By 2025, more than 75% of venture capital (VC) and early-stage investor executive reviews will be informed using artificial intelligence (AI) and data analytics, according to Gartner.
Remember Chesley “Sully” Sullenberger, who successfully landed a commercial airplane on the frigid Hudson River after a flock of geese flew into both engines, disabling them? That was miraculous as all 155 passengers on board survived and Captain Sully was dubbed the hero pilot for trusting his guts more than data – But that was way back in 2009. In recent times too, we have often heard CXOs, analysts and investors saying they ‘prefer to work on gut instinct’ when making decisions… But ‘The Times They Are a-Changin’.
In its recent research by Gartner, the analyst firm said that by 2025, more than 75% of venture capital (VC) and early-stage investor executive reviews will be informed using AI and data analytics. That’s news indeed as AI and machine learning have been something most VCs were slow to adopt.
Of course, many sectors are increasingly relying on data for many decisions, more than their guts, especially with the COVID-19 pandemic has caused a “digital transformation” in all sectors and areas of work and those who refuse to join the bandwagon may not stay afloat.
“Successful investors are purported to have a good “gut feel” — the ability to make sound financial decisions from mostly qualitative information alongside the quantitative data provided by the technology company,” said Patrick Stakenas, senior research director at Gartner. “
However, the “impossible to quantify inner voice” grown from personal experience is may not play a big role in investment decision making. The traditional pitch experience will significantly shift by 2025 as VC and private equity (PE) investors turn to leveraging AI and data science insights for due diligence, he believes.
Quantitative Analysis Will Shift Investing Strategy
Gartner predicts that by 2025, the AI- and data-science-equipped VC or PE investor will become commonplace. Increased advanced analytics capabilities are rapidly shifting the early-stage venture investing strategy away from gut feel and qualitative decision making to a more modern platform-based quantitative process. Information gathered from sources such as LinkedIn, PitchBook, Crunchbase and Owler, along with third-party data marketplaces, can be leveraged alongside diverse past and current investments.
“This data is increasingly being used to build sophisticated models that can better determine the viability, strategy and potential outcome of an investment in a short amount of time. Questions such as when to invest, where to invest and how much to invest are becoming almost automated,” said Stakenas.
AI Will Help Determine If Leadership Teams Will Succeed or Fail
Current AI technology is already capable of providing insights into customer desires and predicting future behavior, said Gartner, adding that unique profiles can be built with little to no human input, which can be further developed via natural language processing AI that can determine qualities about an individual from real-time or audio recordings.
While this technology is currently used primarily for marketing and sales purposes, by 2025, investment organizations will be leveraging it to determine which leadership teams are most likely to succeed.
“The personality traits and work patterns required for success will be quantified in the same manner that the product and its use in the market, market size and financial details are currently measured,” said Stakenas. “AI tools will be used to determine how likely a leadership team is to succeed based on employment history, field expertise and previous business success.”
Investment firms such as SignalFire and EQT Ventures are not just investing in tech companies, but are in their own way tech companies—housing their own proprietary AI platforms to analyze and vet investment opportunities.
Ilya Kirnos, co-founder, managing director and CTO of San Francisco-based venture firm SignalFire said in a recent Crunch base report said that SignalFire looks at four stages of successful investing: sourcing, diligence, placing the investment, and adding value to that company once it is in the portfolio and that acted as a ‘differentiator’, according to him.
Likewise, Stockholm-based EQT Ventures, which describes itself as a hybrid between a startup and a VC firm, plans to use Motherbrain over the next few years to help it find investment opportunities for its second fund, which launched last year.
Alastair Mitchell, partner at EQT Ventures, estimates the firm’s AI platform–called Motherbrain–for sourcing portfolio companies has played a role in more than $100 million of the firm’s approximately $900 million total invested since its first fund opened four years ago. “We placed a big bet on technology to be better investors,” he said.
With investors increasingly relying on data and AI, chances are we will see much more efficiency and automation in the process, especially as VCs are late adopters to this data-driven trends. However, not all the decisions we make here are driven by cold, hard numbers. At the end of the day, we’re dealing with people. And when you’re dealing with people and organizations, you will need to include the necessary element of learning to trust your gut—even when the data says otherwise. The CEO of Netflix, Reed Hastings, calls this ‘Informed Intuition’ and he believes that the ultimate decisions come down to smart intuition; a combination of big data analytics and gut-feeling – and striking the balance between the two. And that’s where like every other institution, tech investors can also make a world of difference.