As Microsoft makes waves by poaching talent from artificial intelligence startup Inflection, regulators and venture capitalists are poised for a showdown.
In a strategic move that blurs the lines between acquisition and talent acquisition, Microsoft's decision to onboard co-founders and employees from Inflection is stirring regulatory curiosity. While both companies insist it's not an acquisition, regulators may beg to differ. The arrangement, which involves hiring staff and licensing Inflection AI software without exclusivity, keeps Inflection as an independent entity but significantly diminishes its operational capacity. This nuanced setup, aimed at evading certain antitrust regulations, is likely to catch the eye of regulators concerned about potential competition reduction in the AI sector.
In the tech realm, where startups are often valued more for their talent than their assets, deals focusing on acquiring talent are common. However, the regulatory landscape has shifted, with authorities showing a renewed vigor for scrutinizing tech deals. Recent actions by the US Department of Justice against Apple and ongoing scrutiny over Microsoft's investment in OpenAI indicate a more stringent approach. Such regulatory scrutiny has led to the derailment of significant deals, contributing to a decline in overall tech M&A activity.
For major companies like Microsoft seeking to bolster their AI capabilities and AI startups eyeing acquisition, this poses a dilemma. Microsoft's previous involvement with OpenAI, marked by internal upheaval, seems to have prompted a shift towards in-house AI team development. Inflection's co-founder Mustafa Suleyman, also a co-founder of AI lab DeepMind, is set to lead Microsoft's consumer AI division, signaling the tech giant's commitment to strengthening its internal AI expertise.
While Inflection's investors stand to recoup some of their investment, the prospect of modest returns and the potential disruption to the traditional venture capital model may not sit well with the broader VC community. If Microsoft's approach of talent acquisition over traditional acquisition becomes a trend among tech giants, it could spark resistance from startup investors, posing a threat to the established VC funding ecosystem. As Microsoft's maneuver reverberates across the tech industry, all eyes will be on how regulators and investors respond to this new paradigm.