Why US tech giants are buying British AI start-ups

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U.S. giants such as Apple (AAPL)and Microsoft (MSFT) are flocking to the U.K. to buy artificial intelligence (AI) start-ups as Britain establishes itself as the go-to place for the technology.

Microsoft announced that it had acquired London-based Swiftkey, an AI start-up that makes a predictive keyboard for smartphones, on Wednesday for $250 million, sources close to the deal told CNBC.

“We are looking for interesting tech. It is not new news that London is the most advanced start-up ecosystem in Europe,” a Microsoft insider who wished to remain anonymous because they were not authorised to speak publicly about the deal, told CNBC on Thursday.

“There is a lot of talent in London which is a combination of the education and active verticals in fintech, adtech and all of those that require expertise in machine learning. It explains the interest for us.”

Microsoft is not the only U.S. technology giant to scoop up British start-ups. In 2012, Amazon (AMZN) bought Evi Technologies, a company founded in Cambridge, England, which produces a Siri-like product which users can talk to and ask questions.

In 2014, Google (GOOGL) splashed £400 million ($582 million) to buy DeepMind, which has recently demonstrated its ability to master the ancientChinese game of Go. DeepMind then went on to buy two companies – Dark Blue Labs and Vision Factory – both artificial intelligence companies sprung out of Oxford University.

And earlier this year, Apple announced that it had acquired an start-up called Emotient which has developed technology that can detect emotions.

One reason behind the success, experts suggest, is the talent that is born out of the U.K.’s top universities Oxford and Cambridge. Both founders of Swiftkey, Ben Medlock and Jon Reynolds, were ex-students at Cambridge. DeepMind’s acquisitions were both from Oxford University.

And the continuing success of U.K. AI start-ups is also breeding more companies.

“If you start having one company, then two companies, sub groups for different applications, there is a very strong ecosystem created,” Martin Mignot, an investor in Swiftkey from Index Ventures, told CNBC by phone.

“You have this cluster effect going and it’s a self-fulfilling prophecy,” Mignot added, saying that Medlock is planning to mentor students at Cambridge University.

AI has been a big focus for technology companies with Microsoft pushing Cortana and Apple trying to improve Siri. Google announced on Wednesday that it is replacing the head of its internet search business, Amit Singhal, with John Giannandrea, the person running its artificial intelligence arm in signal that it wants to make search smarter.

Much of the activity with U.K. AI has stemmed from U.S. tech giants attempting to steal a lead on their rivals.

“It’s almost like an arms race between the 900 pound gorillas to make sure they have the technology, even if they are not sure what to do with it to make sure nobody else has their hands on it,” Simon Walker, a partner at law firm Taylor Wessing, told CNBC by phone.

The recent buying spree has also coincided with the rise of Britain as one of Europe’s top technology hubs. Venture capital investment in Britain rose 70 percent year-on-year in 2015 to $3.6 billion, according to London and Partners, citing data from research firm CB Insights. The rise of funding for British start-ups has led to scalable businesses, and this, coupled with the acquisitive appetite of U.S. tech firms, has been a driver behind the recent acquisitions.

“The development of these small businesses has coincided with a booming entrepreneurial ecosystem and that convergence has meant that these business have got started, raised funding and looked to build this tech out which has led to the creation of these businesses and this hub,” Alex Macpherson, head of ventures at Octopus Ventures, one of the investors in Swiftkey, told CNBC by phone.

Arjun Kharpal

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