What makes AI so compelling for venture capitalists?
All industrial revolutions have been driven by some kind of new technology. Steam powered the first one, electricity the second and the transistor powered the third. This Fourth Industrial Revolution is being driven by artificial intelligence.
As in the past, one of the outcomes of the current upheaval will be a step-change in productivity due to increasing levels of automation. The socio-economic implications of this have quite rightly been given a lot of air time already, so there’s no need to repeat them here. Instead, I will focus on why venture capital is focusing on AI and what types of business this technology will change.
As early stage investors, one of the things we at Octopus Ventures look for in a business is its ability to scale rapidly and disrupt a sector. Startups that automate tasks fall into this category because they use machines and software to augment or replace human tasks.
Why do we consider this to be important?
1. Automation increases productivity without increasing cost.
2. Startups are generally more profitable than established businesses. An app, for example, can sell millions of copies at negligible additional production costs.
Speed of implementation and higher margin business mean that companies selling technology based on automation can grow quickly and cost effectively. Additionally, the speed, safety, reliability, repeatability and accuracy of automation combine with reduced costs to create a powerful economic case for disruption. Taken together, these factors make such AI based startup businesses extremely attractive for VCs.
In previous industrial revolutions, automation was driven by the defining technology of the period and while that’s easy to visualise with steam power, electricity and electronics, I think people have been less aware of software’s power to automate. Yet even before we start to consider AI, existing software has already created lasting automated change:
- Automated writing in all sectors with word processors.
- The replacement of physically delivered postal communications with email
- Automated and personalised marketing through email marketing tools
- Automated manufacturing process management with SCADA (Supervisory Control and Data Acquisition) software
AI is now taking software automation to an entirely new level. Historically, automation has been dumb – the mechanical replication of step-by-step recipes produced by humans. However, some processes are too complicated to produce a recipe for, either because the number of steps is too large or the recipe is intangible.
For example, while it’s easy to explain all the rules and strategies for winning a game of noughts and crosses, it’s impossible to write a recipe that guarantees success at Go. Within the last ten years, AI advances have allowed programs to create their own recipes.
AI victory over humans at Go marks a point where an increasing number of processes which historically couldn’t be automated now have been and it’s these successes that are the basis of the VCs’ feeding frenzy around AI. This technology will touch all markets and industries and, as sector generalist investors, we are already seeing that most startups who come to us use it in some form. But because it is still relatively early days, few of them have core products, services or business models that rely entirely on AI.
Since AI technology can be applied to many problems, we haven’t seen AI startups cluster around a particular sector. However, AI based businesses require a couple of features that other startups don’t:
- Access to data – the more you have, the better your algorithms learn
- Access to AI talent – because it’s currently in relatively short supply
By its very nature, it is hard to predict where disruption will come from. That said, it seems clear to me that AI-powered businesses and products will push through a lot of disruption in the near future. That’s why we believe that now is a fantastic time to be an entrepreneur or early stage investor.
One of the most exciting things about the application of AI isn’t that it can help us provide the answers we want but that it can ask the questions we didn’t even think about. It seems likely that the most disruptive AI companies will be the ones that create the products and services we didn’t even know we needed.
Simon King is investment manager at Octopus Ventures, a London and New York based venture capital firm that over the years has worked with the founding teams of over 60 companies, including graze.com and Zoopla
This article originally appeared in D/SRUPTION Magazine.