Venture capitals cautious on AI: Startups must show clear value, returns

Venture capital firms in India are becoming cautious with AI investments, emphasising solid business models and tangible returns, as many startups face closures amid changing dynamics

Venture capital firms in India are becoming increasingly cautious in their investments in artificial intelligence (AI) startups. This shift away from initial excitement is leading to a greater emphasis on solid business models that demonstrate clear returns and tangible impacts, according to a report by Mint. 

The report quoted Adith Podhar, general partner at Gemba Capital saying that the initial fervour surrounding AI startups is unlikely to persist as investors adopt a more cautious approach. He indicated that a market correction is on the horizon, with a growing focus on companies that can provide a compelling value proposition rather than those merely riding the wave of AI hype without a strong business foundation.

 

Evolution of investment strategies

The investment landscape for AI has evolved from what many perceive as a passing trend to a phase where models must showcase their value, impact, and measurable growth metrics. Abhishek Prasad, managing partner at Cornerstone Ventures, said investors are turning away from indiscriminately pouring funds into the AI hype, instead concentrating on sectors that promise substantial value. 

The news report quoted Vikram Chachra, founding partner of 8i Ventures, saying that this increased scrutiny by investors is a positive trend. He believes it encourages startups to refine their value propositions, ultimately fostering real and sustainable growth. This evolution means that both financial and human resources are being directed toward ventures that exhibit potential for significant future impact. 

In recent months, three AI-focused startups — Toplyne, Nintee, and InsurStaq.ai — have ceased operations. Founders of these companies have indicated, via their social media platforms, that they returned capital to investors. Industry insiders estimate that the number of AI startups that have closed down recently could be in the thousands, the report said. 

Despite these challenges, investor interest in Generative AI is rising, resulting in significantly higher valuations compared to non-AI technology firms. Podhar said that seed-stage AI startups are commanding median valuations roughly 20 per cent higher than their non-AI counterparts, escalating to a 59 per cent increase for Series B rounds. 

The Mint report quoted Preeti N Sampat, a partner at Eximius Ventures, saying that models focusing on agents, co-pilots, and solutions that facilitate AI readiness in enterprises are currently very attractive. She said these areas are still developing and hold significant growth potential as businesses move toward more autonomous operations.

Human collaboration

There is a clear concern regarding AI models that claim to completely replace human workers. Prasad emphasises that models incorporating ‘humans in the loop’ are more likely to succeed. He further said that focus on ‘augmented intelligence’ is needed where AI capabilities enhance human performance rather than operate independently, the news report mentioned.

Future outlook for AI in India

According to a February 2024 report by the National Association of Software and Service Companies and consulting firm BCG, India’s AI market is projected to reach $17 billion by 2027, growing at an annualised rate of 25-35 per cent from 2024 to 2027. This forecast underscores the significant potential in the AI sector, despite the current challenges and changing investment climate.