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Investing in AI: Why Venture Capital Firms are Taking the Leap

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Have you noticed an uptick in firms investing in AI? Discover why venture capital investments are through the roof with this in-depth analysis.

As the world leans towards automation, enhanced cybersecurity, and the hybrid cloud system, it’s no surprise that venture capitalists are sniffing around the AI sector for potential leads.

Now, investing in AI is nothing new.

However, with machine learning training now outpacing Moore’s Law (where performance doubles every 24 months for a sector), venture capital firms are fully realizing AI’s potential to disrupt the marketplace and alter the course of business as we know it.

Able to solve everything from business inefficiency to supply chain gaps, AI algorithms and models have proven to be excellent investment opportunities. 

So, if you’re wondering why an impressive $9.3 billion was invested into AI companies by venture capital firms in 2018 alone, simply read ahead for everything you need to know.

Who knows, you may even glean some valuable insights to apply to your own investments…

Why Is Investing in AI So Important?

AI is becoming decentralized

The potential benefits of investing in AI are numerous.

Proven to enhance target marketing strategies, reduce churn through personalized recommendations, and improve supply chain efficiency, it’s unsurprising that AI is set to contribute a whopping $15.7 trillion to the global economy by 2030.[1]

Although AI has been the flavor of the month for quite some time, there are two new kids in town ready to shake things up: blockchain technology and the advent of Web3.

If you’re wondering what these tech buzzwords are, let me fill you in.

Blockchain

Simply put, blockchain is “a distributed, decentralized, immutable ledger used to store encrypted data”,[2] and it’s used across almost all cryptocurrency networks. In a blockchain, instead of information being stored in conventional databases that are centralized by an administrator, this technology distributes identical copies of company databases across several ‘blocks’ which are continually updated. By removing the concept of a ‘main server’ and a single point of failure, blockchain becomes incredibly difficult to hack or infiltrate.[3]

Sound good? Well, it is.

Combine this rapid decentralization with AI algorithms to continually assess your cybersecurity and data analysis systems, and you’re really cooking!

If you’re searching for a real-world example of blockchain in action, simply look to Hyundai. By using the blockchain platform provider Blocko Inc. and tethering the company’s private blockchain to the established Aergo mainnet, the car manufacturer can now seamlessly track and scan information about car resales on a secure ledger. As each new transaction is meticulously checked against a cryptographic fingerprint for validity before a new block can be created, the system is practically immune to tampering.[4]

As most modern companies require large datasets to run their daily operations, being able keep transactions secure is an appealing prospect indeed. What’s more, with up to 70% of businesses believing in the importance of blockchain in the global market, investing in this technology is certainly a worthwhile endeavor – so, don’t sleep on it!

Web3

Web3 on the other hand is an all-encompassing term for the new phase of the internet.

For context, we’re currently living through the more centralized Web 2.0 era, which places the powers of communication and commerce through a selection of large corporations like Amazon, Facebook, and Google.[5]

Ah yes, the infamous “Big Tech” giants.

Although we still get the products and services that we require under Web 2.0, the current setup sees most platforms and apps controlled by a select oligopoly. By removing these middlemen, businesses can move towards digitized purchases that are secure, easily managed, and don’t require permissions from a central authority.

Not only will this improve transparency across all business sectors, but trusted blockchain transactions and the rise of Web3 will enable the creator economy and marketplace to thrive with fewer barriers to entry.

If you’re on the fence about this new technology, it’s worth noting that several investors are already betting big on Web3. Not only has the Venture Capitalist firm Andreesen Horowitz proven that startup investing is worth pursuing with the success of unicorn Coinswitch Kuber, but VC firm Sequoia Capital also raised $450 million for the Web3 scaling startup Polygon (which focuses on the Ethereum ecosystem).[6] Both proven to be immensely profitable endeavors, investing in AI shows no signs of slowing down.

AI solves complex business problems

The rise of blockchain and Web3 is one thing but investing in AI is also useful on a practical level. To prove this, let’s take a closer look at a few business-based examples.

Cyberattacks

Stopping potential cyber-attacks requires significant time investment and upfront costs for businesses. By employing simple AI algorithms to sift through malicious IP addresses and continuously assess industry-specific threats, companies can respond to attacks and fraudulent transactions in real-time. As the average malware attack can cost upwards of $2.4 million to rectify, investing in AI is widely encouraged (if not essential!).[7]

Automation

If the potential cost savings on cyber-attacks weren’t enough to sway you towards investing in AI, the rise of global automation might. Automating back-office tasks may feel like a tricky step when it comes to employee backlash, but it’s set to raise productivity growth by 1.4% annually and massively reduce operating costs for manufacturing businesses.[8]

Reusable AI

If deploying large-scale AI models is currently outside the realms of possibility for your business – never fear!

For most SMEs, internal issues can be resolved with pre-trained, reusable algorithms that are tweaked to fit your specific business dilemma. 

Whether it’s tracking sentiment or increasing levels of automation across the board, there’s a creator out there ready to make things happen. At a fraction of the economic and financial cost, investing in reusable AI is a total no-brainer.

Why do businesses invest in AI in the first place?

 

Gets businesses ahead of the curve

According to current market trends, Venture Capitalist (VC) investments in AI are going through the roof.  

If you’re wondering why that is, it’s largely down to the exponential growth potential of AI startups.

Usually possessing algorithms that give VC firms a leg-up in financial marketplaces, these startups have been considered investment goldmines for venture capitalists in recent years. 

Able to guarantee returns on investment, enable businesses to expand product development, and provide invaluable insights into market behavior, venture capital firms are set to ride the wave of machine learning advancements for quite some time.

The potential benefits of predicting investments

However, it’s not just an AI company’s ability to help businesses progress that makes them appealing to investors.

It’s also about concrete investment decisions and the rise of smart algorithms.

With up to 92% of C-level executives believing that AI is crucial for accurate decision-making,[9] it comes as no surprise that VC firms like Andreesen Horowitz and Y Combinator are investing heavily in the sector. 

With Andreesen Horowitz raising over $30 million for People.ai and Y Combinator boasting a dedicated $150,000 biannual pre-seeding fund for viable AI companies, venture capital’s vested interest in the machine learning world is just getting started.

Although interest in startups comes primarily from venture capitalists, startups like AlphaSense have had incredible Series C funding rounds backed by financial powerhouses like Goldman Sachs, Citi, and Morgan Stanley. This is because of their ability to outperform human investors by sifting through massive amounts of data, essentially leveraging decisions in favor of investors. Equally, software tools like raized.ai can provide personalized data to venture capitalists, feeding them relevant information on potential unicorn startups before anyone else.

This may sound too good to be true, but research from the University of St. Gallen has shown that successful predictions using AI are entirely possible. In a detailed study of Business Angels vs. Machine Learning, smart algorithms showed a performance gain of 184% over human decision-making.[10]

According to Outside Insight, San Francisco-based venture capitalist firm Akkadian cements this idea through their use of data-driven software to track companies. Able to automatically sift through potential startups for profitability, this software hones in on those with the most potential and recommends them for direct investment.

Furthermore, Veronica Wu showcased impressive gains from her machine learning experiment at Hone Capital. Using database information on 30,000 deals from the last decade, she created an algorithm to study conversion rates and money raised from initial seeding rounds. With this knowledge in hand, the algorithms generated recommendations for investment that went on to receive follow-on funding 2.5 times the industry average.[11]

Impressive? Oh yes.

Able to positively disrupt the marketplace? Absolutely.

When paired with human knowledge and professional judgment, VC investments could move from educated guesses to guaranteed successes. Not only could this remove the 118 hours of screening time required for an average VC investment decision,[12] but it should give investors the go-ahead to strike with confidence.

The AI industry is maturing

As venture capital investments typically follow market trends, increased investing in AI proves that the sector is maturing and becoming increasingly valuable on a global scale. Not all AI sectors are considered equally viable, but driverless vehicles, mobility tech, and healthcare applications are all seeing tremendous growth.[13]

Why’s that, you ask?

Well, these AI sectors have the potential to fill significant gaps in the market.

For example, the American trucker shortage has been causing supply chain issues for years and reported a whopping 60,800 driver shortfall in 2018. If this issue isn’t resolved swiftly, the shortage could soar to 160,000 drivers by 2028.[14]

Although increasing pay and transitioning military personnel are short-term stopgaps for this crucial industry, venture capitalists recognize that driverless vehicles may permanently bolster the U.S. supply chain. Not only will this improve efficiency across the entire network, but it should reduce the mental and physical impact on long-haul drivers.

In short, everybody wins.

AI healthcare applications are also seeing untold levels of investment. For example, Y Combinator has recently funded the tracking wristband Airo health, and Andreessen Horowitz has poured money into the diagnostic testing startup Freenome AI. It’s difficult to draw investment trends from two singular healthcare examples (particularly when the global pandemic is considered).

Yet, funding for the AI biotechnology and healthcare sectors has risen to 16% of the 2020 investment total for venture capitalist firms.[15] Moreover, early-stage funding for machine learning startups attracted more than $20 billion in funding in Q2 of 2021, proving that investing in AI is set to increase in coming years despite a definite drop in deal volume.[16]

Trends aside, AI is naturally a growth business and scales at approximately 28.4% per year. With the AI market set to hit $554 billion in total revenue by 2024, it’s unsurprising that VC bigwigs want a slice of that oh-so-profitable pie.

Best AI stocks and trends to watch

With AI technology accelerating at a rapid pace and high-quality data organizations being more profitable than ever, the potential gains from investing in AI are considerable.

So, if you’ve been inspired by the work of venture capitalist firms and want to board the investment train, here are some of the best AI stocks to watch for 2022 and beyond.

Who knows, with the right insights and a bit of clever startup investing, you could outperform even the top venture capitalists.

With AI, the world truly is your oyster.

IBM

IBM is a legacy tech company committed to producing AI that improves business efficiency and augments human intelligence. In addition to their impressive history with supercomputing and chipmaking, IBM acquired RedHat in 2019. This allowed them to make major waves in the hybrid cloud sector.

Reporting a free cash flow of $9.7 billion in 2021 and increasing payouts for shareholders year-on-year, 2022 is a decent time to strike for potential investors.[17]

Nvidia

As GPU requirements have increased for businesses over the years, Nvidia has risen through the ranks to become one of the best AI stocks on the market. Found in everything from the world’s fastest supercomputers to advanced AI applications, Nvidia’s data center revenue is set to grow by 38% in 2022 alone.[18]

Consistently improving its top-tier data chips and producing innovative self-driving software features, this AI company is fully in line with current market trends.

Amazon

Amazon has always been a reliable performer on the stock market, but since the pandemic it has proven just how powerful e-commerce can be. Boasting strong Amazon Prime membership numbers, excellent retail sales per quarter, and a powerful cloud computing service that has seen 34% annual growth in recent years, it remains one of the best AI companies to invest in.[19]

Alphabet Inc

Google has always been a top player in the tech industry, but its parent company Alphabet Inc. is leagues ahead when it comes to automation and AI. With the launch of its driverless commercial taxies in 2020, Alphabet Inc. has proven that it’s following venture capitalist investment trends very closely. With an excellent stock value and robust growth across its main businesses, this exceptional AI company is a low-risk choice for newer investors.

C3.ai

If you’re searching for a more AI-specific stock to back, then C3.ai is an excellent choice. Focused on building enterprise-scale AI algorithms, this company is practically future-proof. Although it experienced an investment dip during the pandemic, the company’s ability to streamline supply chains, organize company data, and cut overall operating costs makes C3.ai stock a powerful thing to own.

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