It’s no surprise that the AI market has grown rapidly in recent years, with enterprise capital investment in AI totaling $332 billion annually as of 2019. Crunch Base data.
However, with the development of artificial intelligence, the value of output in the United States is declining rapidly. M&A for venture-backed firms will total just $47 billion so far in 2024, down from $148 billion in 2021, in accordance with Crunchbase data. At the same time, the IPO market is in a virtual standstill.
The contrast between the frothy AI market and the drought of traditional exits raises the query: How can AI startups cut through the noise and prepare for a successful exit? This unique situation also highlights the importance of VC discernment when selecting which AI firms to support.
Artificial intelligence defense
For an investor, there are many aspects that signal the defensibility of an AI startup.
A big, addressable market and solving a big problem are the primary qualifiers that indicate a startup is able to disrupt the industry with AI.
However, this alone is not enough to ensure that a company will stand the test of time. The startup’s goal industry must also reveal the potential for large-scale change, with the ability for AI to switch inefficient processes that overwhelm critical workflows.
Also most significant? Immediate return on investment that creates a strong buyer willingness to pay for the solution and consistently renew it.
Equally vital is a startup’s ability to gather industry-specific proprietary data and create a flywheel effect over time. More data leads to higher results, and higher results result in more product usage and spending, which results in more data.
AI-powered functionality can provide startups with a strategic advantage over competitors and provide the ability to operationalize each revenue and financial performance. All of those aspects ought to be a part of the founders’ roadmap for a successful exit strategy.
Rational pricing and round sizes
Markets come and go on a different buzzword designed to drive up valuations and ultimately reset them.
That’s why it’s so vital for founders to focus on the fundamentals of the business, build a product the end user can’t live without, and surround themselves with the right enterprise capitalists who appreciate the long, non-linear journey ahead.
The company’s valuation is only a point in time – it is not a liquidity-generating output and is based solely on what the market multiples are at a given moment. Therefore, it is extremely vital to lift the right variety of rounds (founders – don’t dilute yourself greater than mandatory) at a reasonable but not too maximized headline valuation to enable your startup to advance to the next round. Down rounds are difficult for all parties involved and can be demotivating.
Current AI multipliers may or may not last three, five or 10 years. Betting on multiple expansion in the artificial intelligence market is a real risk, but focusing on business fundamentals and rational creation of goodwill is what ensures predictable successful exits.