AI Venture Capital: Microsoft-Nuance Deal Signals Growth

Microsoft Acquires Nuance: A Landmark Deal for AI

This week, the technology sector was dominated by news of Microsoft’s substantial acquisition of Nuance, a leading health tech AI firm.

The transaction, valued at $19.7 billion, represents Microsoft’s second-largest acquisition to date, surpassed only by the company’s purchase of LinkedIn.

Impact on the AI Industry

The sale of Nuance is considered a significant achievement for the AI sector. Microsoft’s willingness to pay a considerable premium over Nuance’s public market valuation underscores the perceived worth of AI technologies to large corporations.

This acquisition is viewed positively by AI startups, effectively re-evaluating the potential revenue value of AI-driven businesses – and to a favorable extent.

Analyzing the AI Venture Capital Landscape

Following this major deal, The Exchange investigated the current state of the AI venture capital market.

The focus was on understanding the dynamics within the artificial intelligence and machine learning (AI/ML) startup ecosystem.

The Exchange provides insights into startups, markets, and financial matters. It is published daily on Extra Crunch, with a newsletter available every Saturday.

Data and Insights

To gain a comprehensive understanding, data on venture capital investments in Q1 2021 and historical trends was gathered from PitchBook.

Additionally, discussions were held with an active venture capitalist specializing in AI-powered startups, and perspectives were sought from several companies recognized as leading AI innovators by CB Insights.

Investor Confidence and Future Outlook

The analysis reveals robust investor interest in the AI/ML space, with expectations of further growth following the Microsoft-Nuance agreement.

Currently, the market conditions are particularly advantageous for AI startups seeking funding.

Today’s exploration will begin with an examination of recent venture capital activity within the AI/ML market, placing it within its historical context.

We will then feature insights from Jocelyn Goldfein of Zetta Ventures, alongside perspectives from several companies operating in the AI sector.

Let’s proceed!

A Surge in Venture Capital Funding

Recent data gathered by PitchBook indicates a robust beginning to the year for venture capital investments in U.S.-based startups specializing in artificial intelligence (AI). The dataset reveals that, from January 1st, 2021, through April 12th – encompassing the first 101 days – 442 deals within this sector were valued at $11.65 billion.

During 2020, a similar analysis of U.S. startups engaged in AI and machine learning (ML) – the distinction between these fields is increasingly indistinct – identified 1,601 funding rounds totaling $27.49 billion.

While the number of funding rounds in 2021 doesn't initially appear exceptional, U.S. AI and ML startups are projected to surpass 2020’s total venture capital investment if their current momentum continues. Calculations based on the year-to-date performance suggest a potential of 1,597 rounds, amounting to $42.1 billion.

This projected dollar amount would represent a historical peak, significantly exceeding the previous record of approximately $27.5 billion set in 2020.

What is fueling this substantial increase in investment directed towards U.S.-based AI and ML startups? As previously observed by The Exchange across various sectors, the influx of late-stage funding is a primary driver. As of April 12, 2021, PitchBook recorded $9.08 billion in late-stage investments within this startup segment.

This figure represents nearly half of the total late-stage funding for the same period in 2020, and is only slightly below the full-year late-stage totals observed in both 2018 and 2019.

Initial and seed-stage data also appear promising; however, due to reporting delays inherent in these venture capital categories, definitive conclusions are premature. This same reasoning cautions against prematurely declaring a potential, albeit modest, decrease in the overall number of AI and ML startup funding rounds in the U.S. for 2021.

Although our extrapolated run-rate suggests a lower round volume compared to 2020, we anticipate that additional investments from early 2021 will be reported over time, increasing the total. The dollar amount appears more reliable at this juncture, and therefore remains our primary focus.

The venture capital community has taken note of this apparent funding surge. Jocelyn Goldfein of AI-focused Zetta Ventures – who has been previously interviewed by TechCrunch – communicated to The Exchange via email that both the fourth quarter of 2020 and the first quarter of 2021 were “excellent periods for AI entrepreneurs.”

Goldfein further commended the “volume and caliber of entrepreneurs securing seed funding” within the field. Enthusiasm wasn’t limited to early-stage investors, however.

According to Goldfein, her firm “also witnessed considerable interest from Series A and B investors, particularly concerning the tools and infrastructure supporting AI projects – specifically MLOps and data infrastructure.”

While compiling information for this analysis, The Exchange reviewed CB Insights’ AI 100 list, which highlighted several noteworthy trends. Goldfein noted that her firm’s “categorization differs somewhat,” emphasizing themes such as “data quality, model quality, active learning, annotation, and synthetic data.”

She also pointed to “significant horizontal markets” like the public cloud and “major vertical sectors” including financial technology and healthcare technology.

Let's examine some of the trends identified by both Zetta and CB Insights to gain a clearer understanding of the dynamics within the thriving AI/ML startup market.

The Current Landscape of the AI/ML Startup Market

A notable trend emerges from examining CB Insights’ 2021 AI 100 selections: the healthcare sector is experiencing significant growth. The analysis highlights that numerous companies within this group developed innovative products and features specifically to address the challenges posed by the recent pandemic and assist clients in adapting.

Furthermore, healthcare represents the most heavily represented industry-specific category among the featured startups. This observation aligns with a recent statement by Microsoft’s CEO, Satya Nadella, made during the announcement of the Nuance acquisition.

Nadella stated that AI is the most crucial technological priority, with healthcare representing its most pressing application. This perspective mirrors the general sentiment surrounding the Nuance deal, indicating enthusiasm not only for the voice technology space but also for its diverse applications and the broader field of AI.

Opportunities for Voice Technology Startups

Companies specializing in voice technology, speech recognition, and natural language processing (NLP) are poised to benefit from the developments surrounding Nuance. According to Scott Stephenson, CEO of Deepgram, Microsoft’s acquisition of Nuance will likely stimulate increased venture capital interest in the speech market.

He draws a parallel to General Motors’ acquisition of Cruise, suggesting that the Nuance deal will trigger a substantial influx of funding into speech-focused companies, as investors recognize the potential for returns on these investments.

Deepgram itself focuses on automatic speech recognition (ASR), utilizing AI and deep learning to empower users in building voice-enabled applications. This strategy has proven successful for the company.

Following a $12 million Series A funding round in March 2020, Deepgram secured a $25 million Series B round led by Tiger Global earlier this year, and has since been recognized as a finalist in CB Insights’ AI 100.

The Democratization of Voice Technology

Deepgram’s success reflects a larger trend: voice technology is no longer exclusive to large technology corporations. Stephenson explains that AI has made customized, tailored speech recognition both feasible and cost-effective.

Consequently, its applications are expanding across a wide spectrum of industries. Edtech startup Elsa, also a 2021 AI 100 winner, exemplifies this trend by employing speech recognition technology to assist ESL learners in improving their pronunciation.

Vu Van, Elsa’s CEO, notes the growing attention from venture capitalists due to the diverse applications of voice recognition technology in areas such as healthcare, education, workplace productivity, and fintech.

Future Outlook for AI/ML Venture Deals

This positive outlook suggests the potential for even more venture capital deals and significant acquisitions within the AI/ML startup space. Stephenson characterizes the Nuance deal as “evidence of a decades-long AI market expansion,” predicting it represents only a small fraction of the overall potential.

A more accurate forecast of venture capital appetite for AI/ML deals will be possible in the coming months as more data becomes available. However, initial indicators suggest that this year will be exceptionally active in terms of investment.