AI is latest target of venture investors
Ecosystem and strong plan are still required
Every few years a technology that takes over the business world captures the undivided attention of investment community. It happened with cloud, with mobile and with big data. Each of those technologies were responsible for creating an entire ecosystem of startups and investors.
Now it’s AI that is capturing investors’ interest.
Integrate. AI is a case in point. CEO and f ounder Steve Irvine left a lucrative role at Facebook to start his own AI platform development company in January in Toronto. It has already received US$ 5 million in seed round funding from Georgian Capital — a firm that almost exclusively invests in growth- stage enterprise companies earning $500,000 or more in monthly recurring revenues.
“It’s the first seed investment Georgian has made. But it’s a fund that really understands the AI space and what business models will be successful,” Irvine says.
“For a firm like Georgian to come to the seed stage for a company that doesn’t yet have a product — that indicates a significant trend,” says Michelle McBane, investment director at Investment Accelerator Fund at MaRS in Toronto.
So what is it about AI that is bringing high- profile investors to the table so early in the game? As a rule, venture funding typically goes for high-growth, highly scalable businesses, she says. “That means the business has to be very disruptive. Cloud computing, for example, affected and changed software development. Mobile is now table stakes. AI is one of those underlying technologies that can touch many, many things. Everyone is putting AI in their slide decks in some form, whether it’s deep learning, machine learning or neural networks.”
Valuations for AI projects are increasing, McBane says. At a recent conference, she attended, a speaker noted that the valuation multiple an AI company would get over cloud computing was substantial.
We wanted to pay attention to what would be the next horizontal technology to enable massive value creation and disruption.
While AI startup investment may have some exceptions, funding rounds typically follow a specific pattern, starting with the angel/friends and family financing stage — usually in the $100,000 to $500,000 range. “Someone has an idea and cobbles together one or two founders to build a minimal, viable product,” McBane says.
Seed- stage investors are the next step as the company “stretches out.” At that point, a company will have reference- able customers, some sort of market validation, and a nucleus of a team that includes a business and/ or product development and a technology person in place. Funding at this stage is usually in the $ 500,000 to $ 3 million range.
The next inflection point is Series A, B and C financing (the differentiation between the three being the maturity of the business and the amount of money involved). “At that point the business is a machine and its model is repeatable and scalable, and has the metrics to understand how it will grow substantially,” she says.
Given the early- stage nature of AI, Jean- Sébastien Cournoyer, co- founder and partner at Real Ventures, says seed- stage investment is especially strong. In fact, Real Ventures’ entire investment focus now is in the AI sphere. “We wanted to pay attention to what would be the next horizontal technology to enable massive value creation and disruption. We set ourselves a goal two years ago to invest in the next value- creation platform and decided that would be AI. In time, every company will need to use it, the same way they use cloud and mobile.”
Real Ventures is working on two AI- focused funds. One is targeted at the preseed stage. “It could be early stage companies with a product, or not,” Cournoyer explains. “The key is to make sure the initial seed round is structured the right way to help companies get to product market fit without too much dilution, and focus on maximizing the opportunity instead of short- term revenue. The intent is to send these people on the VC path.”
The second fund is focused on early stage companies with a project that can be applied to a vertical. Funding rounds range from $2 million to $6 million to go to market aggressively.
As strong as the interest in AI is, a good idea will only take you so far, Cournoyer says. “Once you get a market fit, you need a strong ecosystem — which means access to smart money, talent and networks to get access to customers and other ecosystems around the world.”
Irvine of Integrate.AI says despite its success with seed funding, the groundwork is the same. “It might look easy with all the hype around AI. But there’s no way to skip the steps of having a great business model, people and a market to sell to. Luckily we had a very defined idea of what we wanted to do in this space.”