It's crucial to understand the difference between a company that is truly "powered by AI" and one that merely uses AI as a marketing buzzword. A genuinely AI-driven company incorporates artificial intelligence into its core processes, using it to drive innovation, enhance efficiency, and deliver more effective solutions to customers. AI is not just an additional tool but an integral part of how the company operates and creates value.
"AI washing" is a term that refers to the improper and exaggerated use of claims about the use of artificial intelligence by companies, aimed at attracting investors or consumers. This occurs when a company promotes its use of AI as a competitive differentiator, even though the technology is not really integrated in a significant way into its operations. This type of deceptive practice can lead investors to believe that the company possesses advanced technological capabilities that, in reality, do not exist.
Some companies claim to be "powered by AI" without actually integrating AI significantly into their operations. For example, in March 2024, the American SEC charged two investment advisors with making false and misleading statements about the use of artificial intelligence. These companies eventually paid penalties totaling $400,000 and were required to change their AI usage communication. In 2019, MMC Ventures, a venture capital fund based in London, analyzed nearly 3,000 European Union startups and found that only 60% of the companies had evidence that AI really supported the company's value proposition.
As investors, it is important to conduct due diligence and understand how and where AI is really used before making a decision. When evaluating a company that positions AI as a competitive differentiator, it is essential to conduct a more thorough technology due diligence. This includes understanding the technology and data infrastructure used, as well as the differentiation of their intellectual property.
An initial analysis, even before proper due diligence, can be done by evaluating the composition of the team. A company that builds its own AI tends to have a team with data science and machine learning experts. A company that uses third-party AI tends to have teams with a traditional software engineer profile. Crossing the company's "powered by AI" story with the team profile already allows for identifying initial inconsistencies. Nevertheless, before making an acquisition or investment, it is important to conduct appropriate technology due diligence.
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