Business is booming.

Investors turn to AI-guided dealmaking to gain edge over rivals

Venture capital funds, private equity groups and accountancy firms are using the latest artificial intelligence to pick acquisition targets and start-ups for investment, betting the technology can give them an edge over rivals.

Big Four accountant KPMG, hedge fund Coatue and venture capital firm Headline are among those using the latest AI tools to advise clients and help guide their dealmaking.

With investors under pressure to identify the next high-growth start-up at a time when few companies are going public, some argue that dealmakers can benefit from using generative AI for tasks such as assessing a company’s growth potential based on financial analysis.

“If you can train or use a model that gets a lot of efficiency first, you will get an advantage in that particular area of the business that is harder for a second mover to do,” said Pär Edin, who leads innovation in KPMG’s US deal advisory and strategy business. “It is about getting there first for each and every particular use case.”

The pace of artificial intelligence development over the past six months, triggered by the release of OpenAI’s popular ChatGPT — a chatbot that provides humanlike answers to queries — has spurred investors to use the tools to identify fast-growing companies and acquisition targets.

KPMG has used the technology behind ChatGPT to create a system based on its own data to help advise its staff. The company said the tool had seen high take-up over the course of the month it was in use, adding that recent advances in AI had made it “practically useful . . . particularly in M&A”.

Coatue’s software Coatue Brain integrates generative AI into its data platforms, using the technology to sift through sellside research, earnings transcripts and pitch decks to extract and condense key points into clear and concise briefings.

PitchBook’s AI-driven “VC exit predictor” evaluates how likely a company is to go public or be acquired. The data provider has claimed that the two-month-old tool had a 75 per cent accuracy rate.

Meanwhile, venture capital firms Headline and Moonfire Ventures have used generative AI to assess and compare investment targets based on measures such as web traffic and new users, so as to isolate those with the biggest growth potential.

Partners could then focus on thousands, rather than millions, of companies, said Headline. The VC firm added that it had invested in some businesses, such as password management service Bitwarden, largely on the recommendation of its AI.

The increased use of AI in investment has raised questions over the traditional roles of human relationships and judgment in the sector. Industry analyst group Gartner has estimated that AI and data analytics will inform more than three-quarters of venture capital and early-stage investments by 2025.

“We don’t think it puts the traditional role of a VC under threat,” said Mathias Schilling, a founding partner at Headline. “The whole concept is a co-pilot; it makes us much smarter when we engage with a company.”

London-based Moonfire said it used AI to review about 50,000 companies every week, evaluating, for example, a founder’s experience and the potential for returns on investment. The company drew on its algorithm to discover and back UK fintech LiveFlow, leading a $3.5mn seed raise.

“We’re seeing significant improvement in our algorithms because of what’s happened in the last four months,” said Mattias Ljungman, Moonfire’s founder, who also co-founded European venture capital firm Atomico.

Moonfire is seeking to mitigate potential algorithmic bias by setting out rules so that AI cannot take certain attributes, such as gender, into account when evaluating founders of companies.

But Anne Glover, chief executive at venture capital firm Amadeus Capital Partners, said generative AI had nevertheless tended towards bias, adding that the tools used limited and historic data.

“It is impossible to assume that you should be making that kind of human decision based on what an AI is doing,” Glover said. “For someone like ourselves, where we are investing at the cutting edge, there isn’t a lot written about what we are looking for.”

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