Gartner predicts 75% of VCs will be using AI instead of their ‘gut feel’ to make decisions by 2025 — a path that companies are already discovering

• Global research firm Gartner predicts that 75% of venture capitalists and private equity investors will use artificial intelligence (AI) to make their investment decisions by 2025.
• Investing in startups is just as, if not more, risky than investing in the money market.
• Many companies like Motherbrain and SignalFire are already using data to track down companies that are on the cusp of becoming successful.

A person’s ‘gut feel’ is often the compass for making decisions. However, when it comes to investing in companies and startups, research and advisory firm Gartner estimates that three-fourths of the venture capitalists (VCs), globally, will be using artificial intelligence (AI) to make their decision by 2025.

“This ‘impossible to quantify inner voice’ grown from personal experience is decreasingly playing a role in investment decision making,” said Patrick Stakenas, a senior research director at Gartner. “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.”

The wheels of this transformation are already in motion. Stock markets around the world have opened their doors to AI-led funds, called ‘quant’ funds and startups like Motherbrain and SignalFire are applying data to venture capital around the world.

AI to beat the stock markets
Rather than have fund managers at the helm, quant funds use rule-based algorithms to pick the winners and losers. In India, one such example is the Tata Quant Fund. It claims it can beat the market using AI to cut out human bias. But, there is still a fund manager in-charge to keep an eye out for any mistakes.

The Project One hedge fund, on the other hand, is a ‘pure’ AI model. The brainchild of Andrew Sobko and Rami Jachi uses an alpha-learning AI model which continues to adapt and update itself without human involvement for manual data collection and processing.

"Through our study of praxeology, there is no guessing," said Sobko in a statement. "We are fully aware of the facts associated with human behavior and involvement, which is why we moved to eliminate the error-prone component from our proprietary algorithm."

Between 2016 to 2019, the aggregate return of AI-led hedge funds in Europe was almost three times higher than overall hedge fund returns, according to US-based research firm Cerulli.

AI to find the next big unicorn
Investing in startups is just as, if not more, risky than investing in the money market.

Around 90% of startups in India fail within the first five years of their inception, according to a report by the IBM Institute of Business Value and Oxford Economics. That’s enough to give investors pause when mulling over whether or not to invest in a new business.

And, that’s where AI comes in. It can allow investors to determine how early stage startups will perform. They can estimate the probability of a startup’s success by analysing its revenue growth, market size, industry experience and other pertinent factors.

This way, models using AI can predict if a startup is investment worth before the fundraising process even begins.

One such machine learning system is the EQT Ventures-backed Motherbrain. It applies its algorithm to historical data in order to identify promising investment candidates. It uses a combination of factors, which are included but not limited to, financial information, web ranking, app ranking and social network activity. EQT Ventures already makes 30% of its decisions through the data-analysis platform.

Another startup called SignalFire, founded by Chris Farmer in 2003, is the self-proclaimed ‘mini-Google’. It tracks more than 8 million startups across the world. Companies which are outperforming or doing something notable are flagged on the platform’s dashboard.

Such startups also solve the problem of finding interesting investment targets before anyone else. InReach Ventures, a UK-based VC firm, developed a model in-house to help find new and upcoming businesses. “What used to be a handcrafted job has become significantly scalable. You become 10 times more productive,” InReach founder Roberto Bonanzinga told the Financial Times.

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