Investing in AI – The VC Perspective

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Investing in AI – The VC Perspective

13th August 2018 – Cape Town, South Africa – The AI Expo Africa Team gain a valuable insight from Andrea Böhmert, Co-Managing Partner Knife Capital, about the VC’s perspective on Investing in AI (Artificial Intelligence).

It is 2018. Can you rightfully call yourself a VC if you have not invested in at least one AI company? After all – according to the McKinsey’s and Deloitte’s AI is the disrupting force, the game changer. The Gartner Hype Cycle for Emerging Technologies, 2017 names one of the three emerging technology mega-trends: Artificial Intelligence (AI) everywhere. And when Gartner says “By 2019, startups will overtake Amazon, Google, IBM and Microsoft in driving the AI economy with disruptive business solutions“, we better start investing now.

According to the latest PwC/CBInsights MoneyTree Report, which tracks global VC investments across all industries, total funding for AI-related firms accounted for a total of $5 billion invested across 444 deals in 2017. That’s a 28% increase compared to 2016, when $3.9 billion was invested across 417 AI-related deals, PwC/CBInsights says. And some of the funding rounds and exits are staggering.

But what defines an AI company? Does employing a Data Scientist make you an AI company? Is a company that is using older data analytics tools and labeling it as AI for a public relations boost an AI company? What if you use the algorithms offered by the likes of Amazon, Microsoft and Google? Is AI your core purpose or are you adding AI functionality to an existing value proposition? Or are you creating real business solutions leveraging your own AI algorithms? And which one of the above justifies the sometimes crazy valuation expectations that seem to come with including the term AI in your pitch deck.

As VCs, our mandate is not to invest in disruption and latest technology – it is to make significant returns for our investors. So, do AI companies make money? How does one generate the returns our investors are looking for? Dividends require significant positive cash flow. IPO – sounds cool but you have to have a constant narrative that satisfies your investor base – quarterly. M&A seems to the most logical choice, with AI acquisitions up by 44% in 2017 according to research published by CBInsight.  And AI startups are acquisition targets not only for big tech companies, but also for the likes of traditional insurance, retail, healthcare, and automotive incumbents.

Andrea Böhmert

Andrea Böhmert – Knife Capital

Applying Knife Capital’s principle of building exit-centric but sustainable businesses, what exactly are the acquirers buying? The largest percentage appear to be acqui-hires, trying to buy skills in this still relatively small talent pool. And at a rate of US$2m to US$5m per person, this is not a bad way to generate returns. If you analyse these companies you will often see a well-known and highly respected founder, surrounding himself (and yes, unfortunately in all the cases I analysed it is a HE) with a group of highly skilled scientists consulting to industry.

Knife Capital

Knife Capital – One of South Africa’s Leading VC firms

The next acquisition rationale seems to be Intellectual Property – companies that have managed to solve a “real problem” by applying their own AI solution to a very specific, often narrowly defined issue. These are often the so called Unicorns.

And then there are those who are building businesses. The founders understand AI and they have a solid understanding how the insights that can be obtained can add measurable benefit to a specific industry.

Each of the company types has its challenges. Type A, the acqui-hire potential, needs to move from consulting job to consulting job, hoping that at the end one of the clients (or a big consulting house) wants to have these skills for themselves and is prepared to pay for it.

Type B, the potential unicorn, needs to develop this unique IP and validate that it works. This will most likely require significant funding at a very high risk, while waiting for the validation to materialize. Hoping that nobody solves the problem before you.

Type C has to crack the challenge of matching the AI expertise with industry knowledge and finding a sufficient amount of early adopters to make the business model work. So over and above working with cutting edge technology these entrepreneurs also have to build a real business.

Analysing the publicly available portfolio of the South African VC community (limited to those that are registered on the SAVCA database), only a very few have done investment in companies that mention AI on their website. So why is that? Are there not enough investment ready AI companies in South Africa? Are the majority of investors not ready for it? Or is it just too difficult to generate significant returns from such an investment if you are based in South Africa?

A investors, we get bombarded with business plans full of ”Buzzword – Bingo”, hoping that for every AI, IoT, VR, AR and Crypto, another 0 gets added to the valuation. But how do we distinguish between “Substance” and “Hype” when you are actually struggling to find experts to even conduct a technical Due Diligence on these companies? Looking at the month of September where in one week you have the Learning Indaba in Stellenbosch and the AI Expo in Cape Town, it will be very interesting to experience Africa’s AI community in action. And assess which one it is – substance or hype.

About Knife Capital

Knife Capital is an independent growth equity investment firm focusing on innovation-driven ventures with proven traction. By leveraging knowledge, networks & funding, Knife Capital accelerate the international expansion of entrepreneurial businesses that achieved a product/market fit in a beachhead market. They have offices in Cape Town and London and invest via a consortium of funding partnerships, including SARS section 12J Venture Capital Company: KNF Ventures and select Family Offices. Knife Capital also managed HBD Venture Capital’s portfolio of investments in SA and builds high-growth tech-enabled SMEs through its Grindstone Accelerator. Knife Capital has invested in DataProphet, a Machine Learning company that focuses on providing its AI enabled process control solutions to the global Manufacturing industry.

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About AI Expo Africa

Taking place on 9-11 September 2018, Century City Conference Centre, Cape Town, South Africa, AI Expo Africa 2018 is focusing on real world applications & trends driving the Artificial Intelligence (AI) Economy in Africa and seeking to build the largest Business focused AI Community across the continent. With 400+ delegates, 50+ speakers, 40+exhibitors in the Expo Hall, Innovation Cafe & Demo Zone, the event is aimed at CxO / C Suite delegates with the primary goal of educating business leaders about AI applications and opportunities impacting the Enterprise today as well as generating real business and learning opportunities for sponsors, speakers & AI innovators across the region. If you would like to join the event as a delegate or would like take up one of the exhibition, Innovation cafe or speaking opportunities simply visit the links below

  • Register– Save via our Early Bird ticket sale
  • Speak– Submit a paper for one of our speaking opportunities
  • Sponsor– Secure your company a place in the Expo Hall & networking evening

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By | 2018-08-13T13:58:32+00:00 August 13th, 2018|Press Release, Venture Capital|0 Comments

About the Author:

Nick is Co-founder of AI Media Africa, home of AI Expo Africa 2018. He has 20+ years experience in the technology sector working at the interface of client, vendor, partner & investor to provide organizations with enhanced technology based solutions with high ROI.

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