How automation can streamline and reduce bias in the funding process

Over time, the path to external funding has become a standardized and inefficient process. The founders will approach venture capitalists or wealthy "angels", define their vision and ask for funding in exchange for an equity stake in the company.

Investors will do their own research and trades will always depend on subjectivity. Entrepreneurs must convince investors that their company's mission is worth supporting and that they themselves, as individuals, are capable of achieving it. Despite advanced technologies and investor-funded sectors, these existing methods are outdated and unsuitable. The solution is to deploy automated AI.

The Case for Automation of Funding Processes

Across all other areas of finance, the use of data has grown dramatically over the past decade, from investment platforms to insurance. Today, these financial tools are modernizing the startup funding process, automating typically tedious processes such as calculating monetary provisions or accurately valuing a business.

This saves investors and companies valuable hours and resources, as capital providers make more objective decisions based on metrics and benchmarks instead of purely subjective opinion. The data more accurately informs revenue and industry growth projections and risk profiles, allowing financiers to tap into valuable insights into the past, current and future profitability of products and potential investments.

In industries such as SaaS and e-commerce, where new businesses can generate revenue quickly, success metrics can now be calculated instantly. In these verticals, data-driven finance has already become mainstream, while sectors with delayed profitability (like gaming) have traditionally lagged.

Despite the abundance of data available, it is often difficult to gauge the success of a creative or consumer technology startup. As more industry data and figures emerge, investors are in a better position to predict future returns.

How AI and Automation Work in Funding Processes

The increasing use of digital tools and a data-driven approach in corporate finance is more objective, making returns more reliable. Deciding on a company's market valuation, for example, has become a tedious tussle where investors and founders fight over the terms that work best for them, eventually meeting somewhere in the middle. Automated and fair judging speeds up this process and gives both parties a pleasant outcome.

There are also advantages for investors. Using data that generates more accurate funding projections will give capital providers greater confidence in their choices. Data is used to compare what already exists, painting a quantifiable picture.

Bias rooted in "instinct" and "intuition" distort judgments and can lead to unwise investments. The data provides valuable insights into the past and future success of products, which is especially crucial for technology sectors where monetization takes time.

The role of AI in financing

AI and machine learning (ML) are also increasingly being deployed in credit and risk functions within financial institutions to help determine the creditworthiness of borrowers. With more and more data available on the internet through APIs, new opportunities are uncovered for AI-driven financial institutions to gain deeper insights into credit applications.

For example, in the app economy, a developer's creditworthiness (and revenue) can be predicted using AI using app product data regarding acquisition metrics , retention and monetization. This cause and effect relationship in data is common in predictive analytics.

This new dimension of financial data, the performance of app developers' individual products, can be combined with financial data obtained from the financial transactions of the developer's company to improve overall creditworthiness accuracy. As a result, financial institutions can facilitate financing with greater objectivity and accuracy.

The Drawbacks of Bias in Existing Funding Processes

Most budding tech startups initiate...