Founded in 2012 by Sean Lane and Jeremy Yoder, Olive AI, a healthcare startup, sought to improve operational efficiencies using AI. Over the years, the company has raised significant funds from high-profile investors and reached a peak valuation of $4 billion in 2021.
Initial success has been promising, with more than 900 hospitals adopting the technology. However, rapid and unsustainable growth and strategic miscalculations led to the closure of OliveAI at the end of 2023. “The lack of focus, coupled with the champagne and cocaine mentality Brought on by easy venture capital money totaling nearly $1 billion, this is what killed another AI health startup, Olive AI,” author Sergei Polevikov said.
It’s confusing to think that even with the backing of trustworthy investors, a startup can go bankrupt due to miscalculations. Surprising as it may seem, data shows that several AI startups backed by high-profile investors have closed their doors over the past five years.
When venture capitalists can be counterproductive
In a 2019 interview with Sam Altman, head of OpenAI, venture capitalist and founder of Khosla Ventures Vinod Khosla said: “I have a lot of problems saying this, (but) 90% of investors add no value. In my opinion, 70% of investors add negative value to a company. This means that they are advising a company when they have not earned the right to advise an entrepreneur.”
In fact, Khosla was reiterating this sentiment for over a decade. As a VC who has backed several emerging startups, including OpenAI, one might wonder what motivates this critical stance against his own clan.
Well, Khosla has his reasons.
When young employees asked why they couldn’t join a board like their peers at other companies, Khosla said it was unfair to entrepreneurs. “Just because you got an MBA and joined a venture capital firm doesn’t mean you’re qualified to advise an entrepreneur,” he said.
He believes the key qualification for a VC to offer advice is to have built a large business and to have personally experienced the difficulties, uncertainty and challenges that entails. Without having first-hand experience of the challenges of running your own business, the ability to advise others carries little weight.
Holistic Power of Venture Capital
When interacting with AIM, Pranavan S.founder and CEO of Control aa Bengaluru-based startup that is developing AI-based innovation by creating physical agents, said, “Given the competitive landscape in the AI space, venture capital money plays an important role in infrastructure, team and research needs. Besides funds, a venture capital network or brand helps build customer trust and also strengthen networks and partnerships.
Founded in 2023, Control One has raised $350,000 from industry leaders including the co-founder of iRobot Helene Greinerfounder of CRED Kunal Shahand executives from Tesla, Walmart and General Electric.
AI startups have seen a remarkable increase in investments. It was reported that, from April to June this year, investments in AI startups reached $24 billion, double the previous quarter.
Although venture capital expertise provides overall support for growing a business, conflicts between them are common. Pranav believes that these conflicts often arise from inappropriate expectations. “Sometimes founders tend to overpromise and this needs to be controlled. Once milestones and expectations are set, the chances of disagreement decrease significantly,” he said.
At loggerheads
AIM acquired knowledge from a VC’s perspective after speaking to Abhishek Prasadmanaging partner at Cornerstone Venture Partners.
“Friction can arise when VCs behave like bosses and take on mentoring roles or take a know-it-all approach without providing tangible value. In the Indian context, given that we are still a young VC ecosystem, we have seen VC firms often operating as super angels and not professional investors in the founder’s journey, which leads to situations that often lead to friction,” Prasad said.
Prasad further explained that discord arises between venture capitalists and founders when they do not agree on a common path forward. These frictions often arise when venture capital firms push in directions that conflict with the founder’s vision or agenda.
“For a VC, the company may be just another company and a game of optimization, while for the founder, the company in question is all he or she owns. This often leads to distrust and founders begin to distrust their relationship with venture capital and often stop confiding in venture capital firms, leading to additional strain in the relationship,” he said. added.
Evolution of AI and Deeptech startups
With the rise of AI startups, VCs investing in AI companies are also transforming, meaning that expectations of them are also evolving.
Venture capital firm Bharat Innovation Fund (BIF), which focuses on high-tech startups, began investing there around 2018. Co-founder of BIF Ashwin Raguraman said they are focusing on what they call globally competitive startups, whether they are competitive today or have the potential to become globally competitive and address to global markets.
Although the BIF has not yet invested in generative AI startups, it is closely monitoring developments in this area, particularly those that go beyond simple applications and demonstrate maturity and innovation. The company wants to support “AI-native” companies that integrate AI from the ground up rather than those that simply adopt existing models.
VC-founder relationship
Speaking on the relationship between VCs and startup founders during a panel discussion at the recent Cypher 2024 AI Summit, Ashwin highlighted the importance for VCs to interview the founders.
“We ask questions before investing (and) after investing. We ask questions as board members, but I think…asking questions, especially after you’ve invested, is being a sounding board. We can’t necessarily give answers. The founder must find the answers because that’s when he internalizes them and then executes them. So we are good at asking questions,” Ashwin said.
Interestingly, when asked about a VC’s involvement in a founder’s business, Ashwin’s response was quite clear. “In an ideal situation, we would like to start with 0% investor on the ground, because that means the entrepreneur is up to the task and we don’t need to spend time on it. They will deliver returns. (But) there are times when that zero gets to 70 to 80 percent and that’s not a good situation. I know when I’m 70% involved, we’re trying to save something that may be sinking without our efforts,” he said.
Cypher 2024 – Roundtable with VCs and startup founders.
From left to right: Arjun Rao, General Partner at Speciale Invest, Ashwin Raguraman Co-Founder and Partner at Bharat Innovation Fund, Korak Roy, AIM Video Presenter, Rimjhim Agrawal, Co-Founder and CTO at BrainSight AI, and Abhishek Upperwal CEO/ founder of Laboratoires Soket
VC-backed failures
Regardless of how much a VC gets involved in a startup or tries to maintain a balance, the startup can fail. A number of high-profile venture capital-backed startups have failed in the past.
Founder Problems
The direction or misdirection of venture capital can often cause startups to fail. Additionally, the company’s board of directors may also have disputes with the founders. Members, which sometimes include investors, can give rise to other types of friction.
Interestingly, during the interview with Khosla, Altman said that in risk-driven decision-making situations, he prefers to have a board that calms the entrepreneur rather than adding to the stress.
It’s bizarre that this statement was made in a 2019 interview, especially since just a year ago Altman found himself at odds with his own board. The board ousted him amid accusations of a lack of transparency in his decision-making process.
Although it didn’t last long – a little over two days, to be precise – he was reinstated as CEO and his board of directors was dissolved. Eventually, new members of the board of directors, perhaps his allies, were named. However, the company has faced a number of high-profile departures, including the departure of its co-founders, over the past year.
Reflecting on what Khosla said, it is evident that conflicts over ideas and involvement are primarily the reason for counterintuitive performance results. The 70% figure may not be an absolute number, however.
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