In Orange County, California, we have a lot of these people who want to invest in tech startups, and be a part of the next big tech unicorn (a “unicorn” is a company with a billion dollar valuation). The challenge for many of them is getting beyond the tech hype and jargon to really understand the risks and true valuation. As a result, they pass on promising startups, invest and lose their money on bad bets, or take so long running due diligence that they miss the opportunity.
I’ve had the pleasure of working with or inside of about 20 tech startups, mid-sized companies, and Fortune 100 corporations, so I have seen how the sausage is made. I know how the jargon can create confusion and barriers to understanding for people who want to get involved and invest smartly.
One of the biggest problems I see is a fundamental misunderstanding of AI and what it can do for a business. Throwing “AI” around in a pitch deck has become the de facto standard to justify investment for a startup and add a veneer of innovation and endless investment return. This is, unfortunately, highly misleading in many cases and should cause an investor to immediate begin asking questions. AI, or Artificial Intelligence, is a goal, not a technique.
As an example, I recently sat in a pitch meeting for a promising medical device startup that I actually believe would be great for helping people manage chronic illness. I was fully onboard until I saw that their product strategy included “Use AI to manage…” It really isn’t important what came after those words, because no place else in that presentation or Q&A session did someone explain what this actually meant for their product, how they were going to use it, or even if they had someone employed who could eventually answer those questions. How can you base a company on something but have nobody onboard who can explain how it will be used? That’s like asking for investment in a manufacturing business and not having anyone who knows the strengths and weaknesses of different manufacturing techniques. Would you trust that valuation?
In most cases I think startups are invoking the hype around AI to paint a picture of self learning systems and exponential improvements. That’s all well and good, but “machine learning” and its subset “deep learning” require amazing algorithms AND tremendous amounts of data. Where is this data coming from? Who is building the algorithm? Who is tuning it? How are you presenting the results and verifying that the question you asked the system to answer is even the right question? How reliable are the results? And how will you know if the system fails, rather than continuously propagating the output as the “correct” answer?
I’m not saying that machine learning and deep learning are ineffective at solving complex problems in business today, but I am saying that you need to take a critical eye any time a pitch deck simply states “AI” as part of their strengths or product plans. A lot of companies claim to use AI, but when you dig into it, they’re actually pattern matching based upon inputs and human intuition. If you as an investor don’t understand the topic enough to ask questions, then you should find someone who can. You don’t need personally need to quiz them on Bayesian Machine Learning. If the application of AI techniques is too complex to be explained, then the founder doesn’t understand it or hasn’t figured it out yet, neither of which is a good sign for an investment in this space. As proof that AI techniques can be explained in terms that anyone can understand, this is one of the most straightforward examinations of AI hype that I have found.
To paraphrase Warren Buffett, “invest in businesses you can understand”, to which I would add “or find someone who you trust and knows the right questions to ask.” I do technical due diligence as part of my analysis of companies and how they’re operating, because sometimes toxic cultures arise when employees don’t believe their own hype. Sometimes getting the company to own their current product state is the impetus an organization needs to begin building a culture of truth, which leads to trust and can really move your company forward. I’d love to talk more about this, and I look forward to your thoughts on this matter.