Navigating the Rise of Generative AI: New Era Capital Partners’ Investment Framework for Sustainable Growth
What are AI and Generative AI?
As artificial intelligence (AI) gains momentum, a wave of profound change is rippling through businesses and society. With its ever-evolving capabilities, the revolutionary nature of AI is propelling us into an era where AI-driven advancements are set to permeate every aspect of our lives. Its disruptive capabilities offer new avenues for a variety of startups which require investment, but not without a range of emerging risks and unprecedented challenges that require thoughtful management and adaptation.
Initial, standard AI systems learn and adapt to their environments by synthesizing information from large data sets to make decisions and predictions. Many of these AI systems are limited to performing specific tasks to reach a specific outcome. Generative AI systems, on the other hand, design new content in the form of text, images, or music by creating content similar to examples from a data set. Furthermore, the popularity of ChatGPT has ignited a global fascination with the power of generative AI, leading to its rapid adoption.
How is AI changing the business landscape?
The recent surge in the efficiency of AI can be attributed to remarkable advancements in computational power, data availability, and machine learning techniques. The decreased cost and time associated with storing, transferring, and processing massive amounts of data have made both standard AI and generative AI economically viable. Coupling this phenomenon with advanced tracking of data and accessibility to diverse data sets has created countless use cases for AI in every industry. In fact, the use of AI models has more than doubled from 2017 to 2022.¹ This growth is generated as business leaders use AI to alleviate skill shortages, boost productivity, and innovate products and services.² For instance, companies like Glossai, a NECP portfolio company, are revolutionizing marketing by automating content creation and enabling personalized experiences at scale. Another NECP portfolio company, aiOla, uses voice recognition to convert speech into digestible data to expedite and elevate tasks ranging from food inspections to customer service.
This transformative potential has not gone unnoticed by business leaders and entrepreneurs, who recognize generative AI’s ability to revolutionize software development, marketing, and data analysis. The investment landscape reflects this growing interest, with venture capital funding in generative AI increasing by 425% since 2020, reaching an impressive $2.1Bn.³ Tech giants like Microsoft and Google have also made substantial investments, further validating the immense market potential. In 2023, Microsoft invested $10Bn in OpenAI, while Google invested $300M in Anthropic, a leading generative AI developer.⁴ With the generative AI market projected to reach $60Bn by 2025⁵, investors are eager to capitalize on this emerging field.
Brisk market for generative AI funding rounds⁶
What are key risk factors of AI to consider?
However, this surge in generative AI investments has risks that closely resemble those of past technological boom-bust cycles like the 2000 dot-com bubble. In a similar manner, valuations of generative AI companies often hinge on assumptions surrounding the widespread implementation of AI, overlooking the fact that some applications are still unproven. Additionally, AI startups are commanding a 15%-50% premium over other startups, driving valuations even higher. Despite this, 40% of companies classified as AI startups in Europe do not actually use AI technology in a significant way.⁷ This poses a significant risk to investors who may pay a premium for a company that is mistakenly described as an AI startup.
Another risk around generative AI surrounds bias, incorrectness, and intellectual property infringement.⁸ For instance, one study⁹ highlights that 97% of DALL-E 2’s images depicting positions of authority, such as “CEO” or “director,” featured white men, while real-world statistics indicate that 88% of Fortune 500 company CEOs, CFOs, and COOs are white men according to a 2022 survey. Another MIT study estimates significant error rates within the top 10 AI data sets, highlighting concerns over the impact that flawed testing data can have on real-world deployment.¹⁰ Finally, there are lawsuits underway alleging unauthorized use of copyrights to train AI systems which may lead to substantial infringement penalties. Waves of regulation are beginning to crack down on these missteps which poses a risk for AI companies. For example, the EU’s AI Act will issue fines and prevent the sale of AI technology that is discriminatory, fails in general data protection, and makes biased decisions about lifestyle aspects such as employment or healthcare. As one of the first pieces of AI regulation, many non-EU companies will comply with the law making it the world’s de facto AI regulation.¹¹
What is New Era Capital Partners’ approach to AI investing?
To navigate these risks, New Era Capital Partners developed an AI assessment framework to complement current due diligence processes. This AI framework helps distinguish between add-on features which leverage AI and fully fledged AI businesses. It also assesses an AI company’s ability to generate revenue in a highly dynamic, nuanced, and competitive market. Using a six pronged approach, NECP is able to determine the vitality of AI startups:
By employing this framework, NECP invests in AI startups that demonstrate tangible use cases, comply with emerging regulatory frameworks, and utilize AI in durable and innovative ways. This approach enables them to harness the transformative power of AI while mitigating associated risks. With this in mind, NECP invites you to join us through a series of articles that delves into the AI landscape in both the US and Israel. As we explore the impact of AI on business and society, and showcase real-life examples of NECP’s AI investment framework in action, we hope to hear your valuable insights as we navigate the frontiers of AI together.
This blog post was co-authored by John Malloy, intern at New Era Capital Partners, and Ziv Conen, Partner at New Era Capital Partners.
The authors wish to thank Avi Kapadia, Shira Gershon, Eugenio Sabbadini, Ran Simha, and Gideon Argov for their contributions to the post.
1 What is AI? | McKinsey
2 AI Adoption Skyrocketed Over the Last 18 Months (hbr.org)
3 Generative AI: The New Frontier For VC Investment (forbes.com)
4 Google Announces Bard, Its Rival To Microsoft-Backed ChatGPT (forbes.com)
5 What is Generative AI and How Does it Impact Businesses? | BCG
6 VCs try to parse through the ‘noise’ of generative AI | PitchBook
7 Forty Percent of “AI Startups” in Europe Don’t Actually Use AI | HEC Paris
8 FTC Report Warns About Using Artificial Intelligence to Combat Online Problems | Federal Trade Commission
9 Stable Bias: Analyzing Societal Representations in Diffusion Models (arxiv.org)
10 AI datasets are filled with errors. It’s warping what we know about AI | MIT Technology Review
11 Our quick guide to the 6 ways we can regulate AI | MIT Technology Review
