AI is already shaking up VC

Venture capitalists have made big bets on AI transforming a host of industries, from banking to pharmaceuticals. But what they may not have counted on is how quickly it is affecting their own business. The signs are everywhere, including at Greycroft, which is reportedly letting go of a couple of partners as part of a strategy to double down on AI.

For most VCs, the question is not about how to invest in AI, but whether to use it to supercharge operations. As we wrote in our recent cover story, several firms, both large and small, are already using AI to help with deal sourcing, operations and due diligence, including Alumni Ventures, AngelList, EQT Ventures, Headline, H/L Ventures and M13.

In fact, some firms have been using AI for years, allowing them to punch above their weight. After we published our story, a small Kentucky firm named Connetic Ventures reached out to let us know it had built its own AI system and has been using it since 2019. Dubbed Wendal, the system has enabled Connetic to analyze more than 30,000 start-ups, something that would be virtually impossible for its three full-time investors to do on their own.

Wendal “screens out 90 percent of companies [that apply, freeing us to] meet with 10 percent and invest in maybe 10 percent of those,” partner Chris Hjelm told Venture Capital Journal. “We’ve done some analysis, and Wendal can do the work of roughly 250 analysts, so we can keep a team of our size as we scale and get more assets under management and just tweak the algorithm.”

If you’re worried you’re already too late to get into the game, we’ve got good news. This week, a company called BlueFlame AI told VCJ that it is making its AI platform for alternative asset managers broadly available. Just like you can outsource your back office, you can now hire a third party to provide the benefits of AI.

BlueFlame’s solution sits on top of large language models, such as ChatGPT from OpenAI. It aims to improve clients’ access to data in siloed systems – including the data rooms of portfolio companies, vendor contracts, legal agreements and portfolio oversight tools – and it uses natural language commands to drive mass automation, CEO and co-founder Raj Bakhru told us.

One of the selling points for BlueFlame is that it ties into a venture firm’s existing systems and workflows, so they can get the benefits of AI without being an expert. “We’re going to be natively integrated into [Microsoft] Teams and Slack,” said company co-founder Henry Lindemann. “There will be a web interface if you want to go to it, but we’re not asking people to fundamentally change their day.”

Different opinions

In addition to wrestling with how to use AI in their operations, venture firms are trying to figure out the optimal way to invest in the technology. Two established firms are taking different approaches. In July, Mayfield unveiled a dedicated vehicle called AI Start, supporting it with $250 million from its existing funds and handing the reins to Vijay Reddy, a newly hired partner with deep AI investing experience.

Managing partner Navin Chaddha told VCJ Mayfield created the dedicated fund because AI is “a once in a generation opportunity that requires a dedicated mindset, team and operational prowess that is as forward-thinking as Gen AI itself. AI Start is the first seed fund in our history, which will partner with founders starting at day zero, and syndicate with angel investors and seed funds by being flexible on check size and ownership requirements compared to our main fund.”

Over at Greycroft, which was co-founded in 2006 by VC legend Alan Patricof, the firm has decided to go all-in on AI, a move that will result in the year-end departures of longtime partners Ellie Wheeler and Will Szczerbiak, the leader of its health tech team and co-leader of its fintech team, respectively, according to a report by Axios Pro Rata. It noted that Greycroft plans to formally unveil its AI strategy in November.

A Greycroft managing partner did not respond to a request for comment.

Citing a letter Greycroft sent to limited partners this week, Axios said the firm “told investors that it will refocus its core strategy around AI start-ups.” Greycroft plans to continue to invest in health tech and fintech, “but through the lens of what its letter calls ‘vertical software that is powered by artificial intelligence,’” Axios reported.

VCJ talked to one Greycroft LP who spoke on condition of anonymity. “I don’t think it’s a huge shift,” they said. “It’s more a reframing that a lot of VCs are currently doing — thinking about how AI threatens, enhances or helps their portfolio companies, in terms of the product they’re selling, as well as how they use AI in their own operations.”

So, what’s the optimal strategy for investing in AI? Do you continue to do what you’ve always done but hire an experienced AI investor to lead a dedicated new fund? Or do you veer away from traditional sector-based investing and make AI the focus of everything you do? These are sure to be questions on the minds of most VCs as they wrestle with AI’s sudden impact on their business.