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Artificial Intelligence
In the GenAI race, who will prevail? Expert tips for backing the winners
A flurry of venture capital activity presents investors with a challenge: how to distinguish genuine innovators from opportunistic players capitalizing on the AI hype. Enter Harshul Sanghi, a seasoned technology investor with a framework to separate the wheat from the chaff. 
 Venture capitalists around the globe are setting their sights on the blossoming market of artificial intelligence (AI) startups, fueled by the growing enthusiasm surrounding “generative AI.” Recent strides in the development of AI models capable of crafting text and generating art within seconds have sparked a surge of interest among investors. 
According to CBInsights data, venture capital investment in generative AI skyrocketed fivefold in 2023 compared to the previous year, with a 66% increase in deals. Already, 36 “GenAI” companies have achieved unicorn status. However, this flurry of investment activity presents investors with a challenge: how to distinguish genuine innovators from opportunistic players capitalizing on the AI hype.
Enter Harshul Sanghi, a seasoned technology investor with three decades of experience navigating major tech disruption cycles. In 2022, he co-founded WillowTree Investments, a seed-stage fund with an AI-first focus, alongside partners Rohit Bodas and Venkat Varadachary. Their decision to venture into this area was driven by a sense of urgency and excitement when they recognized the transformative potential of AI. Sanghi recalls: “We said this sounds very different; this sounds really massive… we can’t sit on the sideline and watch this go by. We have to be a part of this.” 
Expert strategies for investment success
WillowTree has already placed 13 bets on early-stage AI ventures. However, the fund steers clear of investments in companies developing the Large Language Models (LLMs) that underpin GenAI applications like ChatGPT. “That will be commoditized,” Sanghi predicts. “And it is for the big boys to play in. It is really everything above that layer where we’re investing.” 
Instead, their “AI-first” investment thesis concentrates on ventures that contribute to enterprise adoption of generative AI. “It’s a net-new technology… and will play out over the next five-to-ten-years. There are a lot of missing parts that will be needed for that adoption to happen. That is where we are fundamentally focused: on driving and operationalizing the adoption of GenAI in enterprises,” Sanghi says. 
For example, WillowTree has backed fintech companies Telemetry and Tensec, which both view AI as integral to product functionality, not just an add-on. “There are too many companies that have merely put an AI wrapper around their existing products and calling themselves AI companies,” bemoans Sanghi. 
Part of his job is to filter out startups using AI superficially in their pitches to ride the current mania. “There are two things that I would say that help us differentiate and cut through the noise,” the investor says. “One is the experience of our team.” That includes Varadachary, the former Global Chief Data and Analytics Officer at American Express, and Bodas, who has an extensive background in investing in tech startups. 
“The second thing is our curated LP network of practitioners, including CIOs, CDOs, and CTOs,” Sanghi continues. “We leverage them to understand the enterprise applicability of their products. We’re able to dig deep to understand the technology’s uniqueness, and I think that differentiates us from many others.” 
“What we are finding is that there are a lot of people marginalized as a result of the bias in algorithms.”
Data integrity and ethical use: key differentiators
Data, Sanghi asserts, is paramount in determining the success of AI ventures. “All of AI begins and ends with data. Algorithms are a commodity. They’re now open-sourced as well… the competitive advantage will be the data being used to train the model.” 
With ongoing lawsuits — the New York Times filed a lawsuit against Microsoft and OpenAI, accusing them of benefiting from millions of articles without proper authorization to develop GenAI chatbots — and growing awareness around data privacy, he sees a shift in perception towards the value of data. “People already knew that their data was very valuable but didn’t know how to monetize it. Now, I think with GenAI, there’s an opportunity to monetize that data and to leverage it for differentiation.” 
As algorithms become increasingly commoditized, he says the competitive edge lies in the quality and ethical use of data. That’s why WillowTree has invested in startups like Caden, which provides ethically sourced, first-party data for training AI models. 
“That is going to be used by enterprises that need a broad consumer panel to train their data and marry it up with their own data sets,” Sanghi says, adding, “We think that there is a lot of differentiation if one can create a honey trap of data that is ethically sourced and monetizable.”
Furthermore, WillowTree has backed companies like FairPlay, which offers “fairness-as-a-service,” driven by the Founder Kareem Saleh’s personal experience; his hard-working immigrant parents struggled to access credit. 
Sanghi underscores a wider disparity in access to finance among smaller financial institutions, such as credit unions and regional banks. “What we are finding is that there are a lot of people marginalized as a result of the bias in algorithms,” he says. FairPlay’s AI models help detect and reduce that algorithmic bias, aiming to promote fairness and inclusivity.
“We’re investing in the entrepreneur. There’s typically no revenue. There’s not even a team. There’s a founder, but a very experienced founder at that, who is very credible, who has a very good thesis and approach to their product.”
Leveraging networks for quality deal flow
Sanghi stresses the importance of referrals and vetted deal flow in identifying such promising AI startups, underscoring WillowTree’s collaborative approach to investment. “Every single investment we make, and every entrepreneur that comes to us is a referral through our network,” he says. “That provides us with an edge in terms of access, and what we’re getting is already vetted. So, we’re getting a high-quality deal flow.”
Notably, WillowTree positions itself as a symbiotic investor, only co-investing and not leading funding rounds in AI ventures. “We are not competing against existing VCs; we only add value to them,” Sanghi stresses. 
Unlike his previous role as Founder and Managing Partner at American Express Ventures, where Sanghi focused on later-stage companies with established product-market fit, WillowTree targets entrepreneurs at the concept stage, leveraging their potential and vision. 
Sanghi calls it his “superpower” to recognize and empower the strengths of startup founders. “We’re investing in the entrepreneur. There’s typically no revenue. There’s not even a team. There’s a founder, but a very experienced founder at that, who is very credible, who has a very good thesis and approach to their product.” 
One such example is Curie, a startup that builds GenAI products to enhance the productivity of enterprise IT teams, founded by AI experts from big-name corporations like Meta, Amazon, and Uber. 
Sanghi says, “When you look at enterprises, they all have a lot of legacy code that they need to continuously integrate as they upgrade new versions of software. Curie is a co-pilot for engineers to automate the integration. You could not do that before you had GenAI.”
In essence, the rush of venture capital into such startups reflects the immense potential of AI-driven innovation and the need for discernment in investment decisions. WillowTree, with its enterprise focus, practitioner network, and collaborative ethos, offers a framework to separate the wheat from the chaff. 
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