 6.7bn, down from 129 deals totaling USD 25.5bn in YTD 2021, when Microsoft agreed to pay USD 19.4bn for conversational AI company Nuance Communications.

Deals fall into two main buckets. In the first, Big Tech and venture capital firms have made large investments at multibillion dollar valuations in promising AI startups lacking revenue. Besides OpenAI, that includes Adept, Anthropic, Character AI and Cohere. Two-thirds of all deals this year have involved such share placements or funding rounds.

The other (much smaller) bucket features acquisitions by strategics – such as Snowflake’s [NYSE:SNOW] purchase of AI-powered search engine Neeva and’s [NASDAQ:AMZN] deal for audio-content search engine Snackable AI.

“The big players are going to watch it all play out,” said Gabriel Rene, CEO of VERSES AI [NEO:VERS][OTCQX:VRSSF], which believes AI will be used to create intelligent assistants for individuals and has developed an operating system for it. “Over the next two years we’ll start to see [acquisition] offers come in.”

Future proofing

Dealmaking for AI companies by strategics remains at an early stage, even as buyer interest in the technology has increased, noted Satya Bajpai, a managing director at JMP Securities. 

Mergermarket data shows a small but rising proportion of technology transactions are specifically for AI-focused companies, accounting for 6.9% of software deals in 2023, up from 5.1% last year and 3.3% five years ago.

Private equity investors are even more careful about investing in or acquiring AI companies given most are pre-revenue and do not fit the PE playbook for platform acquisitions, cautioned Bajpai. But just like strategics, PE firms want to ensure any technology acquisitions their portfolio companies do make are future-proof and can adapt to AI, he added.

One PE firm looking at AI is Thomas H. Lee Partners (THL Partners). It has a primary fund of between USD 5bn and USD 6bn, of which about USD 1bn is an “automation-focused” fund, to focus on AI technologies.

“We’re spending less time on code-based models like Chat GPT, because those tend to be pretty expensive,” said Gaurav Mittal, a THL managing director, during a panel at The Montgomery Summit in March. “Data is the new gold. What excites us is an AI technology that is built on top of data.”

Trillion-dollar question

Some older AI-focused companies have received increased interest since OpenAI’s launch of ChatGPT last November. “Is my phone ringing more than it did from third parties showing interest because of ChatGPT? Yes,” said Ryan Steelberg, CEO of Veritone [NASDAQ:VERI], a provider of AI computing solutions. “Whether that changes where the capital sitting on the sidelines will be deployed is to be determined.”

Another is Yext [NYSE:YEXT], whose platform helps businesses answer customer questions and began its shift to AI four years ago. It believes AI can generate blogposts that push customers toward specific businesses. Yext’s shares have doubled since last October.

Likely consolidators will involve Big Tech – Meta Platforms [NASDAQ:META],, Apple [NASDAQ:AAPL], Alphabet [NASDAQ:GOOG] and Microsoft – as well as possibly Adobe [NASDAQ:ADBE] or even Honeywell [NASDAQ:HWEL], predicted VERSES AI’s Rene. Google launched AI chatbot Bard in March to respond to Microsoft’s ChatGPT-powered Bing. It is likely to make other moves to defend its search business, say others. Worth watching too are and database company Oracle [NYSE:ORCL], whose troves of customer or enterprise data can train AI.

The eventual winner in AI may be among them or be an entirely new startup, just as the web browser and smartphone eras each spawned new mega caps. As Raj Ganguly, co-CEO and co-founder of B Capital Group, put it, “There are multi-trillion-dollar companies to be built.”

Analytics by Izaz Ansari

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