Inside the minds of VCs: 5 ways AI is changing investment decision-making

Venture capital firms (VCs) have always been at the forefront of the innovation economy, providing financial support to some of the world’s leading tech firms, from Microsoft to SpaceX. 

It shouldn’t be surprising, then, that many VCs – e.g. Nauta Capital and SignalFire –  are already ahead of the trend, leveraging artificial intelligence (AI) to enhance their decision-making processes. From identifying promising startups to monitoring their portfolios, VCs are empowering themselves with AI to make smarter investments.  

Startup fundraising is tougher than ever due to economic downturns, with no thanks to SVB's collapse. Accordingly, startups have to become more competitive than ever to weather these volatile times. Understanding how VCs are leveraging AI can help you tailor your approaches and stay ahead of the curve.

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#1 Screening, sourcing, selecting 

VCs have the luxury of picking from a sea of options but this privilege is two-sided. While in theory, they have the opportunity to pursue the most promising opportunities, sifting through countless options requires significant time investments. VCs reportedly spend over 100 hours per startup as neglecting this can spell disaster.

VCs are now using AI-powered tools, such as Oracle DataFox, to rapidly analyze thousands of startups, flagging and filtering interesting opportunities according to their pre-specified criteria. This essentially transforms the screening process into an automated one.

For startups to acclimatize, it is crucial to prioritize visibility (e.g. updated websites), showcase their unique selling points, and ensure key metrics like growth are accessible. 

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#2 Reducing bias

The inherent bias, be it gender, anchoring, or confirmation, ever present in VCs during the decision-making process pose a long-standing problem. These biases risk overlooking high-potential startups while neglecting inclusivity, diversity, and fairness within the startup ecosystem.

Completely eliminating bias is impossible. In fact, AI tools themselves can be subject to biases during their creation and design. However, more VCs are using tools like Kanarys (i.e. monitoring DEI-metrics within startups) and DataRobot (i.e. objectively analyzing financial data) to mitigate the problem of biases.

Startups must understand the AI tools VCs use and how they evaluate startups. Prioritizing visible and impactful DEI initiatives is also essential to align with the VC landscape.

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#3 Saves time conducting analysis

Besides screening, another time sink for VCs is calculating and understanding the potential impact of their investments. Analyzing financial projections, valuations, burn rates, runways, and cash flow forecasts requires significant time and effort.

AI tools like Visible Alpha shorten the time spent on analysis work, allowing VCs to allocate it to other areas. These tools enable combing through financial data and using novel algorithms to support scenario analysis, assess financial projections, and more.

So for startups, clear, accurate, and transparent data presentation couldn’t be more important  to maximize their visibility to VCs.

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#4 Startup monitoring 

For VCs, deciding to invest is only one side of the coin. The other is meticulously tracking and assessing how their invested startups are performing via monitoring throughout the investment lifecycle.

ForwardLane is one of the many AI tools in the arsenal of VCs today. With AI, VCs have effectively streamlined the monitoring process, turning a once manual process into an automated affair. This includes conducting sentiment analysis, automatically aggregating data for reports, and even alerting VCs in the event of anomalies.  

With constant digital surveillance, startups must maintain their financial health and performance data. They should also closely manage their online reputation and consider using AI to monitor it.

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#5 Market research

Besides paying minute attention to startups’ portfolios, VCs also religiously observe broader economic trends and developments, staying on top of them to adapt to ever-changing market conditions.

AI tools like TechScout and NetBase Quid help VCs automate the market research process, tracking key technological developments along with analyzing thousands of articles in real-time to identify notable market trends.

Startups must adapt by staying abreast of trends. Doing so will both showcase competence to VCs and enable them to better align themselves with the preferences of VCs.

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The one constant 

Regardless of how VCs are using and are going to use AI for novel applications, cap tables are still always going to be analyzed by VCs, with or without AI tools, making it imperative for startups to always have well-maintained cap tables at the ready.