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Navigating Tech Due Diligence in the Era of Advanced AI: A Guide for Investors

Tech due diligence in AI

Many of us assessed AI targets before the current wave of technologies was released. Yet with models like GPT-4 becoming commonplace, the landscape of technology due diligence is rapidly evolving.

This shift necessitates a fresh understanding of what to look for, how AI impacts intellectual property (IP), and what this means for investors.

Let’s explore the key changes and provide some actionable tips for investors on why tech due diligence is more critical than ever in this brave new world of AI.

AI and Its Impact on Tech Due Diligence

In simplest terms, tech due diligence assesses a company’s assets, capabilities, and potential liabilities. This has always been a necessary step for investors, but with advanced AI models, this process has become even more nuanced and complex.

Advanced AI models like GPT-4 are reshaping industries and altering what tech due diligence looks like. Traditionally, due diligence focused on assessing the company’s proprietary technologies, its IP portfolio robustness, and its tech infrastructure’s scalability.

Now, AI introduces new dimensions that need to be taken into account:

  1. AI Ethics and Transparency: One of the primary concerns with AI technology is its ethical use and transparency. It is essential to understand how the company’s AI models make decisions, whether they are biased, and how they handle personal data.
  2. Dependence on Open-Source AI Models: Many companies leverage open-source AI models like GPT-4 as a foundation for their products and services. This reliance can present risks if the company has not built sufficient proprietary technology or lacks the technical expertise to adapt these models to their specific use case.
  3. Robustness of AI Models: How well does the AI model perform? What measures are in place to ensure its robustness? An AI model’s performance can significantly influence a company’s value, making it a critical assessment point.

AI and Intellectual Property

In this new AI-driven world, intellectual property has expanded beyond patents, copyrights, and trademarks to include AI algorithms, datasets, and even the specific uses of AI.

However, IP rights for AI are still a grey area. Given that AI models can create content, the question of who owns the IP – the model, the developer, or the user – becomes complex. Therefore, investors need to understand how a company’s AI IP is protected, what claims it has on the technology, and potential IP risks that may arise in the future.

Additionally, many AI models, like GPT-4, are based on open-source technology, which raises questions about IP ownership. Companies must clearly articulate their value-add beyond the open-source model, whether unique data, proprietary training techniques, or specialised applications.

What’s Important to Investors?

While each investor will have their own set of criteria, several aspects have gained importance in the AI era:

  1. Technical Expertise: Investors should look for teams with deep expertise in AI. This includes technical skills and an understanding of AI ethics, data privacy, and the evolving regulatory landscape.
  2. Data Strategy: A solid data strategy is critical as AI models are only as good as the data they’re trained on. This includes access to high-quality data, data annotation and cleaning strategies, and robust data privacy practices.
  3. Monetisation Strategy: Given the open-source nature of many AI models, investors should look for clear monetisation strategies. How does the company plan to create and capture value beyond the base AI model?
  4. Risk Management: As AI evolves, so do its associated risks. Investors should assess the company’s risk management strategies around AI, including potential bias in AI decision-making, data privacy and security, and potential misuse of AI applications.

Tips for Investors in the New AI World

Given AI’s rapid advancements and unique challenges, investors need to adapt their tech due diligence processes. Here are some tips to help navigate this new world:

  1. Stay Informed: Keep up-to-date with AI developments and regulatory changes. This knowledge will enable you to assess a company’s alignment with industry standards and its preparedness for future changes.
  2. Leverage AI Experts: Engage AI experts during the due diligence process to help assess the technical capabilities, ethical considerations, and potential risks associated with a company’s AI technology.
  3. Prioritise AI Ethics and Compliance: Ensure companies have clear guidelines and strategies for ethical AI use, data privacy, and regulatory compliance. These elements are essential not only to protect users but also to minimise potential legal and reputational risks.
  4. Assess Scalability and Adaptability: AI is a rapidly evolving field, and companies must be able to scale and adapt their technology to keep pace. Look for a robust tech infrastructure and a team with demonstrated innovation ability.
  5. Diversify Your Portfolio: As AI continues to reshape industries, consider diversifying your investments across different sectors and AI applications to mitigate risk and capitalise on the transformative potential of AI.

In conclusion, the rise of AI models like GPT-4 has brought new complexities to tech due diligence. As investors, understanding these changes and adapting your due diligence process is essential to making informed investment decisions. You can confidently navigate the evolving AI landscape by staying informed, prioritising AI ethics, leveraging expert advice and capitalising on its opportunities.

Hutton Henry
Hutton Henry
Hutton has worked with Private Equity Portfolio firms and Private Equity funds since 2015. Having previously worked in post-merger integration for large firms such as Ford and HP, Hutton understands the value of finding issues prior to M&A deals. He is currently the founder of Beyond M&A and provides technology due diligence for VC, PE and corporate investors, so they understand their technology risks before entering into a deal.

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