Artificial intelligence: the investment of 2017 and beyond

February 2017 | EXPERT BRIEFING | PRIVATE EQUITY & VENTURE CAPITAL

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The rise of artificial intelligence (AI) has, for the last couple of years, dominated headlines as technologies associated with AI advance and appetite grows exponentially for AI products.

Key market players in industries too many to mention are looking towards AI innovation to stay ahead of their competitors and gain market share, seeing AI as the catalyst for success. This appetite only serves to make AI start-ups a more attractive proposition to the global VC community.

AI spending is forecasted to grow from $640m in 2016 to $37bn by 2025, according to market research firm Tractica. Tractica’s research director, Aditya Kaul, told website Datanami that cases like image recognition, algorithmic securities trading and healthcare patient data management, “have huge scale potential”, as well as in areas such as business services, consumer products, industry (industrial robotics), advertising, finance, media and defence.

AI is not just one of a number of trends in VC activity we have seen before. Uniquely, AI is a super sub-sector of technology, which is set for a development surge which will span not only years but decades, as many industries come to rely on long term development.

The automotive sector, for example, is such an industry that will seek to buy and develop AI technologies as it refines driverless cars and other vehicles such as trucks and tractors, bringing them to and keeping them on the road. Current AI programmes being developed for this purpose include vehicles being able to recognise faces and responsive GPS systems.

The UK’s contribution to AI

Over the last 12 months, we have seen some incredible AI deals being done out of the UK, attracting interest from Silicon Valley. There has also been a marked rise in venture capital firms requesting advice on corporate and tax elements of AI deals.

Octopus Ventures’ interest in AI began in 2008, when the firm first backed Evi (then TrueKnowledge.com), a natural knowledge answer engine. In 2012, Amazon purchased the company and Evi now provides the technology behind Amazon’s Echo, showing how far AI products can come with backing and sale to the right company.

The VC firm has been an active investor in the AI market since, with the sale of AI language input app Swiftkey to Microsoft being a standout deal in the last year. Octopus Ventures started working with Swiftkey in 2010 when the AI application of natural language was a little-known area of research.

Another standout deal is the sale of machine learning platform Magic Pony Technology to Twitter. The social media giant acquired the firm only 14 months after meeting Octopus Ventures through the Entrepreneur First programme.

Luke Hakes, investment director at Octopus Ventures, said that companies such as these all have one thing in common: “their dedication to undertaking fundamental research into the applications of AI and machine learning. This desire to push boundaries is the reason Octopus was so excited to work with all three businesses – and surely plays a big role in making them so interesting to global technology acquirers”.

Mr Hakes also gave an insight as to why he thinks the UK is leading the way in AI and piquing the interest of parties in the US. “Good news stories like these mean the world’s AI talent will continue to look to the UK for inspiration in how AI can be successfully commercialised. This means more AI talent, more funding for these businesses and more experienced people to help nurture the ecosystem,” he said.

Another great deal rounding off the end of 2016 was an investment by a range of investors into Cambridge-based speech technology company Speechmatics.

Speechmatics’ technology enables businesses to generate data about customers and employees which is harnessed to improve process and efficiency, and benefit the bottom line. Last year the business launched its new AI framework, Auto-Auto, which enables the company to add almost any language automatically. Since building the framework, Speechmatics has released a new language every two weeks, including most European languages, as well as Greek, Russian and Arabic.

The firm received investment from several sources, including technology venture capitalist IQ Capital, AI/machine learning specialist and technology investors Amadeus Capital Partners and a number of technology investors including Laurence Garrett (Highland Capital Europe), Cambridge professor Ted Briscoe, a specialist in Natural Language Processing as well as co-founders of CSR, and former executive chairman at SwiftKey Richard Gibson.

Chief technology officer at Speechmatics, Tony Robinson, said of the AI developments: “We are at the forefront of how deep neural networks are changing speech recognition. With our ever expanding and highly experienced R&D team, we continue to push the boundaries in speech technology, especially around languages, accuracy and deployment”.

Do not believe the hype?

There is a lot of hype around AI – and rightly so. According to CB Insights, nearly 140 private companies working to advance artificial intelligence technologies have been acquired since 2011, with over 40 acquisitions taking place in 2016 alone. Global corporates such as IBM, Google, Yahoo, Intel, Apple and Salesforce, are competing for private AI companies. Samsung also emerged as a new entrant in October with the acquisition of start-up Viv Labs, which is developing a Siri-like AI assistant. GE also made two AI acquisitions in November.

With this ongoing global activity and more on the cards, there is no doubt that AI will continue to be a hot funding item in VC and PE rounds in 2017. Knowledge is power, and it is critical that VC firms ensure they have enough institutional knowledge to invest well in AI products.

However, there are long term hurdles, not only to AI, but to VC firms operating in the UK.

First, with the huge amount of interest from global corporates across all industries for AI experts and very deep pockets to offer attractive salaries, some tech and market commentators fear this could lead to a brain-drain of AI talent for start-ups, which could present as a long term challenge.

Second, peripheral to the rise of AI and the excitement surrounding it, there are still issues with the Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) regimes which are hindering tax-efficient investments into AI (and other) companies, thereby reducing a potentially critical source of funding to start-up tech companies at a time when they need it most.

The VCT and EIS legislation changed substantially in 2015 and those changes, together with the way that HMRC is interpreting the new legislation, have resulted in long delays to the advance assurance (AA) process which provides certainty to investors that the expected tax reliefs will be available. While there is a current consultation document looking at ways in which the AA process could be improved, failure to do so will continue to negatively impact those start-up companies which require relatively large amounts of cash investment but are high-risk.

AI is in it for the long-haul

Overall, despite the challenges outlined, investment in AI should follow an upward trajectory in 2017 and is likely to be the most popular area of investment for tech-savvy venture capital firms.

As virtually all industries catch up with the technological advances AI presents, and as they seek to implement them one way or another into their businesses and structures, AI is set to become more than a trend – it will become a moving feast for years and even decades to come.

Alastair Peet and Tom Wilde are partners at Shoosmiths LLP. Mr Peet can be contacted on +44 (0)121 625 4163 or by email: alastair.peet@shoosmiths.co.uk. Mr Wilde can be contacted on +44 (0)118 965 8713 or by email: tom.wilde@shoosmiths.co.uk.

Alastair Peet and Tom Wilde

Shoosmiths LLP