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Venture capital firms have been instrumental in the growth of artificial intelligence startups poised to revolutionize corporate operations. Presently, these firms are intensifying their adoption of AI technologies themselves.
Although venture capital firms have previously experimented with utilizing AI internally, the advent of more sophisticated and creative AI technologies has significantly amplified the potential capabilities, according to investors.
Previously, companies could analyze internal data regarding potential startups and make comparisons based on their findings. However, now they are developing software and utilizing advanced AI systems to create dashboards that integrate internal data into displays featuring AI-driven scoring mechanisms. These systems evaluate portfolio companies, potential investments, and competitors.
Additionally, companies are inputting vast amounts of data regarding potential investments, existing portfolio companies, and market trends into sophisticated AI tools to structure the data and extract specific information through simple, plain English commands. For instance, a partner exploring investment opportunities in a complex and technical industry for the first time could instruct the AI to retrieve information from a lengthy report detailing regulatory risks for emerging companies in the space sector.
AI to spot deals
Sierra Ventures credits AI for uncovering a deal opportunity that the firm might have overlooked otherwise. In the past year, the San Mateo-based firm has implemented an in-house tool designed to highlight instances where a company being evaluated may be lagging in one aspect but compensates in another. This tool employs a color-coded system—green, yellow, or red—for different metrics, signaling deviations from the norm and potential investment opportunities. Sierra Ventures' platform incorporates proprietary algorithms developed by the firm, along with features powered by ChatGPT and Gemini, an AI chatbot created by Google.
Initially, Mark Fernandes, managing partner at Sierra, presumed that a healthcare software startup was older and had secured more capital than the startups he typically prefers to invest in. However, upon subjecting the company to Sierra's internal AI tool, the tool emphasized the company's robust employee growth. This insight led Fernandes to the conclusion that the company was indeed on a promising path. As a result, Sierra intends to finalize a financing agreement with the startup.
Fernandes remarked, 'I wouldn't have considered this deal if the model hadn't prompted me to do so. Given the sheer volume of deals we receive, I would have overlooked it.
Utilizing AI for Research Purposes
Amplify Partners has recently embraced AI to accelerate its research processes. According to General Partner Sarah Catanzaro, the firm found that conducting month-long research endeavors for one-off deals in new sectors wasn't always justified. Often, they would dedicate weeks to analyzing intricate technical reports to extract only a small amount of pertinent information. Now, Amplify's partners utilize AI tools such as ChatGPT and Perplexity to instantly extract the necessary insights from these reports.
ORI Capital, a life sciences venture firm, has developed an AI platform designed to analyze numerous companies and pinpoint those operating within at least one of the firm's three specified disease areas. Additionally, the platform identifies companies developing drugs aligned with the firm's interests. It subsequently highlights startups with exceptional personnel before human intervention is required to assess the results.
The Constraints of Artificial Intelligence
According to PitchBook Data, venture capitalists poured $58 billion into AI startups based in the U.S. last year, marking a 26% surge from the investment recorded in 2022 and a significant 113% increase from 2019.
Nevertheless, venture investors emphasize the importance of human intelligence in investment decisions, noting that chatbots do not engage with entrepreneurs or negotiate deal terms. Catanzaro expressed skepticism regarding relying on AI for investment selection, stating, 'I maintain significant doubts about utilizing AI for sourcing investments. It's challenging to envision AI replacing discussions with founders.
The Securities and Exchange Commission issued a cautionary message to investors utilizing AI, advising against exaggerating the capabilities of AI to their supporters.
Gurbir S. Grewal, the head of the SEC's Division of Enforcement, stated during the announcement of a recent breach that the agency would oversee assertions made by investors employing AI tools in their investment strategies. Grewal emphasized that if investors claim to incorporate AI into their investment procedures, they must ensure that their statements are accurate and not deceptive.
The SEC announced that it resolved allegations against two investment advisors for issuing inaccurate and deceptive statements regarding their claimed utilization of AI. According to the SEC, the firms opted to settle the charges and pay $400,000 in civil penalties. It's worth noting that these two firms are not solely venture capital firms.
AI as a Navigator
Jonah Midanik, COO and General Partner at Forum Ventures, stated that within the venture industry, AI isn't a guarantee for boosting returns. However, AI can assist investors in evaluating a larger number of deals. Midanik mentioned that Forum Ventures examines approximately 8,000 deals annually.
It's primarily designed to assist in decision-making," Midanik explained. "Another piece of data to consider.
After the controversy surrounding generative AI emerged in the autumn of 2022, Forum recruited a small team of engineers and product experts to aid in developing an in-house AI tool. This tool rapidly generates investment memos for potential companies and competitive analysis reports. According to Midanik, previously, analysts would spend several hours on each of these tasks. The tool utilizes various data sources, including internal data from the firm and AI applications like OpenAI's GPT-4.
Forum is developing an additional AI tool designed to evaluate the significance of different metrics such as annual recurring revenue or customer growth. The firm will input diverse data about a startup into the tool from various sources. Subsequently, the tool will generate a score that could provide insights for investment decisions. This process is expected to involve a combination of subjective judgment and objective analysis.