Featured Article

Expect an even hotter AI venture capital market in the wake of the Microsoft-Nuance deal

Finally, Microsoft is having an impact in Silicon Valley


Image Credits: Nigel Sussman (opens in a new window)

Microsoft’s huge purchase of health tech AI company Nuance led the technology news cycle this week. The $19.7 billion transaction is Microsoft’s second-largest to date, only beaten by its purchase of LinkedIn some years ago.

For the AI space, the sale is a coup. Nuance was already a public company, but to see Microsoft offer a firm premium over its public-market value demonstrates the value that AI technology can have to wealthy companies. For startups working in the AI space, the Nuance deal is good news; the value of AI revenue was repriced by the acquisition’s announcement — and for the better.

In light of the megadeal, The Exchange dug into the AI venture capital market. What’s happening on the startup side of the coin in the artificial intelligence and machine learning (AI/ML) space?

The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.

To get a handle on the situation, we’ve compiled Q1 2021 and historical venture capital investment data via PitchBook, spoken to an active venture capitalist with a focus on AI-powered startups, and heard from a couple of startups recently featured on CB Insights’ list of leading AI upstarts for their take on the recent news.

The picture that emerges is one of strong investor interest and the expectation of even more in the wake of the Microsoft-Nuance tie-up. For AI startups, it’s a great time to be in the market.

This morning, we’ll start with a look into recent venture capital activity in the AI/ML market and its historical context. Then we’ll talk to Zetta Ventures’ Jocelyn Goldfein and a few companies in the AI space. Let’s go!

A venture capital rush

According to historical data compiled by PitchBook, venture capital investment into U.S.-based, AI-focused startups is enjoying a strong start to the year. Per the group’s provided dataset, from the start of 2021 through April 12, or the first 101 days of the year, 442 deals in the space were worth $11.65 billion.

In 2020, the same query for U.S.-based startups working in the AI and ML space — the line between ML and AI is blurrier than ever — turned up 1,601 rounds worth $27.49 billion.

In terms of round volume, then, 2021 does not look particularly special. However, AI and ML startups in the U.S. will smash 2020’s venture capital totals if they maintain their current pace. Doing some quick run-rate calculations, if AI and ML startups kept up their year-to-date pace, they would raise 1,597 rounds worth a total of $42.1 billion.

That dollar amount would be the strongest in history, easily eclipsing 2020’s prior record of around $27.5 billion.

What’s driving the huge boom in dollars invested into U.S.-based AI and ML startups? As The Exchange has examined several times in other sectors, it’s the late-stage money that is shaking up the market. Through April 12, 2021, PitchBook counts $9.08 billion in late-stage money going into our segment of startups. That’s just about half of 2020’s total for the same slice of the same market, and only fractionally lower than full-year, late-stage totals in both 2018 and 2019.

Early-stage and seed data look strong so far, but as those two categories of the venture capital market have the most temporal lag in their reporting, we don’t want to draw too many conclusions yet. The same reason is why we’re not shouting about a possible, if modest, decline in 2021 AI and ML startup round volume in the United States.

Sure, our extrapolated run-rate figure for this year’s expected AI and ML startup rounds in the U.S. is under 2020’s total, but we expect more early-2021 investments to become known over time, boosting the tally. The dollar figure is more sturdy at this point in time, so we focused our attention there.

The apparent boom in funding is not lost on the venture capital set. AI-focused Zetta Ventures’ Jocelyn Goldfein — TechCrunch has spoken with her before — told The Exchange in an email that both the last quarter of 2020 and the first quarter of 2021 were “great quarters for AI entrepreneurs,” with the venture capitalist going on to praise both the “quantity and quality of entrepreneurs raising seed rounds” in the space.

But it wasn’t only the earliest stage of investors who were enthused by the prospect of putting capital to work in AI/ML startups. Per Goldfein, her firm “also saw tremendous enthusiasm from Series A and B investors, especially around the tooling and infrastructure for AI projects (MLops and data infrastructure.)”

In collating information and notes for this particular entry, The Exchange read through CB Insights’ AI 100 list, which included a few trends that the group felt were worth highlighting. Goldfein said that her firm’s “taxonomy is a bit different,” citing themes like “data quality, model quality, active learning, annotation, synthetic data,” along with what she described as “major horizontal markets” like the public cloud and “mega verticals” like financial technology and health tech.

Let’s dig into a few of the trends that Zetta and CB Insights both noted to get a better grip on what’s going on inside the hot AI/ML startup market.

Inside the AI/ML startup market

One of the key trends that becomes obvious after even a quick look at CB Insights’ 2021 AI 100 picks is that healthcare is hot. As the write-up points out, “a number of these companies developed new products and features directly in response to the pandemic to mitigate its impact and help clients adapt.” But it is not just that: Healthcare is the most represented category among featured startups that focus on a specific industry.

This also matches a recent comment from Microsoft CEO Satya Nadella that caught our attention in the middle of the Nuance acquisition announcement: “AI is technology’s most important priority, and healthcare is its most urgent application,” he said. This is representative of how our sources view the Nuance deal: as reflecting excitement around the voice space, but also around its applications, and, more broadly, around AI.

Startups that work directly on voice technology, speech recognition and natural language processing (NLP) are likely to benefit from being in Nuance’s wake. In the words of Deepgram‘s CEO, Scott Stephenson, “Microsoft’s acquisition of Nuance will intensify VC’s interest in the speech market the same way that GM’s acquisition of Cruise did in the self-driving car market. There will be an immense inflow of cash to fund speech companies now that VCs know that investments in speech pay off.”

As you may recall, Deepgram’s offering centers on automatic speech recognition (ASR), for which they leverage AI and deep learning in order to help its users build voice-enabled applications. This has proven to be a good bet for the company itself: After raising a $12 million Series A round in March 2020, it attracted Tiger to lead its $25 million Series B earlier this year — and is now part of CB Insights’s AI 100 shortlist.

Looking at the bigger picture, Deepgram’s momentum reflects the broader trend to which it is contributing: Voice technology is no longer reserved for tech giants. “AI has made custom, tailored speech recognition not only possible, but also affordable,” Stephenson told us. As a result, it is being applied across a wide range of industries.

Edtech startup and fellow 2021 AI 100 winner Elsa is a good example of this because it is using speech recognition technology to help ESL speakers correct their pronunciation (see our recent post). CEO Vu Van noted: “Speech recognition technology has been gaining more and more attention from the VC world given how companies leverage voice recognition technology on multiple fronts these days — in healthcare, education, productivity in the workplace, fintech and more.”

That optimism could spur even more venture deals, and even more big sales in the AI/ML startup space. Stephenson called the Nuance deal “evidence of a decades-long AI market expansion,” adding that the transaction is “just the tip of the iceberg.”

In another few months, we’ll have enough data to better forecast the year’s venture appetite for AI/ML deals more precisely. But from what we can see thus far, it’s going to be a scorcher of a year.

More TechCrunch

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

2 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

2 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo