Over $8.3bn in venture capital was invested into artificial intelligence companies in 2017, up more than 80% over 2016. Investors are piling in, with the expectation of massive opportunities as many, if not most, industries are disrupted, giving rise to huge potential returns.
We took a look at the data on exits, to see who was making money and where, who was buying what, and whether we could draw any conclusions about which sectors offered the highest potential returns. There were three clear conclusions:
Firstly it is still early days from an M&A perspective. The data shows a steady increase in AI companies being acquired, but the numbers are still relatively small – we identified only 74 companies acquired in 2017 that could be described as AI.
Secondly there is a small number of very active buyers, but the wider buyer universe has not yet committed to taking action as far as AI acquisitions are concerned, although they are certainly talking about it. You can see from the diagram that Google is by far and away the largest acquirer of AI companies, and that it has been investing in AI for some years.
The busiest buyers in AI have been the big digital properties, led by “GAFA” but also including others. One of the things that AI needs is data, and these guys have an abundance of data and a good understanding of how to use it. Apart from Microsoft and Intel who have made a number of bets, other more traditional tech buyers have been slow to acquire in this space, with only a few, relatively small deals being done.
Thirdly there are no clear standout sectors where there is obvious leadership and traction for AI. Looking at the sector breakdown of deals, we can see that over a quarter of deals relate to how humans and machines can interact through vision, images, unstructured text and speech, but this probably reflects the interests of Google as a buyer. Otherwise deals are fairly widely spread across sectors.
In summary it is early days for investors in AI, in terms of proven ability to make money. Most of the deals have been relatively small, focused on technology and talent, and capability building for a small number of buyers. As AI companies themselves grow and scale and start to generate significant revenues, we expect to see a broader set of buyers swing into action. We believe we are just at the beginning of a long term trend of M&A.
We'll be publishing a series of posts on this topic - watch out for our next post which will be on the sectors where we think there is the greatest opportunity for M&A in the next few years.