Amazon acquires AI startup one employee at a time to avoid regulatory scrutiny

Normally, the process for a large tech company acquiring a smaller, venture-backed startup looks something like this:

1. Big company and startup agree to an acquisition price

2. The startups’ investors receive proceeds from the big company in exchange for their stakes

3. Many of the startups’ employees join the big company

In March, Microsoft cut a deal with two-year-old generative AI and machine learning startup Inflection that looked like an acquisition, but it wasn’t called an “acquisition.”

Microsoft agreed to pay Inflection $650 million, in cash, as a licensing deal to allow the tech giant to sell Inflection’s models through its Azure cloud service. Most of that money was used to pay back investors, including Greylock and Dragoneer, 1.5x what they invested, and Inflection’s founders, as well as many of the firm’s 70 employees, left to join Microsoft.

One reason Microsoft may have done this was to avoid regulatory antitrust scrutiny. Led by the FTC’s Lina Khan, government regulators in the US and Europe have cracked down on big tech acquisitions in recent years, and Microsoft, Meta, Amazon, Nvidia, Adobe, and Visa have all faced lawsuits and complaints from US and UK regulators regarding acquisitions since 2021.

(It remains to be seen if Microsoft will succeed in avoiding regulatory hurdles. Last month, The Wall Street Journal reported that the FTC is now investigating whether Microsoft’s deal with Inflection was structured to avoid a government antitrust review)

Now it looks like Amazon is copying Microsoft’s playbook, with GeekWire reporting that Amazon is structuring a similar deal with AI enterprise tool startup Adept:

Adept co-founder and CEO David Luan, the former vice president of engineering at OpenAI, will join Amazon. Adept co-founders Augustus Odena, Maxwell Nye, Erich Elsen, and Kelsey Szot will also move to Amazon, along with a few other employees.

Adept will continue operating as an independent company with its remaining workforce. Amazon will use some of Adept’s technology as part of a non-exclusive license.

That remaining workforce is, of course, much smaller than it was a week ago. Yesterday, The Verge reported that Amazon had hired “close to” 66% of Adept’s employees, noting that the startup may have been running low on cash, per the tone of a blog post published on Adept’s site.

I have a question: If this quasi-acquihire model becomes the norm, what happens to the startup’s investors?

Venture capital is governed by power laws. For even the most successful venture capital funds, most investments go to zero, while a few investments are home runs that generate almost all of the fund’s returns. Even if Adept uses Amazon’s licensing payment to return capital to investors, similar to Microsoft and Inflection’s deal, VCs don’t want 1.5x returns. They want 10x (or more) returns.

And what if investors don’t get compensated?

Adept raised more than $415 million in venture capital, including $350 million in its most recent funding round at a ~$1 billion valuation. Now, Amazon has hired most of its employees, including all of its founders, leaving behind a skeleton crew to operate the “company.” Sure, Adept still exists, but with 80% of its workers gone, it’s certainly not the same business that General Catalyst and Spark Capital invested in at a billion dollar valuation in 2023. 

For founders and early employees at AI startups, the big tech acquihire makes sense. After a year or two running a capital-intensive startup, you can accept a generous compensation package to join a larger, stable company with deep pockets. The losers are those who invested in the startup in the first place.

If this trend continues, I imagine that investors will begin to shy away from AI startups.