Considerations For Venture Capitalists Before Investing In Artificial Intelligence StartUps

The Artificial Intelligence industry is one of the fast growing sectors in recent times and thus it is no surprise that that AI companies are attracting venture capital investments. Most recently is the launch of the Vision Fund 2 by SoftBank Group which aims at investing in AI and it is expected that it will have a big impact in the industry.

Growing Investment in AI

Beside the Venture Capital investments in the industry, big companies such as Microsoft Corp (NASDAQ:MSFT) are also keen in the sector having announced an equity stake worth $1 billion in OpenAI. For quite some time the AI industry has been behind but with the growth of Big Data, enhancements of GPUs and innovations in academic research AI is becoming a big force. In Canada companies such as NexJ Systems Inc. (OTCMKTS:NEXJF), Shopify Inc. (NYSE: SHOP) and Kinaxis Inc. (OTCMKTS:KXSCF) are leading the revolution.

According to ScaleVP Principal Jeremy Kaufmann with the on-going AI revolution the technology will soon be the largest driving innovation in business software going into the future. He added that the impact of AI in the next decade will be synonymous to what was witnessed when cloud software overtook on-perm software twenty years ago.

Despite things being different for the AI revolution compared to what was experienced with the cloud revolution, there are still a number of start-ups that are cropping up and ready to leverage thus mega trend.

AI does not replace core business processes

Although the AI revolution will change business operations it will nonetheless not rewrite all businesses processes just like the cloud revolution did. For instance during the cloud revolution companies like Salesforce.com Inc. (NYSE:CRM) managed to outdo established on-perm vendors like Oracle Corporation (NYSE:ORCL). For AI the start-ups will not manage to displace existing companies because AI does not replace core business processes.

AI will bet have an impact in enterprise software by sitting on various business system of record where it can be used as a system of forecast. Equally a start-up will be required to have a strong data strategy that supports the training of models. What this means is that the AI start-up will need to have a proprietary source.

What VCs consider in AI start-ups

Kaufmann states that for them to invest in a project they look at those start-ups that have proprietary data. He says that in each deal they seek to know whether the start-up has domain specific comprehension and data or it is something big players such as Google (NASDAQ:GOOG) can replicate. This is normally the biggest challenge that start-ups face in having data that cannot be replicated.

Beside data start-ups have to deal with other challenges like labelling and tagging as well as other inherent issues to do with bias that can lead to unexpected consequences.

Teams are also very important just like any venture opportunity and the VCs look at the academic credentials of the team behind the enterprise. Northwest Venture Partners’ Rama Sekhar says that they also prefer startups with teams that have had models at scale especially from established companies such as Apple Inc. (NASDAQ:AAPL), Google or Amazon.com (NASDAQ:AMZN).

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