Due diligence is needed, but do not overlook the 'X factor'

For a company set on digital transformation, the quickest path to getting the AI technology, solution and expertise needed is to get them from a startup – whether by acquiring the startup outright or purchasing its products and services.

But how does one choose among so many AI startups, each claiming to have the best solution?

A new paper from the Deloitte AI Institute provided to AI Business offers tips on how to screen them – so your company can find the startups that offer the best products for your needs. After all, there are many to choose from: Venture capital investments in startups developing AI-related products and technologies have exceeded $2 billion since 2011, the paper said.

“Teaming with an AI startup has significant benefits: It may save you development time, could help create a competitive advantage, and may result in an outstanding return on investment by solving your company’s real problems,” the paper said.

To start winnowing down the candidates, answer these questions for each startup:

1. Is the startup a good match for the slate of problems my business is focused on?

2. Can it scale into new opportunities for the business?

3. Does it have the capability to actually do what it says it can do?

4. Can my company tolerate the risk of being dependent on a startup?

According to Deloitte, the three things an ideal startup should have are adaptability of its solutions, business stability and scalability.

Solution adaptability: AI startups offer use cases of how their solutions have helped other clients. But can it be adapted to what your company needs? “If the product was built specifically for another client, it may need additional changes to work for you,” the paper said. “Dedicating the extra financial and management resources to get what you really need from a ‘one size fits all’ offering of a startup isn’t an ideal situation, unless it’s started upfront.”

Business stability: Founders and top executives most likely will be spending much of their time trying to raise capital, which can distract them from running the business. Are they adept enough to respond to a ‘Black Swan’ event such as a pandemic?

Scalability: Many startups have pilot projects with one customer but “fail to understand the difficulty to scale up to multiple large companies,” the paper said. Only when it has a scalable product can the startup earn the big revenues it needs to stay financially sound.

Digging deeper into the startup, take stock of three aspects: its visionaries, vision and viability.

Visionaries: Management teams and track records

First and foremost, team experience is critically important,” according to Deloitte. “A startup founder’s past experience is often the leading predictor of future success.”

Many founders have strong technical skills, but “has this person previously built a successful company?” Are they experienced in scaling a business?

Further, do not assume that a startup run by someone in their 20s is better than a seasoned officer with more than 20 years of experience – or vice versa. But assess the potential risks inherent in the make-up of the management team.

Also, note that many visionary founders tend to be entrepreneurial and might not be interested in running a larger company as their startup grows – nor have the skills to do so.

Vision: AI products and services capabilities

Can the solution accomplish what the startup said could? If it worked in one industry, will it work in your company and industry?

Make sure there is adequate quality control, the solution is customizable, the startup can support the solution, consider the solution’s speed to market and potential to scale up.

Importantly, make sure the AI startup is actually offering AI and “not just data analytics to orchestrate applications and workflows.” A true AI solution grows more intelligent and increasingly autonomous over time, according to Deloitte.

Viability: Financial and operational

Not only must the startup’s solution fit your business needs, but also ensure there’s healthy demand from other companies. “Will this company be viable tomorrow, next year, next decade? A great product is the cost of admission for the startup. A great product that is noticed, vetted and purchased is the cost of long-term staying power,” the paper said.

The startup’s funding levels are critical, as well. How well funded is the startup and who is backing it? “The biggest risk is the startup going out of business.”

Also evaluate the level of professionalism across the startup’s departments, such as legal, to understand its true capacity, and consider its culture. Startups “often being their journey without a definitive culture, which often leads to internal challenges, conflicts, disappointments and employee turnover and can significantly impact its long-term viability.”

The X factor

Finally, do not forget the ‘X factor,’ that elusive je ne sais quoi that makes a startup special. “While hard to define, a company’s X factor could be what pushes you into the arms of the startup you’re considering. It can be part culture, part people, part product, part possibilities, part ‘can’t put my finger on it.’ And it may be exactly what you need.”