The Ethical Imperative: How Venture Capitalists Evaluate AI Startups
Investors seek AI startups that solve societal problems while making money
Venture capitalists are increasingly interested in supporting artificial intelligence (AI) startups that not only generate profits but also address significant societal issues. These investors are seeking entrepreneurs who understand the power of AI as a tool and its potential to bring about urgent change in industries and society. While AI companies attracted a significant amount of investment in 2023, some investors are concerned about the hype surrounding AI capabilities. This article explores how venture capitalists evaluate AI startups and the criteria they use to determine which companies to support.
The Need for Real Transformation
Venture capitalist Matt Ocko emphasizes the importance of AI startups reinventing how work is done today, rather than simply providing a productivity boost. Ocko believes that AI should be used to solve massive societal problems and bring about positive change. He is interested in entrepreneurs who combine deep industry expertise, proprietary data, and AI to tackle urgent challenges in large industries or society as a whole.
The Dilemma of Overhyped AI Capabilities
The explosive interest in AI has led to a troublesome dynamic in the investment landscape. Some venture capitalists are only interested in meeting with startups that have an AI tool or strategy, creating pressure on entrepreneurs to exaggerate the capabilities of their AI solutions. Investors are aware of the rapid adoption of AI features by established companies, such as Meta, Adobe, Salesforce, and Microsoft. To stand out, AI startups need to demonstrate how they can truly reinvent existing workflows and address unresolved pain points in industries.
The Three Categories of AI Companies
Adam Coccari, managing director at Intuit Ventures, identifies three main categories of AI companies. The first category includes transformative foundational models, such as OpenAI, which require significant capital and are highly competitive. The second category focuses on the tools and infrastructure built around these models. The third category is applied AI, where AI is used to solve specific industry problems or improve workflows. Coccari is particularly interested in startups that fall into the applied AI category and can demonstrate a 10x improvement over existing solutions.
Aligning Values and Priorities
Venture capitalists like Soraya Darabi of TMV prioritize investing in AI startups that align with their firm’s values and verticals. TMV focuses on sustainability and logistics, considering them both good for business and capable of delivering high returns. Darabi asks founders questions that help her assess their long-term alignment with the firm’s values. She has invested in AI startups such as Tali AI, Clockwise, and Roon, which operate in the medical and scheduling sectors.
The Future of AI Entrepreneurship
Lawrence Watkins of Atento Capital believes that AI will eventually impact all industries, making everyone an AI founder in some capacity. Watkins emphasizes the importance of addressing issues related to data privacy and bias when evaluating AI startups. He asks founders about data ownership, privacy concerns, and the decision-making process behind AI algorithms.
Conclusion:
Venture capitalists are increasingly focused on supporting AI startups that not only generate profits but also address significant societal problems. They seek entrepreneurs who understand that AI is a powerful tool that, when combined with industry expertise and proprietary data, can bring about urgent change in large industries or society as a whole. These investors are interested in startups that can truly transform workflows and offer solutions that are 10x better than existing alternatives. The future of AI entrepreneurship lies in aligning values, addressing data privacy and bias concerns, and striving for a resilient and hopeful society. By investing in startups that prioritize ethical AI applications, venture capitalists aim to shape a future reminiscent of Star Trek rather than one marred by the dark realities of Star Wars.