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January 29, 2025 | Tom Ballard

INVESTOR OUTLOOK 4: AI seems to be the “darling” right now

Our panel of investors from East Tennessee offer their insights.

Today’s Question: Artificial intelligence (AI) seems to be the current “darling” for many investors. How are you approaching it? Have you made any investments in AI-based companies? What about those using AI?

  1. Travis Manasco, MD, Principal, Solas BioVentures: At Solas, we evaluate AI with the same rigor as any medical device. We ask key questions: Does it solve a specific problem? Does it have a meaningful impact on patients and physicians? Will it fundamentally improve care? If a solution meets these criteria, we consider it. However, we remain disciplined in our approach and avoid investing in AI companies just for the sake of AI. There must be clear, transformative value.
  2. Grady Vanderhoofven, Founder and Chief Executive Officer at Three Roots Capital: We do have a direct investment in an AI-related company, and we have several portfolio companies who are seeking to integrate AI in their business models. The AI company in which we have invested is based in Tennessee and is not a generative AI company. We are optimistic about that investment because we believe the company’s approach to engaging in the AI universe is differentiated from many of the competitors in the market. In general, we believe the new and young AI companies that are competing in any way with Meta, Google, Microsoft, or any of the other 800-pound gorillas in the industry are unlikely to be successful because the resources possessed by the leading, large companies create an insurmountable barrier to profitable entry for a new entrant.
  3. Ken Woody, President, Innova Memphis: AI remains one of those super-hyped technologies that are in search of a real application. Most of the “AI applications” we’ve seen so far were just standard algorithms a year ago and have been renamed. Part of the challenge for many of these AI companies is intellectual property (IP)protection, which in most cases is not available. To me, the real value comes in AI ability to parse large datasets and produce new value. Thus far, AI is another promising technology looking for a good application.
  4. Brandon Bruce, Managing Partner, Market Square Ventures: It’s rare to see a company that isn’t using AI to bolster its product or at minimum to improve internal productivity. In that sense, it’s table stakes. We’ve invested in two companies where AI is at the core.
  5. Eric Dobson, Managing Partner at Community Equity Partners and Sheltowee Venture Fund II: We have been watching the “AI” segment, which was broadly interpreted over time, for a decade. This is an area where we have expertise, and consequently made no investments until 2023. We were looking for applications that required “AI,” of which we found none that could not be completed with other standard approaches and technology. The big challenge with AI is IP. It is software but does not act like a software company. It is a service but does not act like a service company. It appears to have unique abilities but does not act like an IP-backed company. And entrepreneurs are terrible at explaining its sustainable competitive advantage in their business context and market space. The only IP that can be identified is to be found the training data. That leaves investors scratching their heads looking for any means of protecting the business model of the company long enough for them to create a beachhead, grow, and establish a brand that will get them acquired. If others, especially larger better funded competitors, can simply hire smart people to build appropriate technology under their own brand, why bother acquiring start-ups? The rise of the LLMs (Large Language Models) was still a surprise, not that it existed, but that it happened so dramatically quickly and pervasively. We see companies founding using outsourced AI that can begin to generate revenue in single months. The barrier to entry for entrepreneurs in leveraging AI is near zero. That is good and bad. It is good that companies can bootstrap easily and relatively cheaply validating their business models. However, it is bad that it only serves to exacerbate the problem above. We have made one investment in this “new” AI space, Authentrics. It is selling-shovels-to-the-miners. They provide critical tools for understanding how LLM’s are being trained and hardening and protecting them. Authentrics also provides a monetization scheme necessary to open previously inaccessible data repositories that should drive a new generation of AI’s trained on highly curated science and technical information. Much like the rapid development and adoption of the LLM, we have high expectations of Authentrics. As for our operations, we are moving to adopt AI based tools for helping us with diligence and market research. We believe it will expedite our “first look” diligence with potential investments. We will still perform a human overread on all diligence information because we have no room for error and LLM’s are prone to error. This type of automation will accelerate in 2025.
  6. Tony Lettich, Managing Director of The Angel Roundtable: The Angel Roundtable has invested in two companies which have developed technology for use by other businesses. Our first investment in an AI technology company was ConverSight.ai which provides AI-powered augmented analytic tools for business leaders / management. Smart Response Technologies provides cloud based ai technologies to first responders aimed at eradicating miscommunication and missed communications. These are the first of what we expect to be continuing interest in this sector.

 



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