Forty Percent of "AI Startups" in Europe Don't Actually Use AI

There has been a dramatic increase in the number of Artificial Intelligence (AI) and machine learning startups in recent years. Yet, despite all the hype, for many people, AI still remains something of an enigma. How it functions – or even how to define it  – can often feel elusive. 

AI's marketing potential and its attraction to potential investors, however, is undeniable. For this reason, companies are often tempted to label themselves as AI startups even when they are not. According to a study by venture capital firm MMC, 40 percent of companies classified as AI startups do not actually use AI technology in a significant way. 

The study focused on 2,830 startups in 13 European countries currently designated as AI companies. By defining AI as “computer systems that can perform tasks, normally requiring human intelligence”, the research found that only 1,580 of the companies accurately fit this description. In several cases the AI classification proved to be completely wrong. 

AI Attracts Investment

There is no denying that artificial intelligence startups have become increasingly attractive to investors. In fact, companies labeled as AI startups can attract between 15 and 50 percent more funding than other technology firms. It is therefore not surprising that some business ventures are tempted to claim they use AI, even if this means stretching the truth. 

In many cases, these companies do not actively advertise themselves AI startups. David Kelnar, the head of research for MMC, points out that the AI classification is often attributed by third-party analytics websites. Although probably aware that they have been incorrectly classified, the potential for attracting investment often means there is less incentive for these startups to set the record straight. 

Are Startups Making the Most of AI?

The survey from MMC also found that even though many companies are being mislabeled, there has been an upsurge in the use of AI in businesses, from 4 percent to 14 percent, over the past year. That said, the AI used in startups is rarely innovative or cutting-edge. Many companies use machine learning for chatbots or automation tools that replace uncomplicated administrative tasks, such as processing an insurance claim – so it can be difficult to judge exactly how much this technology benefits customers. 

It is abundantly clear that AI means different things to different people. Investors therefore need to be able to make the distinction between the companies that are genuinely pushing the technology forward and those that see it as funding opportunity in a highly competitive market.