Venture capitalists rely on connections and short pitches to make decisions. With advancements in AI, the VC pitch process could change.

Want to pitch to a VC? You’ll have to impress AI first

Venture capitalists rely on connections and short pitches to make decisions. With advancements in AI, the VC pitch process could change.

Utah’s venture capitalists (VCs) know that investing in startups can be risky. According to the Wall Street Journal, three out of every four startups will fail, which can cause VCs to pause when considering whether to put money into a new business. 

Despite the risks, companies in the U.S. raised over $142 billion in 2021, according to Pitchbook data. While Utah-based companies made up only a small fraction of the total funds raised, the number is increasing each year. In 2021, investors funneled more than $3.4 billion into companies based in Utah, nearly double the amount invested in 2020. 

Typically, venture capitalists have little data to go on when deciding to invest in a startup. Besides their instincts and limited financial data, investing in an entrepreneur can be a considerable risk. Further, sourcing and screening processes for VCs have remained relatively stagnant for decades. Apart from a few VCs who use web crawlers in their sourcing, practices have remained largely the same since the first modern VC firm was formed in 1946.   

Fortunately, artificial intelligence (AI) has the potential to streamline complicated processes and make the funding process more manageable for investors. AI can create greater value for VCs by quickly creating a summation of a company’s probability for success by analyzing factors such as industry experience, market size and revenue growth. 

AI’s ability to recognize data patterns and forecast probable outcomes has raised hopes that it can play a role in business operations, customer-related decisions and performance assessments. Now, venture capitalists are placing similar bets on AI.  

While traditional VC processes rely mainly on pre-existing connections and short pitches, AI can help investors quickly determine whether early-stage startups will succeed. For example, AI can instantly evaluate a company’s prospects for success through a combination of data mining, language processing and algorithms. Thus, investment-worthy startups can be identified before they even begin raising funds. 

Many investors in states around the country are already using AI to help make major investment decisions, and Utah is no exception. Convoi Ventures, a Utah-based pre-seed venture capital firm, partnered with Mercato Partners and Kentucky-based data analytics firm Connetic Ventures to host a unique VC pitch competition during Utah Tech Week in January. 

The VC pitch competition utilized an AI VC analyst called Wendal to help the judges vet startup applicants and pick finalists. While Connetic engineered the technology, Convoi Ventures and Mercato Partners organized the competition and fronted the $100,000 prize money.

"It was fascinating to see the finalists that pitched on stage because Wendal was able to take in and synthesize some information about the founders themselves."

Wendal uses cloud-based technology to gather data, communicate with company founders, analyze financial data and rank companies. Wendal also utilizes machine learning to get smarter about the questions it asks as it talks with founders. Wendal begins vetting companies by asking founders basic questions about revenue, company structure and sales. The technology also asks more complex questions, such as how a founder would handle a difficult situation. 

More than 100 Utah-based startups applied to pitch to Wendal. Each company had the opportunity to interface with the technology in a Zoom-style interview in which Wendal asked a series of questions. Based on the answers and spoken elements like diction, tone and confidence, Wendal narrowed the pool down to five finalists, says Trent Mano, co-founder of Convoi Ventures. 

The five finalists chosen by Wendal then made a live pitch to a panel of VC judges. The ultimate winner of the competition was Nonsense, a company that uses AI and proprietary language technology to help users learn new languages by watching movies. 

Tyler Slater, CEO of Nonsense, says he preferred pitching to Wendal over the panel of judges. He said VCs sometimes get distracted by things that don’t matter and don’t take the time to get to know the personality of the individual team members. Wendal, on the other hand, administered a personality test and asked questions to find out how well team members work together.  

“It was fascinating to see the finalists that pitched on stage because Wendal was able to take in and synthesize some information about the founders themselves,” says judge Rob Hennefer, co-founder of PANDO Ventures. “It was interesting knowing that an AI picked these founders … [Wendal gave us] insights into the style and the personality of the founders.” 

After seeing the competition’s success, Mano says he plans to use Wendal in next year’s VC pitch competition during Utah Tech Week. 

Global research firm Gartner estimates that AI will be involved in 75 percent of venture capital investments by 2025. Hennefer sees the value in AI, but is not ready to entirely rely on the technology to make decisions, he says, “because you can’t outsource judgment.” Investors should not remove their existing instincts from the conversation but can use AI to complement their intuition, he continues.

As for Mano, he’s optimistically confident that AI could play a significant role in Utah’s VC scene in the future. 

“AI is very rudimentary…but I think that purpose-built tools are coming, and they will probably change most industries, and I don’t think that VC is any different,” Mano says. “It will help automate the time-consuming tasks that take away from the core job of VC, which is a lot of judgment.”