Like practically every other group of venture capitalists in the world, the investors at Brightspark Ventures have spent much of the last year trying to make sense of the sudden, deafening hype about artificial intelligence.

But while the Montreal-based firm weighs new investments in the technology, it is also pushing each of the companies in which it has already invested—whether or not they work in the sector—to make sure they have a strategy for how AI will affect their business.

“It’s an enabling technology that we want to see in everything,” said Mark Skapinker, a partner at Brightspark. “We also want to try to catch it before it becomes commoditized.” 

Many Canadian VCs, including Skapinker, have for years touted the promise of AI in fields like precision medicine and agriculture. But the sudden mainstreaming of OpenAI’s ChatGPT in late 2022 marked what Panache Ventures’s Calgary-based managing partner Patrick Lor called a “holy crap” moment, awakening investors to the technology’s consumer appeal. 

In the past quarter alone, investors piled about US$215 million into Canadian AI companies, up from about US$186 million a year earlier, according to PitchBook data—even as overall venture capital dollars declined. 

VCs are now struggling with a classic dilemma that plagues all boom cycles: get in now and potentially overpay for a dud, or wait and risk missing out on the next Apple. 

“It’s always a balancing act between hype and reality,” Skapinker said. “And often, the hype is real. It’s the timing that’s the difficult part.” 

Venture capital investors who spoke to The Logic widely agreed that the technology holds immense potential to overhaul our lives—including how we work, socialize and access medical care. Some likened AI’s potential impact on daily life to the onset of the internet or mobile. 

A chorus of warnings about the dangers of AI, however—from job displacement to killer robots—have left some investors concerned about how existing portfolio companies will fare in a world transformed by AI. 

Here’s how some of Canada’s top VCs are navigating the hype.

---

Portfolio sweeps

OMERS Ventures partner Michael Yang, who’s working in Silicon Valley for the Toronto-based firm, said investors are checking in with portfolio companies on their AI risks and opportunities the same way Silicon Valley Bank’s collapse prompted VCs to evaluate their startups’ cash-management practices. “It’s hygiene,” he said. 

Brahm Klar, managing partner at Toronto-based Round13 Capital, said that while the knee-jerk reaction may be to panic about AI making startups irrelevant, his firm is looking for areas where portfolio companies can use AI to improve their efficiency. 

Exactly how to integrate AI into their operations is unique to each company, said Round13 associate Jack Stanley. “Most of these tools are not super mature, even though they are very impressive,” he said. “We’re still in the exploratory phase. Not all of these companies can use ChatGPT and just increase their efficiency 100 times overnight. There’s a matching process we have to go through.” 

Like Round13, Skapinker said Brightspark wants all portfolio companies using AI in some capacity. “We’re starting to get to the point where it’s not ‘What’s your AI strategy?’ or ‘How are you building AI?’ It better be part of what you’re doing,” he said. 

Fellow Round13 managing partner Wilson Lee said the firm may invest in or even build consulting companies that help other firms navigate AI tools. “There’s a tremendous amount of demand [for] ‘How do I leverage AI to improve my business? How do I incorporate it into my workflow?’” he said. “We’re very interested in the thesis of basically building or partnering to build a large AI consulting firm.”

The great AI rebranding

Many investors said they’ve seen a spike in inbound AI pitches, with some companies pivoting to AI the way others had to the blockchain or metaverse in recent hype cycles. “We’re seeing a lot more AI-first pitches,” said Klar, “or a lot of businesses will have a slide or two on how AI impacts their business.”

Some companies that had already used AI in some minor capacity are now reframing the technology as a core part of their business, said Skapinker. “People who have some elements of big data and AI are stressing them more because it’s the right thing to do to get attention,” he said. “They’re definitely putting them higher up in their pitch decks.”

Getting schooled on due diligence

Identifying real opportunities in a space as complex as AI can be difficult for venture capitalists, many of whom tend to be generalists. Lor said that’s why his firm has started working with academics to help with its due diligence. 

“It’s gotten to a level where we need to understand whether there’s a true advantage to what’s being developed, or whether it’s somewhat trivial,” he said. “It’s hard to understand how good this stuff is if you don’t understand it inside out.” 

Round13 has gone a step further by hiring Stanley—a PhD student who’s studying machine learning applications at the renowned Mila institute in Montreal—as a summer associate. 

“When we’re dealing with complicated areas, we try to bring in the smartest people we can find,” said Klar. He said that while tapping into experts’ knowledge is a typical part of due diligence, this is the first time Round13 has hired an in-house PhD to help identify opportunities in a particular sector. 

Jordan Jacobs, managing partner and co-founder of AI venture capital firm Radical Ventures, warned that VC firms that don’t have in-house expertise will make “a lot of mistakes.” 

“There’ll be tons of money lost by people not understanding,” he said. “This is a very technical area. Generalists coming in who don’t understand what they’re investing in, I think will get burned.”

Resisting the hype

Yang subscribes to the idea that AI holds massive potential. But he’s exhausted by the attention investors are paying the sector—calling it “nauseating” and “over the top”—and worries it’s a disservice to companies in the space. 

He said it’s still not clear in many cases how AI technologies will be applied and how they will change people’s lives—something he’d rather have a clearer picture of before cutting big cheques in the sector. But he worries the hype is overinflating companies’ value and boxing out investors like him. “We don’t need things getting out of whack,” he said, comparing the AI investment climate to the recent VC boom that saw valuations ascend to unsustainable heights. 

Klar also noted that while Round13 is looking for prospective AI investments, the firm is only interested in businesses that have proven they’re addressing a clear market need. “I don’t think the power of AI today is going to push us towards bets where we still don’t see product-market fit,” he said. 

Skapinker, meanwhile, said it’s important to resist companies that may have proven technologies and clear market demand, but limited potential return for investors. He said he considered investing in a diagnostic technology years ago that claimed to identify whether a spot on your skin was benign or potentially harmful. “Pretty soon we realized this is just a technology that everybody better use. It’s not something that’s differentiated, that one player has that nobody else in the world has,” he said. “So we spent three months looking and invested nothing.”

Managing soaring valuations

With rapidly rising valuations in the sector, it will become harder for some investors to participate in AI deals, including in existing portfolio companies. 

Jacobs said Radical Ventures’s US$550-million fund—which typically invests in early-stage deals—won’t be able to keep up in a world where companies are raising billion-dollar rounds. “At some point we just get tapped out,” he said. 

In that event, there are other ways the firm can maintain its stakes in portfolio companies, like creating an opportunity fund. Ultimately, he said it’s a good problem to have. “It means you’re writing cheques into massive winners,” he said. 

But whether to double down on those winners or make a new bet on what could be the next big thing is a tricky calculation, Jacobs said. “Every single dollar we invest … we want to maximize the return,” he said. “Are we better off following on something if we think there’s a 10x [return] ahead on it? Or is there something else that we can invest in earlier and get 100x?” 

With files from Murad Hemmadi in Ottawa