Founded in 2012 by Sean Lane and Jeremy Yoder, Olive AI, a healthcare startup, looked to boost operational efficiency by using AI. Over the years, the company raised significant funding from high-profile investors and reached a peak valuation of $4 billion in 2021.
The initial success was promising, with over 900 hospitals adopting this technology. However, rapid, unsustainable growth and strategic miscalculations led to OliveAI’s shutting down in late 2023. “The lack of focus, coupled with the champagne and cocaine mentality brought on by easy VC money totalling almost $1 billion, is what killed yet another AI health startup, Olive AI,” author Sergei Polevikov said.
It’s perplexing to think that even with backing from trustworthy investors, a startup can fold due to miscalculations. As surprising as it sounds, data shows that several AI startups backed by prominent investors have shut down in the last five years.
When VCs Can Be Counter-Productive
In a 2019 interview with OpenAI chief Sam Altman, venture capitalist and Khosla Ventures founder Vinod Khosla said, “I get in a lot of trouble for saying this, [but] 90% of investors add no value. In my assessment, 70% of investors add negative value to a company. That means they are advising a company when they haven’t earned the right to advise an entrepreneur.”
In fact, Khosla has been reiterating this sentiment for over a decade. As a VC who has backed several emerging startups, including OpenAI, one might wonder what drives this critical stance against his own clan.
Well, Khosla has his reasons.
When junior staff asked why they couldn’t join a board like their peers at other firms, Khosla said that it was unfair to entrepreneurs. “Just because you got an MBA and joined a venture firm doesn’t mean you’re qualified to advise an entrepreneur,” he clarified.
He believes the key qualification for a VC to offer advice is having built a large company and personally experienced the difficulties, uncertainty, and challenges involved. Without having firsthand experience of the challenges behind running one’s own company, the ability to advise others holds little weight.
Holistic VC Power
During an interaction with AIM, Pranavan S, founder and CEO of Control One, a Bengaluru-based startup building AI-driven innovation by building physical agents, said, “Given the competitive landscape in the field of AI, VC money plays an important role in the infrastructure, team and research needs. Apart from the funds, a VC network or brand name helps build confidence with customers and also strengthen networking and partnerships.”
Founded in 2023, Control One has raised $350,000 from industry leaders including iRobot co-founder Helen Greiner, CRED founder Kunal Shah, and executives from Tesla, Walmart, and General Electric.
AI startups have been witnessing a remarkable surge in investments. It was reported that, from April to June this year, AI startup investments touched $24 billion, which was double the previous quarter.
Though VC expertise brings in holistic support to scale a business, conflicts among them are common. Pranav believes these conflicts often stem from mismatched expectations. “At times, founders tend to overpromise and that needs to be kept in check. Once the milestones and expectations are set right, the chances of disagreement drop drastically,” he said.
At Loggerheads
AIM gained insights froma VC’s point of view after speaking to Abhishek Prasad, managing partner at Cornerstone Venture Partners.
“Friction can arise when VCs behave like bosses and assume roles of mentors or have a know-it-all approach while not bringing any tangible value. In the Indian context, given we are still a young VC ecosystem, we have seen VCs often operate as super angels and not as professional investors in the journey of the founder, leading to situations that often lead to friction,” Prasad said.
Prasad further explained that discord occurs between VCs and founders when they don’t agree on a shared path forward. This friction often arises when VCs push for directions that conflict with the founder’s vision or agenda.
“For a VC, the company may be one among many and a game of optimising, whereas for the founder the particular company is all she or he has got. This often leads to mistrust and founders start becoming wary of their relationship with the VC and often stop confiding in VCs, leading to further strain in the relationship,” he added.
AI and Deeptech Startup Evolution
With the rise of AI startups, VC firms investing in AI companies are also transforming, which in turn implies that expectations from them are also evolving.
VC firm Bharat Innovation Fund (BIF), which focuses on deep tech startups, started investing in them around 2018. BIF co-founder Ashwin Raguraman said they focus on what they call globally competitive startups, whether they are competitive today or have the potential to become globally competitive and address global markets.
Though BIF has not yet invested in generative AI startups, they are closely monitoring developments in this area, particularly those that go beyond simple applications and demonstrate maturity and innovation. The firm is keen on supporting ‘AI-native’ companies that integrate AI from the ground up rather than those merely adopting existing models.
VC-Founder Relationship
Speaking about the relationship between VCs and startup founders at a panel discussion in the recent AI summit Cypher 2024, Ashwin emphasised the importance of VCs questioning founders.
“We ask questions before we invest [and] after we invest. We ask questions as board members, but I think…asking questions especially after we invest is to be a sounding board. We can’t necessarily give answers. The founder has to find the answers because that’s when they internalise it and then execute it. So we’re good at asking questions,” said Ashwin.
Interestingly, when asked about a VC’s involvement in a founder’s business, Ashwin’s answer was pretty clear. “In an ideal situation, we’d like to start at 0% investor hands-on, because then it means that the entrepreneur is delivering, and we don’t need to spend time. They’re going to deliver returns. [But] there are times when that zero goes all the way to 70-80% and that’s not a good situation. I know that when I’m hands-on 70%, we are trying to save something that is perhaps sinking without our effort,” he said.
Cypher 2024 – Panel Discussion with VCs and Startup founders.
From left: Arjun Rao, general partner at Speciale Invest, Ashwin Raguraman co-founder & partner at Bharat Innovation Fund, Korak Roy, AIM video presenter, Rimjhim Agrawal, co-founder & CTO at BrainSight AI, and Abhishek Upperwal CEO/founder at Soket Labs
VC-Backed Failures
Irrespective of how much a VC gets involved in a startup or tries to maintain a balance, the startup can fail. A number of prominent VC-backed startups have failed in the past.
Founder Problems
VC guidance or misguidance can often cause startups to falter. In addition, the company board can also have tiffs with the founders. The members, who sometimes comprise investors, can lead to a different kind of friction.
Interestingly, during the interview with Khosla, Altman shared that in risk-driven, decision-making situations, he prefers having a board that calms the entrepreneur, rather than adding to the stress.
It’s bizarre that this statement was made in a 2019 interview, especially considering that just a year ago, Altman found himself at odds with his own board. The board ousted him over accusations of a lack of transparency in his decision-making process.
While that didn’t last long – just over two days, to be precise – he was reinstated as CEO, and his board was disbanded. Eventually, new board members, possibly his allies, were appointed. However, the company has faced a number of high-profile exits, including the departure of co-founders, over the last year.
Reflecting on what Khosla said, it is evident that conflicts regarding ideas and involvement are mostly the reason for counterintuitive performance results. The figure of 70%, however, may not be an absolute number.
The post Dear Investors, Our Failure is on You: Startup Founders appeared first on Analytics India Magazine.
