Danielle Avidor.

VC in the Age of AI: Redefining due diligence

“AI can improve efficiency, but human interaction remains irreplaceable,” writes Danielle Avidor of IBI Tech Fund

It appears that artificial intelligence (AI) is increasingly making its way into various fields, including venture capital (VC). Enhancing the decision-making process can be achieved by automating data analysis and improving risk assessment, primarily by redefining the due diligence (DD) processes. DD includes a comprehensive risk assessment, and AI allows stakeholders to gain comprehensive insight into target companies.
In a nutshell, due diligence consists of a series of tasks and workflows that can span days or even weeks. These tasks include scrutinizing company data rooms, assessing data from internal and external sources, and analyzing and presenting findings. Gen AI, a technology that has swiftly permeated various industries, is now being used by some VCs to optimize the DD process.
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Danielle Avidor
Danielle Avidor
Danielle Avidor.
(Moriya Peretz)
Conducting due diligence involves gathering extensive information about the company, the market and the prevailing trends. By integrating AI, this process is streamlined, saving time and research time: Locating competitors and complementary products, and determining the ICP (ideal customer profile). Non-dry data, such as investors' investment preferences, their perceptions of the team, and the dynamics among founders, can enhance this information. Ultimately, it is the human element that remains irreplaceable, as investing in a startup hinges on trust and interpersonal connections.
As a VC focused on early-stage startups, our inherent challenge lies in the lack of available data, making realistic financial analysis a formidable task. When founders approach us, they often believe they possess a compelling problem to solve and a capable team to address it. Seed-stage investors seek teams who will develop products with solid product market fit, which will become capital-generating machines. Given the inherent uncertainty of seed-stage investments, due diligence is an almost indispensable step in our investment process.
What role can Gen AI play in due diligence? Firstly, AI can automate screening and deal sourcing by matching VCs with startups aligned with their investment preferences. Secondly, AI excels at data analysis, enabling VCs to move quickly in a competitive environment. Furthermore, AI facilitates comparative analysis by assessing multiple startups within the same industry and offering side-by-side assessments of their strengths and weaknesses. By training AI platforms with their proprietary data sources, investors can construct a custom, structured internal knowledge database for handling unstructured data and incorporating external data sources.
However, it's essential to acknowledge the limitations. While we certainly respect Gen AI, it tends to excel at more structured, data-centric tasks. When it comes to the creative aspects of trying to predict the future trends, understanding customer needs, or finding unique ways to stand out from competitors, AI often falls short. Could it have predicted Facebook's extraordinary rise from a side project? Or that Twitter/X would emerge from the podcasting platform Odeo? The nature of successful startups is unpredictable and unconventional.
Additionally, the human touch remains paramount in this field. It's not just a cliché that people are the most valuable assets; we place our bet on the founders. AI platforms cannot (yet) engage with the team or assess the dynamics and relationships within. A team with an outstanding product addressing a genuine problem may fail due to a toxic dynamic or founders who couldn’t be able to identify opportunities. Moreover, each investor possesses their unique perspective, beliefs, and opinions regarding emerging trends and technologies and has it’s own flavour for the deal.
In summary, for Gen AI to be effective, it must complement rather than replace human expertise. Beyond AI-driven insights, other non-quantifiable data, including investors' preferences, their perceptions of the team, and founder dynamics, must be considered. In addition to other tools available to funds, AI can improve efficiency, but human interaction remains irreplaceable.
Danielle Avidor is Director of Business Development & Communications at IBI Tech Fund