Artificial intelligence market is rapidly accelerating and consolidating 

Artificial intelligence (AI) and machine learning (ML) have the ability to dramatically enhance technology's impact not only on consumers' everyday experience and are being adopted by enterprises businesses rapidly, which is leading the way for consolidation in a fragmented market consisting mostly of startups.

02/06/2018


Figure 1: Public company valuation trends. Courtesy: 7 Mile AdvisorsArtificial intelligence (AI) and machine learning (ML) have the ability to dramatically enhance technology's impact not only on consumers' everyday experiences, but also in the productivity of an array of business functions. And while we are likely years away from an AI solution with business functionality (i.e., virtual agents, analytics, etc.) that requires zero human interaction (if technology does advance to that realm), it is more likely than not human intervention of some degree will continue to be needed (albeit to a lesser and lesser extent) to ensure desired results are being achieved. That rationale implies we are still early in the lifecycle of development and there are many breakthroughs and waves of adoption on the horizon.

Given the advancement of technology, AI and ML are being adopted by enterprise businesses at a rapid clip, leading the way for consolidation in this highly fragmented market consisting mostly of startups. The AI and ML platforms that have managed to scale their business are a rare gem and highly sought as an acquisition target since the business model and functionality of the software has been proven and adopted in the market. A key focus is customer retention and ideally a software-as-a-service (SaaS)-based revenue stream. Merger and acquisition (M&A) activity in the AI and ML space is expected to remain robust in the future and more platforms of scale will be acquired.

Breaking down the AI sector through an M&A lens

Due to AI's broad reach and application, there are a number of ways to categorize the sector. These four aspects are a good dissection of the M&A market at this point in time:

  1. Machine learning
  2. Deep learning
  3. Vision and image recognition
  4. Chatbots and virtual agents including natural language processing, generation, and understanding.

These areas of focus are being used to drive efficiency, reduce risk, and enhance compliance. However, there is an ongoing increase in AI application across industries. AI's initial application may have been an operational efficiency tool for business intelligence, forecasting and search optimization. However, the uses of AI are expanding beyond the core and have filtered into almost every industry, such as conversational, vision, auto, healthcare, insurance, regulation, fintech, security, business intelligence & analytics, text recognition, and commerce.

Chatbots and virtual agents (think Siri & Alexa) are a highly sought-after AI application. They have reached a level of sophistication where human conversations are becoming increasingly engaged. This opens up a tremendous data stream via consumer communication. 

The increased use and application of AI could be attributed to the rise of Big Data, advanced computational power and large amounts of funding. Big data has seen an unprecedented rise in demand and application. Given the nature of AI, it has also acted as the fuel to machine learning.

Despite the overwhelming evidence AI is here to stay, there is still resistance in the market and businesses are hesitating. The lack of clarity and stigma attached to the job displacement rhetoric might be the largest barriers looming over the industry. However, the curve of acceptance will only continue to steepen toward complete acceptance of AI's value and power as it continues to be enhanced and understood. Until then, companies that view disruption as an opportunity and are not complacent will lead the market.

Figure 2: Industry dashboard and operating metrics. Courtesy: 7 Mile AdvisorsM&A in the AI Sector is increasing

The artificial intelligence industry has experienced $30.8B in transaction value across 3,603 deals from Q4'12 to Q4'17, according to CB Insights. Apart from AI's abundance of implementation advantages, the M&A deal volume and investment concentration is proving AI is at the frontier of digital initiatives and is the interface between human and technology.

The large tech giants (Google, Intel, Apple, Facebook, etc.) have combined for 50 AI acquisitions in the last 5 years with specific expertise in chip makers, chatbots, and facial recognition, to name a few. Google (Alphabet) has been the most active acquirer with 12+ acquisitions since 2012, investing in over 29 AI companies. Apple, Intel, Microsoft, Amazon, and Facebook are not far behind in acquisition volume and investments.

The buyer universe is expanding

The increase and sustained momentum of the AI battleground in the application and service market is being fueled by private investors and non-tech firms that have identified the business value-add in enhanced decision making, intelligent processes, advanced analytics and user experience. There was a similar trend in the digital marketing sector beginning in 2014 when technology budgets were shifting to CMOs of enterprise customers and acting as the catalyst to broaden the buyer universe and expand valuation multiples. We would view the growing adoption and application of AI as the catalyst to broadening the buyer universe and increasing competitive valuations in sell-side mandates.

Rory Julyan, associate, 7 Mile Advisors. This article originally appeared on 7 Mile Advisors' blog. 7 Mile Advisors is a CFE Media content partner. Edited by Chris Vavra, production editor, Control Engineering, CFE Media, cvavra@cfemedia.com.



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