Investing in AI – How to Avoid the Hype

In the late 1990s, the world eagerly awaited the dawn of the Internet. Companies rushed to invest in dot-com startups, but the hype soon turned into a bubble that burst, leaving investors with heavy losses. Fast forward two decades, and a similar hype is building around Artificial Intelligence (AI). It seems every company wants to invest in AI, every investor wants to bet on AI, and every startup wants to claim to use AI. But how do you, as an investor, navigate through this hype to make smart investments in AI?

Quantifiable examples

Before diving into the tips for investing in AI, let's look at some quantifiable examples. According to the International Data Corporation (IDC), global spending on AI systems will reach $97.9 billion in 2023, up from $37.5 billion in 2019, with a compound annual growth rate (CAGR) of 28.4%. By 2023, 29% of the world's IT spending will be on AI-related projects. The market for AI chips is expected to grow from $4.27 billion in 2018 to $34.3 billion by 2023, at a CAGR of 52.2%. In the financial sector, AI is expected to generate $1 trillion in value by 2030, and globally, AI cybersecurity spending is expected to reach $68.2 billion by 2025, up from $10.5 billion in 2017. These numbers are staggering and reflect the huge potential of AI as an investment opportunity.

Beware the hype

However, with every technology hype comes a risk of investing in a bubble that could burst. In the case of AI, it is crucial to differentiate between real AI applications that offer tangible value and reality-distorted marketing gimmicks that are nothing more than a dressed-up version of traditional software or simple automation. One common pitfall is to assume that any technology that is labeled as AI is inherently valuable. Investors should be aware of "AI washing," where companies market their products as AI-powered when they barely use any AI technology. Hence, it is essential to understand the technology and application of AI before investing.

Three tips for investing in AI

1. Understand the problem

Investing in AI should begin with understanding the problem that AI can solve. AI is best applied to problems that are complex and require human-level perception, cognitive capabilities, and decision-making skills. Therefore, the target must be to invest in AI that can deliver real solutions to real-world problems. Look closely at the use of AI in a company or startup and assess how it adds value to the world. Consider investment opportunities in healthcare, finance, transportation, and cybersecurity, where AI has already demonstrated its potential value.

2. Assess the technology

Investors must take the time to understand the technology behind AI-based solutions and the diversity of technologies available. There are currently several AI technologies available, including machine learning, natural language processing, computer vision, and deep learning, among others. Every technology has its unique features, advantages, and limitations. As an investor, you must assess how well the AI technology that a startup or company uses matches the problem it aims to solve. Investors can look at the technical qualifications, qualifications of the AI team members, and their track record in the industry.

3. Evaluate the market potential

The market potential of AI-based solutions is enormous and includes the potential to create entirely new sectors, transform existing sectors, and provide a significant competitive advantage for companies. As an investor, it is essential to map out the market potential of AI-based solutions across different sectors and industries. Some of the currently trending areas include healthcare, finance, transportation, and cybersecurity. Investors must assess the impact of AI on customer behavior, revenues, profit margins, and competitive dynamics. It is also vital to keep track of regulatory developments around AI.

Conclusion

Investing in AI offers tremendous opportunities for investors, but it also comes with significant risks. It is critical to distinguish between real AI applications and hype and to understand the technology and market potential of AI-based solutions. Investors should take the time to investigate the AI being used and set out to solve the critical problems that AI uniquely solves. By following these three tips, investors can make smart investments in AI that generate real value and avoid the hype-driven bubble that has been too common with new technologies in the past.

References:

1. "Worldwide Spending on Artificial Intelligence Systems Will Reach $97.9 Billion in 2023." IDC, Sep 2019, https://www.idc.com/getdoc.jsp?containerId=prUS45439719.

2. "Artificial Intelligence Market Size, Share and Trends Analysis Report By Component (Hardware, Software, Services), By Technology (Machine Learning, Natural Language Processing), By End Use, And Segment Forecasts, 2020 - 2027." Grand View Research, Sep 2020, https://www.grandviewresearch.com/industry-analysis/artificial-intelligence-market.

3. "Global Artificial Intelligence In Cybersecurity Market To Surpass $68.2 Billion By 2025 - KBV Research." PRNewswire, Oct 2020, https://www.prnewswire.com/news-releases/global-artificial-intelligence-in-cybersecurity-market-to-surpass-68-2-billion-by-2025--kbv-research-301144986.html.

Hashtags: #AI #investing #technology #finance #business #startups

Category: Technology/Investing