M&A Activity Trends in Tech and AI

It's been an interesting few weeks actually in the world of MA, particularly when I speak to venture capitalists, they might actually be more upbeat that some of their later stage venture backed companies are more likely to be acquired than go public, that there's kind of some energy there. Is that something that you see from your desk as well? Yeah, I think that's exactly right. I think that there's a lot of optimism in the market right now. If you look at the last you know, three to four years, you obviously had a massive uptick in 21 and 22 and that dropped off precipitously with valuations dropping in 22, end of 22, all of 2023 and to some extent to the beginning of this year. And we have you know probably three major groups of acquirers that will acquire venture backed technology companies. You have private equity traditional tech acquirers and what I like to refer to as non traditional tech acquirers. Those are older industries. You know, looking at private equity, obviously the rise in interest rates made them nervous. But if you go back in history, private equity is very used to operating at double digit interest rates. So have they dusted off their old playbooks, reminded themselves, how do we do this again? Absolutely. And they've become increasingly active in the first two quarters of this year, going to traditional tech acquirers. A lot of them sat out the first couple of years of the boom. They didn't want to spend cash at that level. They didn't want to, you know, you know, use that. Sorry, go ahead. No, no, I'm sorry. I just wanted to jump in and, and, and ask about, you know, there's the mechanics of it using cash. I, I particularly understand the private equity side of that equation. There's also like a little bit of a psychological side of any transaction. What's interesting about your firm is you, you're, you're on both sides of the table, right, Buyer and seller. What what are aptitudes right now to sitting down and hashing out a deal? Yeah. I mean, I think one of the things that we work with our clients right now a lot on is both for traditional and non traditional, traditional tech acquires understanding the mindset of founders and of boards. You know, in a lot of instances these are companies that were two individuals in a garage. They've grown their companies to multi billion dollar companies. But along the way they've underpaid themselves. They haven't bought houses, they haven't gotten married, they haven't had children, you know, they haven't gone on vacation. And any buyer that loses sight of that isn't understanding the company that they're buying. So something really interesting is happening in what I would call non tech companies as well, right? This idea that in a world of AI, for example, as we just discussed, that new kind of Perkins fund, you've got to have some sort of AI tool or your investor base or your employees won't believe you and they'll leave. And I see that happening in all kinds of sectors, you know, oil and gas, utilities, even construction saying, uh oh, we'd better buy a solution here. That must be a boon for business to you. That's exactly right. And you really have two separate things going on here. So first, speaking specifically to AII think it's mischaracterization to say that there's a lot of AIM and a activity. There aren't enough AI platform companies for there to be consolidation. Now there are a lot of companies that do something else. They do cybersecurity, maybe they are an HR platform, maybe it's a fintech company, you know, are they adding AI to what they do to improve their products? Absolutely. Those products are getting smarter, they're going faster, they're more attractive to their customer base. But those aren't fundamental AI platforms. You know, on the on the flip side, the other thing that we're seeing is a lot of, as you said, some non traditional tech acquirers come deeper into the tech space. Another area where they're doing that is cybersecurity. If you go back to the beginning of the pandemic, everybody may remember there was a massive pipeline hack on the Eastern seaboard that woke up a lot of the oil and gas companies to say we have not invested enough in technology, we've not invested enough in cybersecurity and protecting these infrastructure projects. And so a lot of companies in theory, could build those those solutions, those cybersecurity solutions, But some older industries are not equipped to do that. So what do they do? They go out and buy them wholesale. They buy a company to create a product just for them. And so that's what a lot of some of these older industries, it could be oil and gas, it could be agriculture. You know, to some extent even banking is still behind the ball for some of these technologies. Ali, what you just said on consolidation was really interesting. It almost contradicts kind of what we've been hearing what I wrote about a few weeks ago, which was based on comments from Hugging Face, that, you know, Hugging Face is a platform that hosts loads of large language model providers and the smaller players needed help. They've run out of cash. It's an expensive enterprise. You seem to be saying that actually at the platform level that isn't happening because there aren't enough platform level providers right now. Just just give me a bit more on that. Yeah, so to be clear, there is a ton of investment going into AI and AI platform companies 100%. And I think you see that with the Kleiner Perkins fund that was just announced. But what you're not seeing is the exits. There aren't enough of those companies for there to be consolidation. Yes, absolutely. There are some, but not to the the volume that you see in other sub sectors of tech.