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The artificial intelligence (AI) market has seen significant growth in recent years[1], with AI technologies becoming increasingly integrated into all facets of our lives. From machine learning algorithms powering recommendation engines, to natural language processing chatbots, to robotic process automation – AI is transforming industries and creating new business models.

This rapid advancement of AI has also created new investment opportunities, particularly in the private markets. Venture capitalists and angel investors have poured billions into AI startups, in fact $75B in 2020 alone[2], hoping to back the next breakthrough technology. However, navigating the private AI investment landscape can be challenging for individual investors. What subsectors of AI you may want to focus on? What are some key considerations when evaluating these deals? How can you identify AI investment opportunities?

When most people think of AI, they may picture technologies like machine learning, natural language processing (NLP), and robotics. And it’s true that these are major areas of focus for AI investors. Machine learning algorithms that can analyze vast troves of data to identify patterns and make predictions have helped to power breakthroughs in fields from healthcare to financial services. NLP has enabled the development of conversational AI assistants and language translation tools. And advancements in robotics are transforming manufacturing, logistics, and even the way we live in our homes.

However, the AI landscape extends well beyond these more well-known applications. Some other AI subsectors include:

• Computer vision: Algorithms that can analyze and interpret visual data, enabling applications like autonomous vehicles, facial recognition, and image/video analytics.
• Reinforcement learning: AI systems that learn by interacting with an environment and receiving feedback, leading to breakthroughs in gaming, robotics, and decision-making.
• Generative AI: Models that can generate new text, images, audio, and other content, unlocking potential in areas like creative design, content creation, and synthetic data generation.
• Neuromorphic computing: Hardware inspired by the human brain that aims to mimic its low-power, parallel processing capabilities, with implications for edge computing and energy-efficient AI.
• Quantum computing: The use of quantum mechanical phenomena to perform computations, which could dramatically accelerate certain AI and ML workloads.

While not an exhaustive list, these are some of the key AI technology areas that private investors may want to consider monitoring. Identifying promising startups and scaleups across this diverse AI ecosystem can help diversify an investment portfolio.

Investing in private AI companies requires a thoughtful and rigorous due diligence process. Here are some key considerations:

• Technical capabilities: Assess the strength of the AI models, algorithms, and underlying technology. Do they demonstrate meaningful advances over existing solutions? Is the team highly skilled in fields like machine learning, computer science, and data engineering?
• Market opportunity: Evaluate the total addressable market and growth potential of the target industry or use case. Is there strong demand for the AI-powered product or service? Can the company gain significant market share?
• Competitive landscape: Analyze the competitive environment. Are there high barriers to entry? Does the startup have a sustainable competitive advantage, whether through proprietary technology, unique data, or domain expertise?
• Commercialization strategy: Understand how the company plans to monetize its AI capabilities. Do they have a clear path to generating revenue and achieving profitability? Can the business model scale effectively?
• Data strategy: Assess the startup’s data acquisition, labeling, and management processes. High-quality training data can be crucial for building robust AI models. Does the company have the right data governance policies in place?
• Team and leadership: Evaluate the founders, executives, and broader team. Do they have the technical know-how, domain expertise, and entrepreneurial skills to execute their vision? Is the team well-rounded with complementary skill sets?
• Regulatory and ethical considerations: Consider any regulatory hurdles the company may face, as well as potential ethical concerns around the application of their AI technology. Does the startup have a thoughtful approach to responsible AI development?

By carefully evaluating these factors, investors can better assess the risk/reward profile of private AI investment opportunities and identify companies that make the most sense for their portfolios and risk tolerances.

So where are some of the AI investment opportunities in the private markets today? A few areas to watch include:

• AI infrastructure and tooling: Startups providing the underlying AI infrastructure, frameworks, and tools that enable other companies to build and deploy AI applications.
• AI-powered vertical solutions: Companies developing AI-infused products and services tailored to specific industries like healthcare, finance, transportation, and more.
• Edge AI and embedded systems: Startups innovating in the space of energy-efficient, low-latency AI processing at the “edge” of computing networks.
• Generative AI and creative tools: Businesses leveraging large language models and other generative AI techniques to power novel content creation, design, and creative workflows.
• AI-driven analytics and decision support: Companies applying AI and machine learning to enhance business intelligence, forecasting, and strategic decision-making.

No matter the specific subsector, the key could be in identifying AI startups with strong technical foundations, compelling product-market fit, and the potential to capture value as AI continues to transform how we live and work. By thoughtfully navigating this dynamic private investment landscape, investors may find the AI companies that make the most sense to add to their portfolios.

Are you interested in learning more about artificial intelligence? MicroVentures has written multiple blogs that go in depth on this topic we recommend checking out.

Are you looking to invest in AI startups? Sign up for a MicroVentures account to start investing!

[1] https://www.statista.com/outlook/tmo/artificial-intelligence/worldwide

[2] https://www.forbes.com/sites/eliamdur/2023/11/16/venture-capital-in-ai–where-and-how-much/?sh=7ae5a41d20e0

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.