Microsoft’s $19.7 Billion Nuance Deal Repriced AI Revenue
Microsoft’s purchase of Nuance for $19.7 billion was the company's second-largest acquisition ever, behind LinkedIn. The deal also paid a premium over Nuance's public-market value, and that mattered. For startups working in artificial intelligence, the announcement repriced AI revenue upward — a signal venture investors read immediately.
The Exchange dug into the startup side of the market after the megadeal. What follows is what the data and the people say.
Early 2021 Momentum Beats 2020 on Dollars
PitchBook data through April 12, 2021 — the first 101 days of the year — shows 442 AI-focused deals in U.S. startups worth $11.65 billion. In all of 2020, the same query returned 1,601 rounds totaling $27.49 billion.
Round count is not yet ahead. Dollar volume is. Annualizing the Q1 pace suggests about 1,597 rounds worth roughly $42.1 billion for the full year, which would easily eclipse 2020's prior record. For infrastructure-scale AI deployment context, see the rent-a-gpu-outfits-secure-billions-in-venture-capital-to-meet-ai-demand coverage from the same era.
Early-stage and seed reporting carries lag, so round counts will likely rise as more deals are disclosed. The dollar figure is more reliable at this stage, and it's the headline.
Late-Stage Capital Is Driving the Surge
Through April 12, 2021, PitchBook counts $9.08 billion in late-stage money going into AI/ML startups. That's just about half of 2020's total for the same slice, and only fractionally lower than full-year late-stage totals in both 2018 and 2019.
Early-stage and seed data look strong, but they have the most temporal lag in reporting, so conclusions are premature. The dollar figure is the steadier signal.
Venture Voices: Enthusiasm at Seed and Series A/B
Jocelyn Goldfein of Zetta Ventures told The Exchange that both Q4 2020 and Q1 2021 were "great quarters for AI entrepreneurs." She praised the quantity and quality of seed rounds being raised and highlighted unusual enthusiasm from Series A and B investors, particularly in AI tooling and infrastructure.
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. Those categories lower the barrier for new entrants and extend the investable universe beyond pure-model plays.
Goldfein's taxonomy is a bit different from CB Insights'. She cites data quality, model quality, active learning, annotation, synthetic data, along with major horizontal markets like public cloud and mega verticals like financial technology and health tech. venture-roll-ups-ai-consolidation represents a related capital deployment trend.
Healthcare Dominates Industry-Focused AI 100 Picks
A quick read of CB Insights' 2021 AI 100 picks shows healthcare is hot. A number of these companies developed new products and features directly in response to the pandemic, but the concentration predates that. Healthcare is the most represented category among featured startups that focus on a specific industry.
Microsoft CEO Satya Nadella said during the Nuance announcement: "AI is technology's most important priority, and healthcare is its most urgent application." The Microsoft-Nuance deal reinforced the notion that AI applied to health outcomes attracts both strategic interest and capital.
Voice Startups Feel Immediate Fallout
Startups that work directly on voice technology, speech recognition and natural language processing are likely to benefit from being in Nuance's wake.
Deepgram's CEO Scott Stephenson said: "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."
Deepgram centers on automatic speech recognition, leveraging AI and deep learning to help users build voice-enabled applications. After raising a $12 million Series A round in March 2020, it attracted Tiger to lead its $25 million Series B earlier in 2021, and is now part of CB Insights' AI 100 shortlist.
Stephenson also noted: "AI has made custom, tailored speech recognition not only possible, but also affordable." As a result, it is being applied across a wide range of industries.
Edtech startup and fellow 2021 AI 100 winner Elsa uses speech recognition technology to help ESL speakers correct their pronunciation. 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." chamath-palihapitiya-goes-all-in-as-ceo-of-his-135m-ai-coding-venture offers a parallel perspective on AI startup formation.
Outlook: A Hot Year If Pace Holds
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, there will be 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.
The Microsoft-Nuance deal may prove to be the catalyst that accelerates capital into sectors that have long been underfunded relative to their potential. For founders and investors alike, the message is clear: the AI market's next phase is already underway.
