“Sometimes AI delivers great potential, and sometimes it poses significant risks”

“I do believe we are at the cusp of a technology revolution. If not already, AI will soon be everywhere and part of everything,” said Rotem Shacham, Director at PSG Equity, LLC. “As investors, we cannot treat it as a standalone segment. Rather, we should ask ourselves how AI is impacting whichever company we are looking at, in any field.”

Shacham joined CTech to discuss the power of artificial intelligence and how it determines investment decisions. “Sometimes AI delivers great potential, and sometimes it poses significant risks. Not all of today's leading startups will be there 5 years from now. The question is, who will falter and who will be the next $1 trillion company?”

PSG's Rotem Shacham

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Fund ID
Name and Title: Rotem Shacham, Director
Fund Name: PSG Equity, LLC.
Founding Team: Peter Wilde and Mark Hastings
Founding Year: 2014
Investment Stage: Growth
Investment Sectors: AI, Fintech, Cyber, Mobility, Healthcare, Gaming, Foodtech, all sectors

On a scale of 1 to 10, how has AI impacted your fund’s operations over the past year - specifically in terms of the day-to-day work of the fund's partners and team members?

10 - AI has impacted all walks of life, and investing is no exception. We see AI transforming all elements of the investment process. Starting from Sourcing, we use internally developed software to better identify attractive companies. AI is a force multiplier allowing us to comb through the vast amounts of companies and focus on what in our view are the most promising ones. Other areas that have seen productivity gains from AI are financial analyses and general due diligence processes. Apart from those, we also use AI in internal process optimization. We have a lot of internal proprietary data on what good internal process looks like. We use different AI tools to help generate insights from our internal data, to be used to better manage our portfolio.

Have you already had any significant exits from AI companies? If so, what were the key characteristics of those companies?

We believe AI has now become table stakes. Like the .com at the turn of the century, or cloud following the '07-'08 innovation cycle, we believe AI has to be an integral part of any tech company these days. It's more than a fad. We are in a midst of an innovation cycle and we believe that those companies that won't join the bandwagon won't survive. Even companies that were founded before, and are not AI native, need to think about how they are integrating AI into their business. These days, in nearly every exit scenario, every buyer considers this aspect. It doesn't mean that every company has to suddenly transform into being OpenAI, because not every company can. What it does mean is that every management team needs to consider how they can help enhance their product offering with AI, how they can use AI in their R&D processes, how they can optimize the CS and Sales operations, and so on. In those respects, every company should aim to be an AI company.

Is identifying promising AI startups different from evaluating companies in your more traditional investment domains? If so, how does that difference manifest?

One of the biggest changes in evaluating AI startups has been the pace of change. Think about how recently LLMs were introduced, how ChatGPT changed the landscape, then consider the impact of the release of new reasoning models, vibe coding, etc. The world is changing at an increasing pace that makes assessing which company will be successful in 5 years’ time more challenging. In this regard, if forecasting 5 years ahead has always been challenging, with some new AI technologies, it is hard to ascertain what will happen 6 months from now.

What specific financial performance indicators (KPIs) do you examine when assessing a potential AI company? Are there any AI-specific metrics you consider particularly important?

In general, we look for the same KPIs across companies. One of the most important aspects is velocity. We look for positive momentum. As an example, the basic figure we look at is revenue. Of course, we would like to see revenues above a certain dollar threshold, which varies by company. On top of that, we focus on revenue growth. And beyond that, on the change in growth year over year. In essence, we're looking at the first and second derivatives of different KPIs such as revenue, sales efficiency, R&D spend, etc. Strong momentum is a strong indicator of materializing potential.

How do you approach the valuation of early-stage AI startups, which often lack significant revenues but possess strong technological potential?

We have the benefit of investing in growth-stage companies. Notwithstanding, I think that the beauty of AI is that it allows companies to reach commercial milestones with fewer resources compared to the past. If anything, this quality will help change the paradigm slightly. It will bridge the gaps that we sometimes see between technological potential and revenue attainment.

What financial risks do you associate with investing in AI companies, beyond the usual technological risks?

One of the biggest risks by far is the pace of technology development. As growth investors, we focus on financial trends analysis. We look at historical growth trends and try to forecast the future. As one example, Gross Dollar Retention and Net Dollar Retention are key indicators of customer satisfaction and product value. However, these KPIs are trailing indicators. They cannot capture recent changes in product offering, competitors’ product launches, new entrants into the market, etc. When the pace of change is so fast, history may not be a good predictor of the future, and our job as investors becomes even more challenging.

Do you focus on particular subdomains within AI?

We invest across verticals, including all subdomains. We look for high-potential companies and are agnostic to their specific domain.

How do you view AI’s impact on traditional industries? Are there specific AI technologies you believe will be especially transformative in certain sectors?

As our own field of investing is being transformed by AI, I anticipate that AI will impact all industries. The world is still pretty early in the innovation cycle, so it is quite hard to forecast how and what those changes will be. However, consider the pace of change in the last decades in Information Technology or Software. 30 years ago, we were using mainframe computers and didn't have the basic software tools each and every one of us is using today. The technological advancement this field has gone through is extensive to say the least. On the flip side, many other industries have not seen these leapfrog advancements. Aviation, Energy, Agriculture, to name a few, have been mostly stagnant from a technology perspective. I believe AI has the power to help change all of that - from increasing crop yields through AI-based irrigation and fertilization all the way to AI-based material design for aerospace. For me, the potential is huge.

What specific AI trends in Israel do you see as having strong exit potential in the next five years? Are there niches where you believe Israeli startups particularly excel?

We see innovative companies leveraging AI across the application layer in different verticals such as Healthtech, DefenseTech, LegalTech, developer tools, and others. There is no glass ceiling to Israeli talent in this space and we see promising opportunities in a wide spectrum of segments.

Are there gaps or missing segments in the Israeli AI landscape that you’ve identified? What types of AI founders are you especially looking to back right now in Israel?

So far, we've seen many local AI application layer companies and fewer on the foundational layer side. In general, I believe Israeli entrepreneurs are excellent in using technology in innovative ways and leveraging it to new use cases so the presence in the application layer makes a lot of sense. Especially in areas where one needs creative thinking rather than brute force. I truly believe in Israeli companies’ potential to disrupt multiple segments. Talent is one of our greatest competitive advantages in Israel and that is true in the perspective of AI as well. When we look back at a new opportunity, we look first and foremost at the leadership team and their ability to build a strong, valuable company.