AI will attract investors, but only substance pays
A recent study by London venture capital firm MMC Ventures revealed that 40 percent of Europe’s 2,830 artificial intelligence (AI) start-ups don’t, in fact, use any AI as an important part of their products.
“We looked at every company, their materials, their product, the website, and product documents,” MMC’s David Kelnar told Forbes. “In 40% of cases, we could find no mention of evidence of AI.
“[…] companies that people assume and think are AI companies are probably not.”
Since that report, questions have been raised around whether this is a sign of insufficient definitions as to what qualifies a company to be called AI, but also about how businesses may be using inaccurate terminology as a means to boost their investability— particularly in a market demonstrating such explosive growth.
With that in mind, TechHQ caught up with Duncan Di Biase, co-founder of investment consultancy Raising Partners, to uncover why startups may feel the need to use AI ‘branding’ as part of their equity raising efforts and how this approach could backfire.
“Start-ups believe AI to be a buzzword which will catch the eye of investors, and it will – initially”, said Di Biase. “There is no doubt that AI is a sector which is of growing interest, and as such, it will encourage investors to open decks and invite companies to an initial meeting.”
But, while there may be no shortage of startups with AI tagged on their Crunchbase profile, when it comes to actually securing investment, being part of an “on-trend sector” will never be enough. Quite the opposite, in fact; if a business is found not to be presenting itself in an entirely accurate and straightforward way, it will breed distrust among potential investors.
“Professional investors are extremely questioning,” said Di Biase. “They will look at the financials, IP and the finer details of a company’s product or service and will quickly spot if a sector definition is not accurate.
“Once this is established, chances of securing investment could hit rock bottom as fundamentally an equity deal is built on trust— the belief that entrepreneurs will be able to hit the goals they have set for their business and, as a result, deliver a return for the investment.”
At this point, it’s worth asking whether this is an issue confined to the heady, fast-growth world of AI technology, or whether the problem is endemic of wider startup’s fundraising strategies. For Di Biase, many founders, regardless of sector, often make the mistake of pitching their product as if they are selling it to a general customer.
As such, there is often a focus on USPs of the product or service and their team’s expertise. “These are important, but only to a certain degree when it comes to investment,” said Di Biase. “Professional investors will be looking, most importantly, at the financials to establish if what is being predicted is realistic within the timescale and if the predicted return is actually attainable.”
Painting a “less than accurate” picture of what a company does in the quest for investment is not limited to tech businesses, says the Raising Partners co-founder. The firm often meets businesses who say their product “can do X when, it is actually in a current state of producing Y, with only plans to deliver X after a period of development”.
This is isn’t done maliciously, he explains, but in an effort to stand out from the crowd— let’s not forget these are entrepreneurs that truly believe in their business and long-term vision.
The problem is that it weakens trust among investors, and getting investors to part with capital is built on whether they trust that a company will deliver on its claims: “There is nothing wrong with showcasing your product roadmap to investors and explaining that AI is going to be delivered down the line, but it should be clear this is a future intention and not a current reality,” said Di Biase.
So, how should startups go about correctly positioning themselves so they are investment-ready?
“A key principle is for start-ups to remember they aren’t selling their product or service, they are selling an investment proposition,” said Di Biase.
“Place yourself in the investors’ shoes. They want to see evidence-based claims, valuation analysis, market facts, a realistic five-year financial forecast and how you intend to deliver a return. Optimism and positivity, and using buzzwords can only get you so far, it’s critical to combine honesty and objectivity into your pitch when seeking investment.”
6 August 2020