AI Driven Venture Capital

AI-Driven Venture Capital

Funds use a data-driven or AI-led approach to identify and provide capital to early stage businesses with return or growth potential 

AI-driven venture finance funds evaluate multiple data streams of data to identify companies with potential for high growth, finding companies that may be overlooked or undervalued by standard venture capital. 

AI-Driven Venture Finance is not

AI-driven venture finance provides decision support to fund managers but is not an automated process. These firms use the data exhaust of companies – social media interactions, credit card data, sales data and other publicly identifiable data sets to develop what is called deal flow: the list of companies that a firm should consider for investment. 

AI-Driven Venture Capital vs. Regular Venture Capital

AI-driven firms market their fund compared to standard venture capital, whose deal flow is based on their networks and relationships to specific geographical startup ecosystems and university connections. As the world gets more detached from the Bay Area as the epicenter of venture-funded growth, an opportunity has emerged to find a different mechanism to identify emerging growth companies.

Additionally, AI-Driven Venture Capital can claim to address the inherent bias that may exist in human-formed networks that are not open to diverse founders (but must then practice a data-driven and decision strategy that delivers better than industry standard results).

Example Firms

Fly Ventures | In Reach Ventures |  EQT Ventures | Hatcher + | Hone Capital |  Deep Knowledge

Is AI-Driven VC the right capital for your business at this stage?

COMPANY PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

CAPITAL GIVER PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

When it Works Well

Benefits Companies with Data Exhaust

Companies in sectors like e-commerce and B:C marketplaces may be better targets for AI-driven investment where third party data can be purchased, ingested, and analyzed. These sectors have purchasable datasets. If your company is performing better than your comparable companies, your firm may be discovered and perform well with AI-sourced deal flow. 

Generates Undiscovered Deal Flow

VC firms are looking for the best companies for the best deal, and often in hyper competitive sectors or ecosystems VCs may be priced out of deals. AI-driven sourcing works best when companies are discovered that have not yet been aggressively courted by leading VCs. 

 

Improves Diversity Track Record 

AI-driven deal flow processes are fairly new. If these pipelines are able to increase sourcing and location of company founders outside of the standard Bay Area and top city hubs, this may result in more women and people of color getting funding – but these stats may not appear for a few years. Time will tell if deliberate network development through regular VC will improve these odds vs. standard VC. 

Networks as Strong as Regular VC

From the company’s standpoint, make sure you are not trading down to a less networked venture capital firm. The value of VC still lies in their relationships with other firms that may co-invest or invest in later stages, or banks that may support a public event, or companies that may acquire your company. Do the same amount of reverse due diligence in the VC’s portfolio to ensure the firm can provide these benefits. 

 

Challenges to AI-Driven VC

Narrative Often Outweighs Numbers

Companies that go on to raise Series A, B, and C and beyond tend to have powerful narratives that attract later stage investors. While numbers matter, the most successful tech companies tend to also rely on big visions of the future – Tesla to Apple to Amazon. This is especially true in the earliest years before major exponential returns kick in, and before profits flow. A data-driven approach in VC may be as unsuccessful as a value-driven approach in public markets investing – over focused on benchmarks and intrinsic evaluation, and not enough on the convergence of technology and power of founder-led storytelling. 

AI Can’t Manage Relationships

Humans are often better than AI at detecting the strength of team dynamics and building relationships with founders to help them make strategic decisions and navigate uncertainty. The actual value of AI-driven selection and operational support may end up not providing as much value to the companies in the portfolio, who may benefit from old-school relational support. 

 

 

No AI is Bias-Free

Humans still have to factor how much value to give to parameters, and simple decisions about schools and prior fundraising rounds may still serve up the same deals that perform well in a standard pipeline – Stanford computer science engineers that have been through YCombinator.

 

Trends in AI-Driven VC

Rise of More AI-Driven Funds

AI-Driven VC is a trend within VC, with over 25 funds now claiming the use of AI in different ways. If the trend continues, your companies data exhaust from credit card receipts to social media engagement to competitive intelligence may factor into your valuation in the future. 


AI in VC Operations

Some funds go beyond using AI to screen companies and provide assistance in the development and data operations for their portfolio companies and advice for how to scale AI-driven companies. 


Decline of the Pitch?

Industry experts predict that the traditional pitch experience will significantly shift by 2025 and tech founders will need to give investors access to AI-enabled models and simulations as traditional pitch decks and financials will be insufficient.

 

Before You Consider AI-Driven VC

  • Do you have evidence of customer demand that is substantially better than competition at your stage?
  • Do you have an observable set of data?
  • Are you planning on fundraising and are you actively seeking regular VC in order to compare terms?

Exploring AI-Driven VC

  • You can find a number of excellent roundups of AI-driven VC if you feel your company demonstrates strong traction. 
  • Always run our own investment process in a proactive manner, do not wait for investors to find you.

Discover Alternative Capital

Revenue-Based Finance is one way to grow your company, and you can choose other capital types as an alternative or pair and combine  at different stages of your business. Consider these alternative capital sources or explore our Capital Library