AI investment on the rise amid M&A boost

The rise of artificial intelligence has been buoyed by increasing investment in the sector, with US$24bn of investment in the industry made over the past three years, according to exclusive data by Drake Star Partners, a global investment banking firm focused on the TMT sector. These investments have primarily come from venture capital funds, investing over US$12bn in AI in 2017, with Data Collective, Khosla Ventures, Intel Capital, New Enterprise Associates, Google Ventures and Bloomberg Beta among the most active funds.

Demand across the pond

North America is a hotspot for AI, with VC funds investing US$6bn into AI in the region alone in 2017. The past 12 months have seen a flurry of high profile acquisitions in North America, most notably Intel’s purchase of Mobileye for US$15.3bn in a move to further the US tech giant’s capabilities in the autonomous car industry. According to Drake Star’s analysis, the main buyers in AI include Apple, Salesforce, Microsoft, Ford, IBM, Cisco, Panasonic, Amazon, Google and Facebook.

Key investors

AI investment in North America shows no signs of slowing down, with six out of the top 10 most funded AI startups being based in the USA, such as Sentient, Cylance, Anki, Lemonade and C3 IoT. Some of the key investors in these firms include TPG Growth, Breyer Capital, Sequoia Capital, SoftBank, Dell Technologies, Tata Communications and JP Morgan.

However, Chinese firms are also gaining traction, with SenseTime recently securing US$1.6bn in funding in May and the likes of Mobvoi and iCarbonX securing over US$200m each. Alibaba Group, Qualcomm Ventures, Silver Lake Partners, Google, Tencent Holdings and China Bridge Capital are the main investors in China.

Trends to watch

AI firms are expected to grow dramatically over the next decade, with revenues expected to increase at an annual rate of 39.5% from 2016 to 2025, bringing rich valuations to the broader AI market. H1 2018 has already experienced an average EV/revenue multiple of 6.3 times. Certain companies, such as Nvidia, Facebook, and iFlytek, command the strongest multiples out of the set, with 2018 YTD EV/revenue multiples of 11.3 times, 9.9 times, and 8.2 times, respectively.

According to Drake Star Partners, these factors will result in the following trends:

1. New verticals for AI - As technology becomes increasingly adopted, buyers and investors will be looking at firms that branch out and tap into new markets, such as healthcare, energy and financial services.

2. Increasing commoditisation - Certain sectors within AI to become commoditised as larger players dominate the market. For example, chatbots have proliferated and individuals can now build their own chatbots on platforms such as Google and Amazon’s Alexa.

3. More consumer-driven - AI in mobile will become more consumer-facing, as already seen with Apple and Samsung through the use of augmented reality apps and Animoji.

4. AI’s role in VR will become more apparent with the release of highly-anticipated platforms Magic Leap and Oculus Rift in 2018.