Slowing AI startup consolidation: Is the AI startup shopping spree about to end?

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  Quantumrun Foresight
• October 25, 2022

Insight summary

In the evolving landscape of technology, major companies are reassessing their strategies towards acquiring startups, especially in artificial intelligence (AI). This shift reflects a broader trend of cautious investment and strategic focus, influenced by market uncertainties and regulatory challenges. These changes are reshaping the technology sector, affecting startups' growth strategies and encouraging new approaches to innovation and competition.

Slowing AI startup consolidation context

Tech giants have repeatedly looked to startups for innovative ideas, increasingly in AI systems. During the 2010s, large tech corporations increasingly acquired startups with novel ideas or concepts. However, while some experts initially thought that startup consolidation was imminent, it seems that Big Tech is no longer interested.

The AI sector has seen immense growth since 2010. Amazon’s Alexa, Apple’s Siri, Google’s Assistant, and Microsoft Cortana have all experienced considerable success. However, this market progress is not due to these companies alone. There has been cutthroat competition between corporations, leading to many acquisitions of small startups within the industry. Between 2010 and 2019, there have been at least 635 AI acquisitions, according to market intelligence platform CB Insights. These purchases have also increased six times from 2013 to 2018, with acquisitions in 2018 reaching a 38 percent increase. 

However, in July 2023, Crunchbase observed that 2023 was on track to have the smallest number of startup acquisitions by the Big Five (Apple, Microsoft, Google, Amazon, and Nvidia). The Big Five have not disclosed any major acquisitions worth multiple billions, despite having substantial cash reserves and market capitalizations over USD $1 trillion. This lack of high-value acquisitions suggests that increased antitrust scrutiny and regulatory challenges could be major factors deterring these companies from pursuing such deals.

Disruptive impact

The decrease in mergers and acquisitions, particularly involving venture capital-backed firms, signifies a cooling period in what was previously a highly active market. While lower valuations might make startups seem like attractive acquisitions, potential buyers, including the Big Four, are showing less interest, possibly due to market uncertainties and the changing economic landscape. According to Ernst & Young, bank failures and a generally weaker economic environment cast a shadow over venture investments for 2023, causing venture capitalists and startups to reassess their strategies.

The implications of this trend are multifaceted. For startups, the reduced interest from major tech companies could mean fewer exit opportunities, potentially impacting their funding and growth strategies. It might encourage startups to focus more on sustainable business models rather than relying on acquisitions as an exit strategy.

For the technology sector, this trend could lead to a more competitive landscape, as companies may need to invest more in internal innovation and development rather than expanding through acquisitions. Additionally, this could signal a shift in focus towards acquiring publicly traded companies, as indicated by the recent activities of these tech giants. This strategy might reshape the technology market dynamics, influencing future trends in innovation and market competition.

Implications of slowing AI startup consolidation

Wider implications of a decrease in AI startup acquisitions and M&As may include: 

• Big Tech firms focusing on developing their in-house AI research labs, which means fewer opportunities for startup funding.
• Big Tech competing to buy only highly innovative and established startups, although deals may steadily decline by 2025.
• The slowdown in startup M&A leading to more fintechs focusing on organizational growth and development.
• Lingering COVID-19 pandemic economic difficulties pressuring startups to undersell themselves to Big Tech to survive and retain their employees.
• More startups closing down or merging as they struggle to find financial backing and new capital.
• Increased government scrutiny and regulation of Big Tech's mergers and acquisitions, leading to more stringent evaluation criteria for approving such deals.
• Emerging startups pivoting to service-oriented models, providing AI solutions for specific industry challenges, avoiding direct competition with Big Tech.
• Universities and research institutions gaining prominence as primary incubators for AI innovation, leading to an increase in public-private partnerships for technological advancements.

Questions to consider

• What are the other potential benefits and disadvantages of startup consolidation?
• How might a reduction in startup consolidation affect market diversity?