Predicting Startup Returns: How VCs Use AI to Make Investment Decisions and Identify Successful…
By: Haley Samuelsen
Tags: Data Science, Venture Capital, AI, VC, Startup

Meet the AI Game Changer

One VC firm that has implemented data and technology as part of their investing strategy is Connetic Ventures, a VC firm that has developed and launched an AI platform named Wendal. Companies looking for funding from Connetic complete Wendal’s online assessment in less than 15 minutes, and the data gathered allows Connetic to make an extremely informed decision about the strength and viability of the potential deal. Over half of the algorithm is based on behavioral factors because Connetic believes that the personal characteristics of a startup team is a key indicator of their future success. Connetic says Wendal “automates the due diligence process for early-stage companies” and is “essentially 4–5 MBA educated analysts … [but] is self-learning and can recall over a billion data points on command.” Wendal’s exceptional attributes mainly aim to fix three common problems prevailing in the VC industry.

1. Instinctive Investing

We have all probably been there. Not having tried it before, we see food that looks or sounds good, and based solely on instinct, we decide to purchase it and give it a try. To our dismay, what we thought would be a delicious treat ends up giving us a repulsive taste in our mouth and maybe even a bad stomach ache. Similarly, many investment opportunities can sound exciting and enticing, and VC decision-makers may say that the deal “just feels right” to pursue. However, the investment may not be the right fit for a particular VC fund, may have lacking financials, or may not have ideal founders behind the scenes. Using AI allows VC firms like Connetic to get a true and clear picture of their potential investment without having to worry about unforeseeable factors that could turn an investment into a terrible stomach ache, especially when large amounts of money are on the line.

2. Investor Bias

Bias is prevalent everywhere there is human involvement, and this can be a big concern when relying on traditional in-person pitches for VC funding. Bias in the humas designing AI algorithms is another concern about how these algorithms make decisions. Across the board, VC fund managers tend to be male, with only 11% of VC decision-makers being female. Female entrepreneurs can be asked very different questions during VC pitches, and in 2019, only 2.8% of VC capital went to businesses founded or co-founded by women. This is a significant contrast to the fact that women-owned businesses represent 42% of all businesses in the U.S. With Wendal, Connetic is committed to increasing the fairness of the VC funding process and helping remove gender bias. Connetic notes that “Wendal does not know your age, race, or gender when you apply for funding which gives everyone an equal opportunity.” It makes sense for VC firms to escalate their focus on the gender gap because it has been proven that women-led teams generate a 35% higher return on investment than all-male teams. With the implementation of Wendal, Connetic Ventures’ funding for women and minorities has reached a rate that is 8x higher than the industry average.

3. Excessive Time to Analyze Potential Investments

With time being one of the most valuable resources in today’s age, AI can be a win-win for both the VC firm and the pitching company. Using Wendal, Connetic does not have to waste time listening to irrelevant pitches, and on the flip side, businesses do not have to spend hours preparing perfected presentations. The Wendal application takes less than 15 minutes to complete and quickly gives results to Connetic to help them decide if the company would be a good investment for them. Through Wendal, Connetic is able to sift through numerous potential portfolio companies and choose optimal businesses from an expanded investment pool.