Investing in the public markets is no way to make a fortune. Companies that have been through the IPO process rarely return more than a few percent annually to investors. The advent of trading apps such as Robinhood and Trading 212 has made it easier than ever before to enter the markets, but profiting remains just as difficult as it has always been.
Start-ups are much more exciting than post-IPO companies for investors. Early investors in a start-up on its way to unicorn status will be laughing all the way to the bank. But which one to choose? 90% of start-ups fail. The risks are just as high as potential earnings.
Investors should turn to deep tech and artificial intelligence as start-ups in these sectors show a much higher rate of return than the market average.
Increasing confidence
This is not to say deep tech investments guarantee returns – life is not a fairytale, after all. But deep tech as an industry has a few quirks that differentiate it from any other start-up.
First, the development stage in deep tech is slightly different compared to general tech as it is more extensive. Prototyping is a painstaking process, as deep tech companies tend to release meticulously tested, complete products to market rather than rushing through an unfinished product. It is true that the more time any given startup spends on pre-IPO, the greater the chance of it dropping out of the race. However, successful projects demonstrate a much higher rate of return versus general tech projects, which largely offsets the investment risks. Start-ups that do make it to IPO have battle-tested products suitable for the market.
As we approach the end of the year, we see that 2021 has been a tipping point for AI development start-ups. During the first six months of 2021, venture funds have increased their total investments in this area to a record high of $31 bln, compared to $13 bln in the same period of 2020. This more than doubling of interest among venture capitalists went far beyond the conservative 40.2% annual growth estimation for the sector.
Investors have gained reassurance in the maturity of artificial intelligence as a ready-to-use technology over the past several months. Given the diversity of ultimate applications of AI startups, from agriculture and esthetic medicine to manufacturing and marketing, one would have a hard time singling out clear frontrunners among them. We joined ranks with MTS AI to figure out which specific benefits of AI projects make these startups so appealing and promising.
How to start(-up)
There is an art to investing in a start-up. The trick is to invest modestly at the early stages of projects, thus securing a substantial stake in a business that might show massive growth in capitalization within several years.
Venture funds take a huge risk: a quick investment decision could result in a waste of money on a startup that could eventually fail, but inertia could also mean the investor would have to settle for a more likely but rather limited profit.
Guessing who is going to be the frontrunner in the race of startups, especially in the high-tech domain, can feel like Russian roulette. Even experts in the field are notoriously poor at predicting the future. A major IT magazine once jokingly suggested renowned IT visionaries could demonstrate their clairvoyance by confirming that they had purchased large equities in companies like Apple, Microsoft, Tesla, Amazon and other IT giants pre-IPO. The silence was deafening.
Today, though, we see at least one high technology domain that is almost universally backed as promising – artificial intelligence. The development of AI has moved at staggering speeds. When a startup decides to integrate AI in a certain area of its operations, the venture capitalist shifts focus from assessing the project’s technical feasibility (which is effectively already confirmed since we are talking about AI) towards the willingness of a team of enthusiasts to work hard and shape their concept, which is a much simpler task. This is the reason why investors are now turning so much attention specifically to AI startups in the industries where process automation really matters.
2022 Predictions
It would be smart to broaden the approach to choosing startups for investment: instead of focusing on selected industries only, investors should review applications in the full range of domains.
AI is already having a huge impact on our daily lives and we believe that this trend will continue. We at MTS AI can see real progress in the following areas:
- Virtual shopping venues, where you can try on the clothes that you like using computer visualization tools (allow premium retailers to keep selling online by giving their customers a realistic shopping experience); the next progression of this project is virtual concerts with avatars of celebrities performing on stage and avatars of the audience in the auditorium;
- Applied robotics, which implies the use of mass-produced robots (like the iconic Boston Dynamics “dogs” or aerial drones) with AI-based command and control function in everyday routine, including deliveries, inspection of railways and pipelines, guiding and assisting senior and physically challenged users in public areas, etc.;
- AI training platforms that offer third-party models and extensive collection of graphics for quick and effective learning (saving a lot of time and effort for independent designers of computer vision and smart video surveillance solutions that learn using images of people, vehicles, etc.);
- Smart farming machinery (detection of weeds for robotic weeding, selective and robot-assisted harvesting of crops with preset ripeness levels, measuring of soil quality for selective metered distribution of fertilizers, early diagnostics of plant diseases, and many other applications).
In areas where ideas sprout and artificial intelligence allows meeting a brand-new class of challenges, picking a really promising project for investment is a much simpler job for a venture fund. And, as the existing machine learning systems get closer to the definition of “intelligent”, the rate of transformation of startups into stable businesses will increase, meaning that smart investing in AI startups today will bring high profits in a matter of months and years.
