Interviews, STARTUPS

Investing in high tech startups: Human potential or AI?

Innovative technology is reducing human involvement to a minimum in plenty of segments. AI-powered systems are more precise at diagnostics while computer vision lowers the risk of incidents and BigData solutions make sales easier. But is removing the human factor always a solid advantage? Is there an industry where keeping it is essential? We talked about the benefits and downsides of human involvement when selecting tech startups and in venture investing to Alina Valencia, Ph.D. (Philosophy and Psychology), business consultant and mentor of the Tech Entrepreneurship Program at Innopolis University.

Alina Valencia, Ph.D. (Philosophy and Psychology), business consultant and mentor of the Tech Entrepreneurship Program at Innopolis University

Humans above all

Alina, you have worked in the tech sector for many years. In your opinion, how important and relevant is the human factor for this sector? Is it even appropriate to talk about it in the context of investing and selecting tech projects? 

– I have worked with high-tech companies for my entire career as a business consultant and entrepreneur, which is now more than 20 years. For example, I participate in evaluating and selecting high-tech projects for coaching and preparation for further investing. For the past few years, I have been selecting IT startups and developing the Tech Entrepreneurship Program at Innopolis University.  

Throughout this period, discussions have continued about the importance of making competent, informed decisions for the market, fostering proper relationships between founders and investors, and understanding the impact of the psychological atmosphere within a team on its success. What is this, if not the human factor? In my work, I am repeatedly convinced that human interaction is becoming increasingly crucial in venture investing and working with technology startups.

Is this relevant to the entire industry, regardless of the startup’s sector or the investor’s specialization?

– Absolutely, this is a widespread trend. I am a co-owner of Galactica Biotech, a company specializing in artificial intelligence and machine learning for drug development. Even in such a complex and high-tech field, where you might assume algorithms, numbers, and code are paramount, the human factor remains essential. Since 2015, I have been consulting on international high-tech projects, and in 2017, I had the opportunity to work with SOSV, one of the largest international venture funds. This experience further solidified my belief in the importance of the human element in investing and provided valuable insights into the dynamics between startups and investors.

In your opinion, what is the most important aspect to highlight regarding the human factor in investing?

– As strange as it may sound, despite years of extensive discussions, the industry unfortunately does not adequately prioritize the individual – his talents, competencies, the nuances of human psychology, and his entrepreneurial identity with all its complexity and multidimensionality. Like in many other sectors, the focus is often on technology, process economics, and innovation… However, I continually stress that in the era of high technology, it is the individual, his abilities, characteristics, creative and constructive thinking, that becomes the linchpin of competitiveness in the high-tech environment, a factor crucial for success. The deeper you delve into the operational principles of technology startups and the financial aspects of the industry, the more apparent this becomes. Sometimes, a project may appear brilliant, but if the founder and team lack drive or expertise, or lack faith in themselves and their project, potential investors quickly discern this.

Project portfolio as insurance

The human factor is frequently linked to risks rather than benefits, particularly in the venture capital industry. What are the most significant risks associated with it? Have you encountered any of these in your own practice?

– In my opinion, one of the main risks is the total identification of oneself with the project. Entrepreneurs and founders often make their projects their life’s work, shaping and defining their personal identity through it. While this complete dedication can increase the chances of success, it also poses a significant risk. I once spoke with a renowned international investor and philanthropist who said, “You can’t imagine how many lives have been ruined due to complete absorption in a particular project throughout my long professional journey.” Addressing this issue is a crucial aspect of business psychology.

How can such a situation be avoided, if at all? What insights does your experience provide?

– First and foremost, it is crucial to remember that you and your project are two distinct entities, whether you are an investor or a founder. I work extensively with young entrepreneurs and startups, and this is the first thing I emphasize: you are not your business or project. Your projects can certainly reflect your character, but your greatest value lies in the essence of life itself, in its enjoyment and the joy of creating and being.

Another crucial point to consider is the number of projects in one’s portfolio. In our selection process for startups at the Tech Entrepreneurship program at Innopolis University, during initial interviews, we ask about other projects founders may be involved in. Ideally, an individual should have 2-3 projects in mind. This principle also applies to traditional business settings, where similar risks exist. For instance, a manager might heavily invest their energy, time, and emotions into one employee, only for that individual to pursue a parallel venture or create a competing project. This situation can often lead to profound feelings of depression and disappointment in people.

Why do you focus on the number of projects in the portfolio?

– A portfolio of projects for a highly qualified specialist or entrepreneur acts as a safety net, providing the opportunity to start afresh in case of failure. I recently spoke with one of our long-time clients, who has been in business for over 20 years. His attitude is particularly inspiring: if something goes wrong now, we will rebuild everything from scratch. I think this mindset is essential. Additionally, it’s beneficial if projects have a synergistic effect. For example, as an entrepreneur, I aim to ensure my experience benefits the startups and businesses I advise. This approach also applies to the corporate training I provide. The complementary effect is crucial, as it elevates everything to a new level.

Focus on emotional intelligence

Is it solely a diverse portfolio of projects that helps mitigate the risks associated with the human factor in selecting technology startups?

– In my opinion, the ability to stay true to yourself under any circumstances is crucial. This means maintaining your spiritual integrity and understanding your unique value as an individual. While this may seem obvious, it often gets overlooked. However, in times of failure, it is the emotional intelligence of the entrepreneur, manager, or investor that becomes the key to overcoming challenges. This involves the capacity to find joy in life and to approach it deeply and thoughtfully, yet with a sense of ease and playfulness. Unfortunately, this is not something typically taught in schools or traditional business courses.

What are other human factor risks?

– I often recall what our investor and mentor Bill Liao once said, “If you confuse, you’ll lose.” This is about beautiful words being just a cover. When it comes to investments, we are used to the need to calculate profitability and choose the right startup. We attend forums and listen to pitches; our entrepreneurs have mastered the art of presenting themselves and know about the ways to approach investors. But what happens after these fine words have been said? Sadly, difficulties often emerge. This is a major risk associated with the human factor.

But the human factor means not only risks but also benefits.

– Sure. Recently, I took part at an event as an expert; the team presented a project for introducing an AI and machine learning system in order to automatically build a pipeline of project for investors to pick the best ones. It would seem to be an interesting move. But will this tool actually allow for selecting efficient teams? In the venture sector, you need to find people who have vast potential for development, those who are able to start all over again instead of giving up amidst challenges, rather than those who have already achieved certain results. But AI is only good at working with the existing concepts and clear indicators; it can estimate turnover, revenue, returns, the amount of attracted investments, received grants and the number of customers – but it cannot foresee the future. And this is where the human factor plays an essential role.

It appears that this can be done by experts or investors?

– Investors use a common approach known as “Spray and Pray” – that is, always hope for the best. Yet, there are experienced investors who only need 5-10 minutes to select projects at an early stage of financing based on their first impressions.

When choosing projects, people specifically assess a person’s potential and things they can achieve in the future. Human potential is a key to success in any business, career, and in life in general. Professional development is among the most essential competencies in the market today; it means an aspiration to constantly grow, evolve and develop professionally, and accomplish more than you have already done in the pursuit of the so-called lifelong learning. And such ability can currently be assessed solely by people, not by a machine learning algorithm.

What else should be the focus when selecting technology startups?

– You should analyze the drive and self-motivation potential, or the ability to advance independently for a while without any external incentives and resources, to see whether the startup founder has this quality. You should also assess their ability to hold out without additional sources of support, including finances, with their internal motivation. If this is not the case and human potential is lacking, no material resources will make things better. I have worked in the consulting business for 20 years, and money was the core resource in the market until recently. But look at the startups that have grown into unicorns: most of them had no money at the beginning. Or look at the concept of notebook which seemed a resource up until recently: I know a lot of people that have important phone numbers in their address books, but they cannot do anything because they lack ideas or sufficient trust in their environment for launching their project – while others only have an immense inner drive, a dream about a project with a clear understanding of how they are going to pursue it, an inner core, and perseverance. And this is what ultimately attracts money, people and success.

How important is assessment of teamwork readiness?

– In venture investment, we have a concept of product-market fit, which is about the product compliance with the market demands; I use the ‘team market fit’ term to assess a team’s compliance with the market requirements to see how capable the founder and their team are of developing and launching the project in the market. At later stages of investment, this issue is solved through appointing a third party manager and forming a new team, while at the very early stages it is paramount for the team to be managed and driven, to have extensive expertise, and to be aware of the market needs and their product. Teamwork is a so-called meta-competence that combines many other ones such as the ability to communicate, trust people and be on the same wavelength with them, as well as emotional intelligence. This includes a vast number of various skills that team players must typically have; together they are responsible for identifying the right people for a project to work efficiently and in a cozy environment. Also, being part of the team is also important for investors, even if they are not directly involved in management. Altogether, this makes for competent teamwork.

How do you assess the AI effect on selecting technology projects in the future?

– I think that currently all those involved in the efforts to seek and select technology projects have a very wide range of AI-based programs, such as time and team planning apps, chat bots, systems for working with teams, and programs for creating pitch decks and analyzing a wide scope of information and markets (including ChatGPT-powered ones). Obviously, the trend will grow prospectively, with AI taking on even more functions related to preparation for decision making. Yet, the relevance of core human competencies such as intuition, professional instinct, risk management, and emotional and mental affinity, will become increasingly apparent. To paraphrase our Russian proverb, trust AI but develop your own professional intuition and skills.

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