Adith Podhar, general partner at Gemba Capital, said the hype around AI startups is unlikely to continue as investors become more cautious.
“A market correction is expected, with the focus shifting to companies that can present a strong value proposition rather than those that are simply capitalizing on the AI hype without a solid business case,” he said. Podhar said.
Investing in AI has moved from a mere fad to the emergence of models that can demonstrate their value proposition, business impact, growth metrics and potentially measurable returns, said Abhishek Prasad, managing partner at Cornerstone Ventures.
Investors have stopped blindly pouring money into AI hype to focus on areas that deliver significant value.
“The fact that investors are becoming more demanding is a positive development. This pushes startups to refine their value propositions and prepare to generate real, sustainable growth. This shift means that resources, both financial and human, are being directed towards projects that have the potential to have significant future impact,” said Vikram Chachra, founding partner of 8i Ventures.
In the short term, Podhar expects valuations to rationalize and capital deployment to slow, with fewer funding rounds.
“Historically, any new technology has gone through a boom and bust cycle before widespread adoption, and we believe the AI cycle is still in its early stages,” Podhar said.
Over the past few months, three AI-focused startups – Toplyne, Nintee and InsurStaq.ai – have closed shop. According to posts by the founders of Nintee on its website and Toplyne on X, both startups returned money to their investors. The founders of these startups did not immediately respond Mint» request for comment Wednesday.
Industry executives have suggested that the number of AI startups that have closed their doors in recent months is in the thousands.
What works
However, according to Podhar, there has been a surge in investor interest in the generative AI field, leading to significantly higher valuations than non-AI technology companies.
“Seed-stage AI startups have approximately 20% higher median valuations, as high as 59% for Series B rounds compared to non-AI-focused startups,” he explained.
Models such as agents, co-pilots and solutions that help companies become AI-ready are currently highly investable, said Preeti N Sampat, partner at Eximius Ventures.
“These areas are still in their infancy and have significant growth potential as companies move toward more autonomous operations,” she said.
There are obvious apprehensions about models that claim to eliminate labor altogether. According to Prasad of Cornerstone Ventures, models with “humans involved” will be the most successful. It is critical to focus on “augmented intelligence” rather than hoping that AI capabilities will have a high-value impact independent of human interventions, Prasad said.
Shyam Menon, Partner, Bharat Innovation Fund, noted that vertical-specific AI solutions that reduce operational costs, increase productivity and deliver ROI within 6-12 months are currently attractive. Investors are wary of broad, horizontal AI platforms without clearly defined use cases, especially “AI for everything” solutions, according to Menon.
“B2C applications with unclear monetization paths, high customer acquisition costs, or those that require extensive data and infrastructure are viewed with skepticism,” he added.
India’s AI market is expected to reach $17 billion by 2027, with annualized growth of 25-35% between 2024 and 2027, according to a February 2024 report by the National Association of Software and Services Companies and the consulting firm BCG.
