Why startup founders are turning down multi-billion dollar acquisition deals from big tech - 8/6/24

Presented by GOTO Market Institute

Hey SaaS Sentinel reader. Welcome back. This week we learned why startups like Wiz turn down $23 billion acquisition deals from tech giants like Google, how the cloud industry is approaching $80B in revenue this quarter despite economic uncertainty, and why AI firms are ramping up their lobbying efforts this year.

• Startup founders are turning down multi-billion dollar payouts from big tech in hopes of even bigger exits down the road

• Cloud infrastructure revenue approached $80 billion this quarter despite economic uncertainty

• AI firms are ramping up their lobbying efforts as lawmakers debate regulation this election year

When Big Tech Comes Calling, Startup Selling Decisions Get Complicated

Google recently had the startup world buzzing with rumors that it offered cloud security standout Wiz a whopping $23 billion acquisition deal. That would be the richest exit ever for a private startup. Yet after deliberations, Wiz ultimately turned down the deal. Surprised? We got unique insight into the tricky decision-making process when tech giants come courting hot young startups.

According to Jyoti Bansal, CEO of Harness and founder of AppDynamics, which he sold to Cisco for $3.7B right before its IPO, he sees three key factors startups weigh in these situations:

1. Deal seriousness: Is it a concrete offer or just exploratory? Less info is public for private companies, so it starts more vague.

2. Strategic alignment: Will it be a fit? What happens to a company’s existing employees and products?

3. Deal economics: Does the valuation truly make sense? Google reportedly offered 46x Wiz's current ARR (phew…).

The Cisco negotiations involved several rounds of offers and discussions with investors, the board, and execs who all have differing interests. Ultimately, AppDynamics went for 2.5-3x its planned IPO valuation, making 300+ employees millionaires.

But Bansal still wonders "what if" they stayed independent during the tech boom years since 2017. Wiz's founders may later have the same regrets if growth stalls out.

When titans like Google are involved, it may seem an easy decision to sell. But balancing various stakeholder concerns makes it far more complex than it appears. Both startups chose to stay the course. What do you think? Did they make the right call?

Read more.

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Cloud Growth Approaches $80B This Quarter Despite Economic Uncertainty

The cloud infrastructure market left any hints of a slowdown in the past, posting another quarter of impressive growth. According to Synergy Research, cloud infrastructure revenue totaled $79 billion last quarter, up a brisk 22% from last year.

This marks the third straight quarter of 20%+ year-over-year expansion. And AI and machine learning workloads are fueling much of this cloud momentum. Synergy expects the market to double again within just 4 years.

Most cloud leaders also maintained strong growth despite some headline-grabbing misses. While Microsoft Azure grew 30%, it slightly missed revenue expectations. But Synergy's John Dinsdale cautions against overreacting given Azure's $18 billion scale and historical 29% growth rate.

Other highlights included:

• AWS revenue grew 19%, settling into the mid-teens growth range after temporarily dipping last year.

• Google Cloud broke $10B in revenue for the first time ever, up 29% behind Google Cloud Platform growth. It gained 1 percentage point of overall market share.

The big players continue to dominate, with 73% market share combined. But competition remains fierce for the next tier of providers fighting for expansion scraps. Oracle passed IBM to grab 3% share and 5th place by tying with Salesforce—though its $2B+ in quarterly revenue is still sizable.

As economic uncertainty continues, the scale cloud leaders have built continues to drive steady growth. Both the incumbents and disruptors have lots of cloud battles left to come.

Read more.

AI Firms Ramp Up Lobbying Efforts as Lawmakers Debate Regulation

As generative AI remains red hot, AI startups are racing to influence policymakers amid a high-stakes election year. New data from OpenSecrets, a nonprofit group that tracks and publishes metrics on campaign financing and lobbying, reveals lobbying related to AI issues has surged, with the number of groups lobbying the federal government on AI increasing from 459 in 2023 to 556 in the first half of 2024.

Leading AI companies have rapidly expanded their lobbying footprints in response. OpenAI's lobbying expenditures have spiked to $800,000 for this year so far—a 3x increase over 2023. And the startup has ballooned its lobbying team from 3 consultants last year to around 15 so far in 2024.

OpenAI also added ex-NSA director Paul Nakasone to its board in March and brought on prominent lawmakers like former Republican Senator Norm Coleman. Meanwhile, rival AI firm Anthropic has nearly doubled its lobbying spending from $280,000 in 2023 to $500,000 (and counting) in 2024 by hiring additional top lobbyists.

Even smaller startups like Cohere are getting in the game, upping its lobbying spend from $70,000 in 2023 to $120,000 in the first half of 2024.

What’s the reason for the big lobbying surge? It all comes down to an unpredictable election year that’s ushering in uncertainty around AI laws. Leading presidential candidates Harris and Trump have hinted at very different paths on issues like generative model access and federal oversight.

And with no overarching federal AI regulations passed yet, a patchwork of state laws has emerged. Companies like OpenAI aim to advance bills for light-touch federal regulation they prefer, but as they look to scale, lawsuits and antitrust scrutiny are looming as well.

The race is on for AI firms to steer policy directions to their benefit under the next administration. With no bipartisan consensus yet, expect lobbying dollars to continue pouring in from AI leaders old and new.

Read more.

Parting Thoughts

Well, that’s the tech news for this week. Hit reply and let us know—did you learn something from today’s newsletter?

Until next time!