AI has attracted global attention since ChatGPT debuted in 2022. The technology has not only changed the way people and businesses work, but it has also influenced VC interest in generative AI and AI-related startups.
According to Crunchbase data, investors have poured roughly $50 billion into AI startups in 2023. Macroeconomic challenges may have slowed VC funding last year and for much of this year, but investors are still paying close attention to AI.
“AI has been around for a long time, but it’s only now become something of a buzzword,” Simon Sharp, partner at Global Ventures, told StartupScene. “More and more companies are considering how it will impact their markets and business models and starting to incorporate it.”
According to a PwC report, AI is expected to contribute $320 billion to businesses in the Middle East by 2030, and companies have started using it to automate some of their business functions, including marketing, operations, and HR. The same report predicts that adopting AI will generate a 10x return on investment, making it an attractive area for investors.
What is an AI startup?
Before we get into what investors are looking for in AI startups, it’s important to distinguish between different types of AI startups: those that use AI for chatbots or large language models (LLMs) and those that incorporate AI into their business models to make operations more efficient and cost-effective.
“We’ve seen a number of portfolio companies and investments where startups are using off-the-shelf models to power parts of their business,” Sharp said. “Whether that’s fintech in the fraud detection and credit scoring space, edtech around personalized content, or cybersecurity companies using the data they get from a security standpoint.”
While there’s been strong interest in both types of startups, Sharp sees a unique opportunity in the Arabic model. Arabic is the native language of 400 million people in the region, but less than 1% of web pages are displayed in Arabic, according to a recent AI report by Global Ventures. “So when you think about what it means to be an AI company, there are fewer existing resources published from an Arabic perspective than there are in other languages,” Sharp says.
Investment Criteria
Like any other startup, AI startups need to focus on solid business fundamentals to attract investor interest.
Factors like team, product and market remain important. But Hussein Attar, CEO of Tech Invest Com, a Saudi Arabian venture capital firm that invests in growth-stage startups, believes that in addition to having the right fundamentals in place, AI startups need to pay particular attention to market validation. “When it comes to AI startups, what we usually want to see is market validation,” he says.
“Everyone is promising that technology is the big differentiator, that technology is going to bring change and that it’s something everyone needs, but at the end of the day, it’s what the market says,” Attar said. Founders need to know if their solution can truly solve a problem, rather than just focusing on the technology. “Ultimately, you may have a great technology solution, but if you don’t understand how the market uses it and how to leverage it, then it’s not going to do you any good as a startup,” Attar added.
Investors are also looking for startups that can stretch their cash flow and make the most of their resources. AI can help them do that. “A $3 million funding round is the equivalent of three or four years of cash flow for a company,” Sharp says. “But if you’re leveraging certain technologies because the burn is low, you don’t need as many employees because you can automate some of these tasks.”
Investors are turning to AI startups because of the added value the technology can bring to companies. Conversational AI platform DXwand struggled to raise capital when it launched in 2018, but has seen increased investor interest in recent years. “When I was fundraising in 2019, VCs told me they didn’t know how to value startups because I operate in the deep tech space,” DXwand founder Ahmed Mahmoud previously told Startup Scene. “They told me to look for other ways to raise capital. But now, because we’re in AI, other investors are approaching us and saying they want to invest now.”
Rules
Although some guidelines and frameworks have been put in place, there is still no AI regulation in the Middle East. The lack of regulation is an advantage for startups, allowing them to experiment and develop solutions faster.
“The lack of regulation really allows startups to experiment a lot more,” Attar said. “I think overseas there have been copyright issues with language models learning all kinds of writing skills so that they can be inspired by different artists to create their own work. That’s creating a big problem. These concerns might make investors hold off on investing in these companies because they don’t know if there will be more regulation or if the problem will go away.”
He added that guidelines and policies are not yet widespread in the Middle East and most are concerned about data privacy and data security issues.
Conversely, a lack of regulation can hinder a startup’s expansion. AI startups that want to expand to other markets need to ensure they comply with the rules and regulations of that country. For example, a UAE healthtech startup wanting to expand to the US will be subject to strict regulatory requirements, which could impact their expansion plans.
As technological progress outpaces regulatory progress, countries are forced to walk a tightrope between advancing AI technology and ensuring it’s used ethically and responsibly. “I think every country has that dilemma of wanting to speed up technology,” Sharp said. “They want to develop, enhance and grow these technologies, but at the same time they want to make sure it’s done in an ethical way that works for everyone.”
