As investors rush to find the next big AI deal, they should pay more attention to the potential AI has to reinvent venture capital.
While knowledge workers from lawyers to marketers are wondering how safe their jobs are, there is every chance that AI will disrupt the inner workings of the VC world itself. Most obviously, it can accelerate the speed at which investors find and make deals.
But the real power and potential of using tech in venture could be in using it to find hidden gems. Companies that might otherwise go under the radar and be overlooked by investors, who repeatedly source deals from the same networks.
Using AI to find the hidden gems
AI can galvanise venture because it expands investors’ reach - exponentially.
In the past 20 years, 514 unicorn companies have come from 65 cities across the continent according to Dealroom, but a small investment team can’t hope to physically reach the 100+ places in Europe where exciting companies are emerging every day.
Right now, more than 50% of VC investment goes to just three countries (France, Germany and UK), according to Dealroom. Clearly, there is so much more to talent and potential to be discovered across Europe with a long tail of cities with strong tech talent, developing ideas in relative isolation. Using AI, we’ve unearthed startups of interest in Bratislava, Andorra and even in Bodø in the Arctic Circle. It’s leading us down less travelled roads and that has to be an advantage.
The second way that AI will change venture is because it can be used to eliminate bias. Investors naturally focus on the larger European tech hubs, finding founders similar to those they have worked with before - from the same schools and feeder companies. The end result is that the same types of companies and founders continue to get funding.
Extraordinary founders can come from anywhere. Using AI to find targets, we can look beyond easy and familiar founder metrics, instead of focusing on other signals that correlate with growth and potential. One example is bootstrapped companies. Too often, VCs treat these companies as unambitious but companies that choose to grow from revenue have remarkable qualities. This led us to Checkout.com - now one of Europe’s largest fintechs. As investors focus more on profitability than growth, being alert to these signals will become only more important.
Investors who are prepared to go to less obvious places can convince founders that they will go above and beyond - even when those companies aren’t actively looking for investment. Road trips for a cup of coffee in St Gallen, Switzerland, or a three-hour drive to Andorra, have led us to deals that were on no one’s radar.
The third way that VC will change, is that AI can make up for investors’ human failings. One mistake that most investors have made is passing on a company at seed and then missing the big opportunity to invest at Series A. But with help from an algorithm, investors can keep an eye on how a company is developing. Things that businesses do every day - make a senior hire or redesign their website - can flag a shift in growth or potential that is worth looking into. These always-on alerts provide capacity and powers that humans alone can’t.
Augmenting VC
Like most knowledge industries, data can only take you so far. Relationship building will remain fundamental to venture and there will always be a role for it. Networking is its own form of intelligence, uncovering things you will never find in the data.
Some will argue that using AI in venture will only lead to more cookie-cutter companies being created. But intentional and careful use of AI can have the opposite effect, creating the potential for a system where untypical and unusual founders can be uncovered.
In this way, we can use technology and software to build a more equal tech ecosystem, with all the benefits to economies and even overlooked communities that will bring. Uncovering a different sort of founder, with a different mission, is vital.
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