Artificial Intelligence Hits Record Funding In 2021 Even As Markets Sour Near Year-End

Industry Quick-Take

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In 2021, AI startup funding hit a record high of $68 billion across 2,384 deals, according to CB Insights. US startups continued to dominate AI funding, while Asia narrowed the gap in terms of deal count. Some of the largest AI funding rounds of the year included Databricks ($1.6 billion), Lacework ($1.3 billion), SambaNova Systems ($676 million), Nuro ($600 million), and Dataminr ($475 million).

Verified Market Research estimates that, by 2028, the global AI market will reach $641 billion. That translates to a CAGR of 36% between 2021 and 2028. The below chart shows Gartner's breakdown of the AI software market split by use case for 2021 and for the 2022 forecast.

Trends in Revenue Growth, Revenue, and EBITDA Multiples

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Relative Stock Performance

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The Mercovus AI Index ended 2021 with a 28.1% return, just below the 28.8% return realized by the S&P 500. The erosion of value throughout Q4 2021 occurred concurrently with growing inflation worries. Inflation can often hit high growth companies especially hard as interest rates rise. Other companies in the index, such as UIPath, showed signs of business deceleration and lower annual recurring revenue (ARR) guidance. C3.ai and others had disappointing earnings announcements in Q4 2021.

M&A Drivers and Notable Recent M&A activity

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AI has become a general-purpose technology pervading all other sectors: This effect is highlighted in several recent acquisitions.

	On January 27, 2022, SAP announced its intent to acquire Taulia. Taulia develops AI based working capital management and financing software solutions. The acquisition will help expand SAP’s solutions for the CFO office.
	On December 23, 2021, Automation Anywhere, a developer of robotic process automation solutions, announced that it entered into an agreement to acquire FortressIQ. FortressIQ develops an AI-based robotic process automation platform that provides real-time end-to-end process insights. The acquisition will advance Automation Anywhere’s AI-powered, cloud-native Automation 360 platform.
	On April 12, 2021, Microsoft announced that it entered into an agreement to acquire Nuance Communications (Nuance). Nuance is a leading provider of conversational AI and ambient intelligence. The acquisition will further enhance Microsoft’s Cloud for Healthcare solutions and double Microsoft’s total addressable market in the healthcare provider space.