Amid AI hype, family offices take cautiously aggressive approach
The dot-com era's investor sentiment in the late 1990s, marked by enthusiasm and subsequent crashes, set the stage for established giants such as Amazon, Google and Salesforce. Drawing parallels, family office investors note similar trends within today's AI bubble.
Their consensus is that, beyond the hype, artificial intelligence holds tangible potential. Just as the internet reshaped society and the economy, AI is expected to have a transformative impact.
"There is some euphoria to it, but there is true substance there," said Tom Raymond, a partner in investment management at the Callan Family Office. “The power is real.”
Even before ChatGPT's emergence in November 2022, family offices demonstrated an interest in AI investment. A spring survey that same year revealed that 48% of family offices had already ventured into the sector. Since then, this interest has swelled.
Notable instances include Stanley Druckenmiller investing in Nvidia Corp., Eric Schmidt backing Mistral AI and Inflection AI, the Goodrich Family Office supporting Birdstop and the Dorilton Capital Family Office entering a partnership with Blackbird.AI.
"The number of AI transactions by family offices since Q4 2022 surpasses the prior year," said Dennis Caulfield, vice president of research at FINTRX.
Seizing the moment amidst economic turmoil, opportunistic investors are capitalizing on the private markets by acquiring discounted shares in companies. Raymond likens this approach to a chance to invest in promising companies before they are overvalued. He sees it as a form of time travel for investments.
“Right now, you can buy early AI movers at a discount, secondaries in the venture space at a massive discount – 30-40% discount to their asset value,” he said. “Startups are looking for liquidity and are willing to sacrifice the longer-term upside of investments for the short-term gain of having cash in hand.”
To navigate the potential volatility of the AI bubble, family offices are rigorously evaluating startups for direct deals and suitable funds.
“As an investor, determining what’s real and what’s not is getting harder and harder,” said Ian Sheridan, a co-founder and managing director of Vestigo Ventures. He likened the process to assessing startups during the early days of the internet.
“Inventors would show up with a whiteboard,” Sheridan said, “but at the end of the day, there was no engine. Right now, the technology allows things to look superhuman really fast, and it’s up to the investor to figure out what’s really underneath, to peel back the layers.”
Key considerations when assessing AI startups:
- Market fit and execution: Gauge potential by market size and demand. Are they solving a crucial problem with demand? “We won't touch anything without those," said Peter Bordes of Trajectory Ventures. Execution is vital; failure to execute invites competition.
- Scalability: AI's elements — algorithms, data, models, infrastructure — must scale seamlessly in size, speed and complexity.
- Creating a moat: Does proprietary intellectual property provide a protective edge as the business grows? Sheridan underscores this importance.
- The Human factor: Talent is as vital as technology. Talent’s absence hinders growth.
- Leveraging expertise: Expertise in industries affected by AI aids growth. Partnerships offer more than just capital — operational expertise accelerates progress.
To be sure, investors are also assessing other startups based on their use of AI.
“There isn’t a portfolio company that we haven’t asked: ‘What is your AI strategy? If you’re not using it, why not?’ ” said Sheridan, whose Vestigo Ventures itself uses big data and machine learning in its research and other operations.