According to a recent article by Entrepreneur, the Artificial Intelligence (AI) industry appears to be “consolidating” at a rapid pace – with smaller AI startups being acquired by larger names. This may be worrying for some individuals, but it could come as welcome news to entrepreneurs looking to cash out on their AI technology. Relatively minor AI companies are being acquired for exorbitant sums, and this consolidation process represents a major payday for hardworking entrepreneurs who have dedicated their lives to the advancement of AI. However, there are various legal issues smaller startups need to consider when navigating the acquisition process.

The Pace of AI Acquisitions is Staggering

In June of 2024, the CEO of Hugging Face (a machine learning company) claimed that he was receiving “at least 10 acquisition requests” each week from various startups. Many of these smaller startups are AI companies, and Hugging Face has completed four acquisitions to date. The latest one cost the company a cool $10 million with the purchase of a relatively minor AI name called “Argilla.” This might seem like a considerable payout to Argilla’s 22 employees – but it pales in comparison to Hugging Face’s multi-billion-dollar valuation. Despite its staggering value, many people in the United States have never heard of Hugging Face – highlighting just how insane valuations have become in the AI industry.

A much more recognizable name is Apple, which acquired over 30 AI startups within 2023 alone. Google and Meta acquired around 20 each during the same period. Creating a successful AI startup in the modern era seems like an obvious path toward a quick payout – and this could be an extremely attractive prospect for the right entrepreneurs. Note that many of these small AI companies were created by a few college students within the space of months – not years.

Many Small AI Startups are Falling into the Same Traps

Although there is certainly money to be made in the AI industry, many of these startups are falling into the same traps. Entrepreneurs should beware of“get-rich-quick” schemes, especially due to worrying new reports about the state of the AI industry. There are legitimate fears of a tech bubble fueled by the AI craze. A recent report from Carta states that startup failures have surged by more than 60% – and this is in part due to the questionable viability of many new AI ventures.

Venture capital funding for AI startups is slowing down, and some argue that this is a natural evolution that tends to occur in the tech world. As various outsiders accept that they cannot compete with big tech companies, interest in these investments is beginning to sour. Other journalists have pointed out that many of these AI companies have high valuations despite having no real product. Ambitious ideas may promote enthusiasm among investors, but companies need tangible technology and working models if they want to pursue the rewards of a major acquisition.

The Biggest Recent Stories in AI Acquisitions

Despite tech-bubble paranoia, there are plenty of signs of optimism in the AI world. One example is “Etched,” an AI startup run by what CNBC refers to as “Harvard dropouts.” The startup eventually developed Sohu, an ASIC chip designed specifically for transformer models. According to the leaders behind Etched, this chip is 100 times more powerful than NVIDIA’s flagship GPU. The company has raised hundreds of millions of dollars to fuel its plans.

Speaking of NVIDIA, the tech giant is in the process of acquiring OctoAI, a startup based in Seattle. Rather than creating its own AI models, this company seems to focus on software that helps existing AI models run more efficiently. NVIDIA is offering upwards of $165 million for the company – although various sources believe that this offer is far too low to be taken seriously.

Sakana is an AI startup that most people have never heard of, but it has a value of over $1.5 billion. This is part of Japan’s ambitious plan to “play catchup” in the AI world, and this company apparently focuses on energy efficiency – a key concern for future AI growth.

How Should Small AI Companies Navigate Acquisitions?

Acquisitions can be incredibly exciting for small startups, but it is important to approach this process with caution and efficiency. A significant part of this process involves legal considerations.

First and foremost, small startups can expect larger companies to conduct considerable “due diligence” before even thinking about making an offer. You can expect your small AI to “go under the microscope,” and the larger company will likely want to gather as much information as possible. They may be particularly concerned with any unresolved legal issues you are currently facing, including intellectual property lawsuits. These kinds of lawsuits are extremely common in the world of artificial intelligence.

That being said, small startups may be reluctant to hand over key information, trade secrets, and proprietary codes during due diligence. If an acquiring company steals your secrets during this process, there is no reason to move ahead with the purchase.

Regulatory compliance is another key concern during acquisitions. Smaller companies should make sure they are in good standing before exploring acquisition opportunities. If there are any regulatory concerns, larger companies may want to steer clear.

Perhaps the most important aspect of this process for AI startups is the transfer of intellectual property. This is something you might want to discuss with an experienced technology lawyer during the acquisition process. It is worth obtaining your own legal counsel or, at the very least, consulting with an independent lawyer. Do not assume that the larger company’s lawyers have your best interests at heart.

Can a Tech Lawyer Help Small AI Startups Navigate Acquisitions?

An experienced technology lawyer may be able to help small AI startups navigate acquisitions with efficiency and confidence. This process may involve various legal processes, including software licensing and intellectual property transfers. John P. O’Brien has considerable experience in these areas, and he understands the value of seamless acquisitions for small AI companies. Reach out today to discuss your unique situation in more detail – and navigate your acquisition alongside an experienced technology lawyer.