Sounds familiar?
At Projects RH, we are seeing issues associated with funding applications created with -and applying- artificial intelligence ("A.I."). The experience of our clients is not surprisingly like what we saw with blockchain applications' financing. The first signs of this similarity emerged with the open-source and freely provided source codes for AI technology. The second sign was the rapid transition from parties wishing to invest in anything that had the word "*.ai" as its domain name. Finally, and most telling, is the provision of short courses by leading institutions (e.g., MIT, UCB…) to give professionals an understanding of the topic and investment market. Finally, is the emergence of developer/investor groups. This is happening at a time when blockchain developer/investor groups are declining if not closed.
About a year ago, the media ran hot with stories that from San Francisco to Shenzhen and most other places, there was money for AI, and realistically, there was FOMO (fear of missing out). It was a seen form of gold rushes until today with each new fad. This fever ended by September 2023.[1] We are back to usual, if not harder times, for early-stage companies. This saw USD 100's millions of funding for projects to use AI technologies. An example is Genis Therapeutics, which is seeking to use AI technology to create medical patents. The Middle East is also in the race to develop AI export industries - renting IP with an announcement to invest USD 100m, and Dubai responding with 100,000 "Golden Visas" for coders.
By September 2023, the FOMO began to disappear, and we saw more normal discipline return to the investment markets. While the market disturbance caused by AI was realized, it was now looking at second-generation technologies and applications, spread across a broad range of industries and platforms, including robotics.[2] There are some attributions to AI, which are probably attributable to machine learning, but nevertheless, the rapid application of the technology has already impacted major law and accounting firms and how they provided advice and even this author's work[3]. We need to be careful, however, as we all have precedent files and work templates. The advantage of AI is the automation of the retrieval of relevant material, but today it is far from perfect.
At a time when the "Magnificent Seven" was trading at 30x earnings, investors at the end of 2023 were looking for the next opportunity.[4] In 2024, the "Magnificent Seven" had a diverse treatment and received different treatment from the market.
We need to accept the history of blockchain
In the world of investability, we find that most people are trend followers rather than trendsetters. The early developers of artificial intelligence have clearly defined a pathway and span across many industries which will benefit from their work. There is no doubt that the pure science of artificial intelligence will continue to develop, and there will be huge strides in this technology. But it is somewhat like the development of the nuclear power station, with the first developments of the technology being huge strides and national secrets to now being commercially sold and integrated technologies that have continued to develop since the 1940s.
As with the development of blockchain's first applications, we're hugely transitioning, but the real and enduring benefits for society come from the applications of blockchain. Unfortunately, for the vast majority of people, the benefits of blockchain are clouded by its application in cryptocurrencies, with much of the debate about blockchain being blurred with its application in varying cryptocurrencies but, more importantly, in the results of their trading activities. For the investor, it has been the trading activities of cryptocurrencies which have become their focus, rather than the application or even the cryptocurrency-like transactions to the tokenization of assets. In the case of blockchain, its registry systems now support matches of the real property registration systems in the United States and the share ownership systems associated with major stock exchanges. These applications, in themselves, are bold, and investors are focused on their development, rather than the technology itself.
Many other providers of robust AI technology have made their developments open-sourced. Which in effect means others can copy and use or develop applications that can use this technology.[5] This will allow a multitude of companies to use this technology as a platform for specialized applications.
In the case of the clients of Projects RH, our focus is on applications of the technology to solve problems in a cost-effective and labor-reducing manner. Despite the hysteria in the press about job losses, what is happening is consumers are getting access to services previously too costly to provide 24/7 services without cost reductions. Companies are not lowering their prices.
There are many secondary companies benefiting from the tech boom, such as data processing centers and chip manufacturers.[6]
A hard cold AI application world
Amazingly, or perhaps not so, the first applications of blockchain only needed to say ".ai" to attract investors. They were presented at Angel seminars and later directly to family offices and other sophisticated investors. At Projects RH, we have seen the need for AI-based technologies to have sound business plans, necessary financial models, and information memoranda to get in the door. Currently, investments of over USD 1m require candidates to show a working MVP (minimum viable product) with a strong preference for it to be in the market and have sales. It is ironic that at this point, the investor is no longer an Angel or at an early stage but simply for commercialization.
Another trend we are seeing at Projects RH is that investors are seeking experienced AI technology leaders who may not necessarily be scientists but successful businesspersons who understand the discipline or industry they are applying AI to. Investors also prefer working with teams rather than solo technologists pitching their ideas wearing jeans and black T-shirts. The ideal business pitch should be led by a seasoned, sensible, and realistic commercial expert in the related field and accompanied by a team of technologists, compliance officers, finance, and marketing professionals. Commercial applications must be well-defined with specified markets and operations in multiple jurisdictions to enable rapid rollouts.
Investor expectations remain high, and they are looking for an 85% net margin, which was also seen during the fintech boom.
The Global Experience – we need a transmission solution
The global adoption of AI is not without its critics[7]. While there continues to be considerable merit in arguments regarding privacy and the potential loss of jobs, it is doubtful that this will stop the adoption of the technology. What we can expect to see is regulation.
There is still time to join the AI Boom
To the team at Projects RH, AI is like copper. People want it and need it. The value lies in the application – so application companies and their hardware companies are hot. We should never forget the chip companies and the infrastructure providers. So, at Projects RH, we agree with James Kirby[8] that there will eventually be a bubble and bust phenomenon to AI, but like fintech, copper, blockchain, and lithium, good projects will survive and prosper. We are seeing the hype season peaking in 2023 and now seeing the rise of applications.
Our expectation is that the global market for full AI-based applications is in its early stages, but investors are much more constrained than we saw in 2023. The rules for investors have become much harder. Everyone has stepped up a notch, with even Angel investors wanting to see minimum viable products. Having said that, for companies who are happy to list in North America, the regulation and capital market are open, with many individuals welcoming the opportunity to invest in early-stage AI-based companies.
The hype has peaked- but the opportunities are there
At Projects RH, we recognize that we're operating in a normal market where investors are not struggling for positions in core technology out of a fear of missing out. Rather, we acknowledge that there will be an ongoing evolution of multiple AI applications, each of which will need to adhere to established fundamentals, much like the next silver project. To gain investment, companies must demonstrate a sound business plan backed by a financial model and an information memorandum. They must also have a diverse, complete team with industry experience, technical competence, and strong financial and reporting capabilities. Investors will require proof of a minimum viable product before investing.
Those companies that meet these specific criteria will undergo a rigorous process of analysis to secure even early funding. Naturally, there will be many competitors, and success will likely come down to the team and presentations of each candidate. This reality is simply a normal process of natural selection.
As AI opportunities continue to proliferate, we at Projects RH are excited to work with a number of these companies. We feel strongly that these organizations will have a day in the sun, and we are actively pursuing high-quality future assets for our share portfolios. Perhaps it is time to re-evaluate current investments in light of the potential of AI securities. Will the current market leaders experience a Kodak moment, or will they bounce back?
By Paul Raftery, CEO of Projects RH.
We are happy to receive questions of comments at paulraftery@projectsrh.com
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[1] Smith, P. ; “The Other AI Start-ups thar Raised Huge Money in 2023”; The Australian Financial Review on line 4th September, 2023 – reviewed 22-March-2024.
[2] Wright, J.; “The practical steps that will keep you nimble in AI investing”, The Australian Financial Review on line, 6, 2023, read 23 Mar 2024. And Lui, S and Ning, D.; “China’s edge in AI robotics lies in Greater Bay Area”, South China Morning Post, 23 Mar 24, p A13
[3] Bell, M.; “Accounting firms Deloitte, EY, KPMG and PwC reveal how AI will change professional services”, The Australian, 22 March, 2024
[4] The “Magnificent Seven” in 2023 were: Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla. See Tran, J.; “Big tech stocks are looking ‘stretched’, warns JPMorgan chief”, The Australian Financial Review, 18th March, 2024.
[5] See Conger, K & Metz, C.; “In releasing his chatbot code, Musk escalates A.I. war”, The New York Times, 17 March 2024.
[6] Peach, J., & Bonyhady, N.; “Nvida hails AI boom’s tipping point”, The Australian Financial Review, 22 February, 2024 on line sourced 23-Mar-24.
[7] NCA Newswire, “’Can’t let the fear mongers win’: Experts debate AI risk to our extinction”, Reprinted in The Weekend Australian, on line, Saturday 23 March, 2024.
[8] Kirby, J.; “AI boom takes off, but it’s not too late to get on board”, The Australian, 22 March, 2024.
