Correspondence: Lack of Thorough Investigation or Research
In the fast-paced world of artificial intelligence (AI) and technology, a wave of concern is growing over the lack of proper due diligence in the investment process. Carrie Osman, the Chief Executive and Founder of Cruxy, a London-based B2B tech advisory firm, has added her voice to this chorus, highlighting the collapse of Microsoft-backed start-up Builder.ai as a prime example.
Osman's warning comes in the wake of previous failures in tech start-ups and scale-ups, such as Frank, Zymergen, and Theranos, where due diligence was found lacking. She suggests that the current system is systemically flawed, with investors prioritising high valuations and AI hype over thorough scrutiny.
The collapse of Builder.ai, it seems, was not an isolated incident. Sales of the company were found to have been exaggerated by a staggering 300%. The company's downfall underscores the importance of proper scrutiny and due diligence, particularly in the context of AI hype and inflated valuations.
The key reasons for this neglect of due diligence are manifold. Misrepresentation of AI capabilities is common, with companies like Builder.ai presenting their offerings as cutting-edge AI, while relying heavily on human labour or incomplete technology. This creates a gap between promises and delivery, making it difficult for investors to assess real value without deep technical insight.
Financial irregularities and inflated metrics also play a significant role. Builder.ai, for instance, used round-tripping transactions to artificially boost revenues, concealing the company’s true financial health. Such manipulations mislead investors who rely on reported figures rather than scrutinising underlying transactions.
Governance and operational failures are common in high-growth startups, and Builder.ai's failure revealed systemic governance weaknesses that allowed deceptive practices to go unchecked. There is often a lack of rigorous oversight by boards, legal counsel, and auditors, leading to insufficient vetting of claims and valuations.
The Silicon Valley approach encourages startups to project confidence and growth potential even if based on shaky foundations. This culture can obscure underlying risks and encourage investors to prioritise market buzz and valuation spikes over fundamental due diligence.
The complexity and unpredictability of AI technology also pose challenges. AI products can be highly complex and opaque, with “black-box” systems that lack auditability. Investors often lack the technical expertise to critically evaluate AI models, data policies, or development protocols, leading to overlooked risks.
Lastly, due diligence is complicated by rapidly evolving legal frameworks around AI, liabilities, intellectual property, and data rights. Contracts and risk assessments may be rushed or vague, failing to clearly define responsibilities or liabilities, thereby exposing investors to unexpected risks.
In essence, investors often fall prey to the allure of rapid innovation and high valuations without sufficiently verifying the technical legitimacy, financial transparency, and governance integrity of AI startups. Cases like Builder.ai and Theranos serve as cautionary tales where deception or overoptimism led to significant financial losses and legal consequences, highlighting the urgent need for more rigorous, transparent, and expertise-driven due diligence processes in the AI and tech investment landscape.
Osman urges investors to be more sceptical and diligent about questioning contracts and sales pipelines before investing. As the tech industry continues to evolve at breakneck speed, it is crucial that investors approach investments with a critical eye, ensuring that their decisions are based on facts rather than hype.
Investing in tech start-ups, particularly those involving artificial intelligence (AI), necessitates a critical approach to due diligence. Previous failures like those of Builder.ai and Theranos demonstrate the dangers of prioritizing high valuations and AI hype over thorough scrutiny, as misrepresentation of AI capabilities, financial irregularities, and complex legal frameworks can lead to misleading information and hidden risks. Therefore, it would be prudent for investors to question contracts, sales pipelines, and exercise deep technical insight before making any investments.
