The continued development of artificial intelligence (AI) presents an unexpected solution that can revolutionise the investment industry. Using AI in funding decisions can help venture capital (VC) firms vet founders and startups in Southeast Asia, making selecting which ones to back financially easier.
VCs in Southeast Asia have had to change how they operate since global economic headwinds emerged and limited their investment funds, making them more reserved when investing than in previous years. According to DealStreetAsia’s SE Asia Deals Barometer Report, fundraising patterns for March 2024 showed a cautious approach, with only 1 megadeal recorded in the month. January and February had no megadeals, and funding numbers were also lower than in previous months.
We take a closer look at funding and venture capital trends in Southeast Asia
The still nascent startup ecosystem scene in the Association of Southeast Asian Nations (ASEAN) means investors must be more discerning when selecting companies to invest in. Otherwise, they may end up burdened by a flailing enterprise with a poor organisational structure, which may affect their exit strategy.
Some of the primary challenges VC firms face while still using traditional startup-vetting methods include market volatility and an inability to predict the future cost of their investments. Moreover, reviewing data, making sense of it, and generating actionable insights take up long human hours.
Investors have to review many companies within a short period to fund a potentially profitable business before their competitors discover it. This approach means their risk assessment may be inadequate, opening the VC firm to legal and regulatory issues.
Furthermore, traditional methods are vulnerable to subjective bias. Investors may choose the wrong companies based on false perceptions and miss out on a soon-to-be profitable startup.
How AI in funding is transforming the startup vetting process for VCs in Southeast Asia
With legacy approaches proving to be holding the investment industry back, AI tools can help VC firms reduce risk, enhance their profit potential, and make better decisions on the best startups. Here are several ways how AI is transforming the vetting process:
- Scalability to meet rising demand in vetting
AI helps with scaling by automating repetitive tasks and improving operational efficiency. It leaves venture capitalists with adequate time to focus on reviewing startups for investment. The longer the scrutiny, the more likelihood of spotting problematic issues that may undermine the investment deal in the future.
- Ensuring blind screening
Using artificial intelligence instead of relying on humans can eliminate subjective bias in decision-making. Blind screening allows VCs to see a startup’s and its founders’ value without discrimination or stereotyping people’s future performance. Having AI conduct the reviews may also enhance diversity, ensuring more underserved but qualified groups gain access to much-needed capital.
- Compile company data to assess investment potential
AI’s advantage over humans is that it can review large datasets quickly and provide reports with actionable insights within a short period. It can also assess company filings to confirm whether the startup complies with regulations. This checkup can help detect fraud and identify attempts to mislead industry stakeholders, which may shed light on the founders’ personalities and integrity.
- Identify opportunities for merit-based funding
VC firms can deploy AI to analyse historical data and uncover hidden gems in the startup ecosystem that do not have funding. Reviewing data reams can help investors mitigate investment risks and predict market trends to know which startups are about to surge and which will struggle.
- Choose companies with sustainability policies
Finally, VCs can use AI to check a company’s ESG (Environmental, Social, Governance) record and figure out if those startups ripe for investment have established eco-friendly policies. Since startups need guidance from investors, having few ESG standards should not count against them. VC firms can direct AI to identify areas where a business can improve and become more sustainable.
Future trends in AI adoption by VC firms
VCs in Southeast Asia can benefit immensely by using AI in funding decisions. Artificial intelligence is changing ASEAN’s investment landscape, and it has the potential for continued innovation in years to come. The tech already works well for recruitment agencies, helping to sift through thousands of applications to identify the top candidates for the job, and it can deliver for investors as well.
There may be concerns about adopting AI due to privacy and safety issues when collecting and analysing data. There is also a risk that the way the AI is programmed will cause unintentional bias when reviewing startups. For example, the technology may remove potential companies from the funding shortlists by discriminating against women and black founders.
Addressing these trustworthiness issues will propel VC firms and help them make reliable, data-driven decisions about startups in Southeast Asia. Moreover, if they improve their staff’s AI expertise, they will reap the advantages mentioned above.