Venture Investors Turn To AI To Find Deals
From medicine to retail to the auto industry, there are few industries in tech that have not been changed or disrupted by artificial intelligence.
Now, some of the people investing in those sectors are using AI to figure out where to put their money next. While that may seem like an obvious use of AI and machine learning, it’s been something most VCs have been slow to adopt.
“VCs love to disrupt other spaces using data and networks—except their own,” said Ilya Kirnos, co-founder, managing director and CTO of San Francisco-based venture firm SignalFire.
Investment firms such as SignalFire and EQT Ventures are not just investing in tech companies, but are in their own way tech companies—housing their own proprietary AI platforms to analyze and vet investment opportunities.
AI directs big money
Alastair Mitchell, partner at EQT Ventures, estimates the firm’s AI platform–called Motherbrain–for sourcing portfolio companies has played a role in about $200 million of the firm’s approximately $900 million total invested since its first fund opened in 2016.
“We placed a big bet on technology to be better investors,” he said.
Motherbrain digests both public data, such as investor and LinkedIn data, app store rankings and funding information, as well as proprietary information to score companies. Mitchell estimates the platform is helping the firm track about 2 million companies.
Stockholm-based EQT Ventures, which describes itself as a hybrid between a startup and a VC firm, plans to use Motherbrain over the next few years to help it find investment opportunities for its second fund, which launched last year. About 75 percent of that $700 million fund is still available for investment, said Mitchell, adding that three of the firm’s top five investments from its 2016 fund were sourced through Motherbrain.
The firm, with investments that include Wolt, Handshake and Netlify, also recently promoted Henrik Landgren, who specifically oversees Motherbrain and previously built Spotify’s global analytics team, to partner.
While EQT Ventures is a separate set of funds from the private-equity firm EQT, Mitchell said the more traditional investment firm also has used Motherbrain to analyse growth fund opportunities; illustrating that the use of AI is moving beyond just venture.
AI not just to invest
However, AI uses for firms stretch beyond just investing. SignalFire looks at four stages of successful investing: sourcing, diligence, placing the investment, and adding value to that company once it is in the portfolio, Kirnos said.
SignalFire, which usually invests in seed or early-growth rounds, uses its AI platform in all four phases.
“It has differentiated us,” said Kirnos, who was a software engineer at Google before co-founding SignalFire.
While SignalFire uses AI to help source and do its diligence before investing in companies, the company also uses its proprietary platform to help its portfolio companies grow by analyzing and researching their markets, recruiting talent and creating business strategies. The firm uses its platform to track more than 2 million data sources and half a trillion data to help tell a company everything from how to differentiate itself to how to price its product.
Kirnos said he also looks at his firm as a tech startup, one that has used AI to now invest in nearly 100 companies, including the likes of Grammarly and Ro, formerly Roman Health.
“We have companies in our portfolio that could be public companies,” he said.
COVID and the digital transformation of investing
Nearly every tech executive and investor talks of how the COVID-19 pandemic has caused a “digital transformation” in all sectors and areas of work.
That may apply to investing too, Kirnos said.
“Companies are remote now with COVID,” he said “The stuff you track is more widely dispersed.”
Kirnos said the days of hiring a graduate from Stanford University to go out to talk to people about the next big thing in tech are at least temporarily paused due to the pandemic.
“You have to use data, you have to use systems,” Kirnos said.
With SignalFire having about $1 billion under management and EQT Ventures investing from its second $700 million fund, other investors may eye the returns on that money to see if AI is something they should not just invest in, but also use.
“No doubt as we are successful, there will be imitation,” Kirnos said.