NEW DELHI: More than 75% of venture capital (VC) and early-stage investment decisions will be driven by artificial intelligence (AI) and data analytics by 2025, as investors increasingly turn to data-backed insights for decision making instead of relying entirely on gut feeling, says a new Gartner report, published March 10.
Gartner has forecast that AI and data science-equipped VC or private equity (PE) investors will become commonplace in the next 4-5 years, given the recent advances in data analytics and AI models.
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“Successful investors are purported to have a good gut feel— the ability to make sound financial decisions from mostly qualitative information alongside the quantitative data provided by the technology company,” Patrick Stakenas, senior research director at Gartner said in a statement.
Stakenas said this inability to quantify inner voice grown from personal experience is decreasingly playing a role in investment decision making.
AI models can help investors by determining the viability, strategy and potential outcome of an investment in an early-stage startup, based on past investments, revenue growth, market penetration, consumer sentiment and their industry experience.
“AI tools will be used to determine how likely a leadership team is to succeed based on employment history, field expertise and previous business success,” added Stakenas.
Questions such as when to invest, where to invest and how much to invest are becoming almost automated, he added.
Application of AI is no longer limited to improving operational efficiency in back office processes. More investment firms have started using them for core business decision making.
For instance, Sweden based VC firm EQT Ventures has been using a convolutional neural network, a type of machine learning network, called Motherbrain to identify potential investments for quite some time. Motherbrain has reportedly assessed more than 10,000 companies globally and has played a role in investment decisions worth more than $100 million.
Industry experts believe that post covid-19 market volatility and associated risks have grown significantly and has made investors realise that traditional approaches to investment are no longer adequate.
According to business analytics platform CB Insights, nearly 67% of startups stall at some point in the VC process and fail to exit or raise funding in subsequent rounds.
Though, this data is not for India, it is indicative of the high failure rate of startups.
The ongoing digital boom in India has made it a highly lucrative market for global investors.
In 2020, India received a total of $41 billion in PE and VC investments from 831 deals as compared to $39 billion in 2019, according to Praxis Global Alliance.
Reliance Jio and Reliance Retail were the top funded companies.
The year also saw lower exit activity with 148 exits worth $ 5.1 billion, down from 197 exits worth $ 9.2 billion a year ago.