Anyone observing the news can see that artificial intelligence and machine learning have been getting lots of attention for the past few years. It goes without saying that startups are playing into this trend and raising more money than ever, as long as they have AI or cognitive technologies in their business plans or marketing material. Not only are startups raising increasingly eye-opening amounts of money, but venture capital (VC) funds themselves are raising skyrocketing levels of new capital if they focus their portfolios on AI and related areas. But are we in a bubble? Are these VC investments in AI realistic or out of control?
Why so much interest in AI funding?
AI is not new. In fact, AI is as old as the history of computing. Each wave of AI interest and decline has been both enabled and precipitated by funding. In the first wave, it was mostly government funding that pushed AI interest and research forward. In the second wave, it was combined corporate and venture capital interest. In this latest wave, AI funding seems to be coming from every corner of the market. Governments, especially in China, are funding companies at increasingly eye-watering levels, corporations are pumping billions of dollars of investment into their own AI efforts and development of AI-related products, and VC funds are growing to heights not seen since the last VC bubble.
AI’s resurgence started in earnest in the mid 2000’s with the growth of big data, cheaper compute power, and deep learning-powered algorithms. Companies, especially the big platform players (Google, Facebook, IBM, Microsoft, Amazon, Apple, and others) have tossed aside any previous concerns about AI technology and are embracing it into their vocabulary and business processes. As a result, entrepreneurs smell opportunity, forming new ventures around AI and machine learning, and introducing new products and services powered by AI into the market. Investors also smell opportunity and are taking notice. Over the past decade, total funding for AI companies, as well as the average round has continued to rise. For perspective, in 2010 the average early-stage round for AI or machine learning startups was about $4.8 million. However, in 2017, total funding increased to $11.7 million for first round early stage funding, a more than 200% increase, and in 2018 AI investment hit an all time high with over $9.3 Billion raised by AI companies.
In addition, AI investment is surprisingly global with startups raising large amounts of funding everywhere there’s a technology ecosystem. In contrast to previous technology waves where Silicon Valley was the undisputed champion of startup fund-raising, for AI-focused companies, no one location can be claimed as the nexus for investment or startup creation. Companies from the United States and China are leading the way with the largest rounds raised. In fact, ten of the biggest venture capital deals of Q4 in 2017 were evenly split between Chinese and US companies. And investment in 2018 and 2019 hasn’t slowed down. In fact, according to the Q3 2019 data from the National Venture Capital Association there were 965 AI-related companies that have raised $13.5 billion in venture capital through the first 9 months of this year in the US alone. Funding through the end of the year is expected to exceed the 1,281 companies that raised $16.8 billion in all of 2018, according to the 3Q 2019 PitchBook-NVCA Venture Monitor. And China now has the most valuable AI startup, Sensetime, that is valued at over $7.5 billion.
Rational investment or game of musical chairs?
If you want to see firsthand this latest surge of AI-related VC investment, a quick search on Artificial Intelligence companies funded within the past three months in Crunchbase will pull up some eye watering results. As of December 2019, over $3.7B in capital has been raised by these firms just since October 2019! That’s both remarkable and concerning. Why is there so much money being pumped into this industry and will this sugar rush be followed by the inevitable sugar crash and pull back?
There are a few reasons why this investment might be rational. Just as the Internet and mobile revolutions in the past decades fueled trillions of dollars of investment and productivity growth, AI-related technologies are promising the same benefits. So this is all rational, if AI is the true transformative technology that it promises to be, then all these investments will pay off as companies and individuals change their buying behaviors, business processes, and ways of interacting. No doubt AI is already creating many so-called “unicorn” startups with over $1 Billion in valuation. This could be justified if the AI-markets are worth trillions.
So, what is this money being used for? If you ask the founders of many of these AI companies what their gigantic rounds will be used for you’ll hear things like geographic expansion, hiring, and expansion of their offerings, products, and services. The difficulty in finding skilled AI talent is pushing salaries and bonuses to ridiculous heights. Not only do startup companies need to compete with each other for great talent, but they need to fight against the almost unlimited deep pockets of the major technology vendors, professional services firms, government contractors, and enterprise end users also fighting for those scarce resources. A million dollars simply doesn’t go that far in hiring experienced AI talent. Heck, even $10 Million doesn’t go that far. So, an early-stage round of say $20M with almost half going to hiring and the rest to business development isn’t completely bonkers.
However, what about the billion-dollar rounds that are making headlines? Why would companies need to raise such ludicrous amount of money? The best reason that comes to mind: it’s a land grab for AI market share. The general rule in the technology industry is that the big winners are the ones who can command market share first and defend their turf. Certainly there’s nothing that unique about Amazon’s business model. Yet the reason why they are such an almost unbeatable force is that they aggressively expand and defend their turf. If you have a lot of money it’s easy to out spend the competition, or buy them. Companies that want to become global leaders need to “land and expand” which means finding some easy way into a customer deal and then expanding on that deal later. This might mean losing money on the initial transaction, which quickly can burn lots of money. These unicorn startups also need a lot of capital to go up against the big established players like Amazon, Netflix, Facebook, Microsoft, Google, IBM and others. Venture funds believe that these startups can be the new entrenched players of the future, and as such, need capital that will back them to the point where their dominance can’t be denied.
There are many other reasons why such high levels of investment and valuation are necessary. Many AI technologies, such as self-driving vehicles, are still in the research and development phase. It’s not simply a matter of banging out code and throwing servers and technology up to get these technologies working. This AI R&D costs a lot of money to create, build, and test. The downside to the need for all this R&D investment is that it pushes companies who have been funded under the promise of their AI technology, but unable to deliver on those promises, to succumb to the disturbing trend called pseudo-AI, in which humans are doing the work that the machines are supposed to be doing. Some of this capital could be needed to hire humans who do the work of the so-called “AI systems” until the technology is actually able to provide the promised capabilities.
Enterprises are also spending their money and time buying and implementing cognitive technology solutions from emerging technology firms and clearly want AI solutions that can solve their problems. The problem is that enterprises aren’t as patient as venture capital firms, and VC firms aren’t particularly patient either. They won’t put up with fake AI or lack of market traction. If enterprises lose faith in the ability of AI to solve their problems and start rejecting “fakery”, there won’t be much opportunity for “makery” and that’s the biggest danger of all this AI investment. If the AI solutions can’t live up to the hype, the bubble will rapidly deflate, taking with it all the energy, time, and money from the space. This could then deliver a major setback to AI adoption and growth in the long term, resulting in a new AI winter.
Keeping the AI Beast Fed or Suffering Withdrawal
There are really only two outcomes for these super-funded companies. Either AI proves itself as the great transformative technology that startups, established technology players, enterprises, governments, and consulting firms alike promise it to be, or it doesn’t. If it is in fact the next big wave then all these investments are indeed sound, and the investments will pay off handsomely for those firms that can the last person with the seat in the game of market share musical chairs. However, if the promise of AI fails to materialize, no amount of external funding and puffing can keep this bubble inflated. VCs firms are, after all, beholden to their fund limited partners, who want a return for their investment. These returns are realized through company acquisitions or IPOs. Acquisitions and IPOs are in turn fueled by market demand. If the market demand is there, these exits will happen and everyone wins. But if these companies take longer to exit than investors like, or fail to happen at all, then the house of cards will quickly collapse.
How to adapt portfolios in a low-rate world – Investment Executive
Government bonds provided reliable ballast earlier this year when equity markets tanked in response to the Covid-19 pandemic. Government of Canada seven- to 10-year bonds returned 9.5% in the first three quarters of the year, and long-duration (20+ years) Government of Canada bonds returned almost 20%, according to a report from FTSE Russell.
Seven- to 10-year U.S. Treasuries returned 11.5% as of Sept. 30, while long Treasuries returned 20.8% (in USD).
“It’s going to be really hard to extrapolate that going beyond this,” Taylor said, since he doesn’t see North America moving to negative rates anytime soon.
Phil Mesman, head of fixed income with Picton Mahoney Asset Management in Toronto, said strategies need to shift now, even though the 40% fixed income part of portfolios served investors well this year.
Replicating the benefit from government bonds this year would require a -10 basis point U.S. Treasury yield, he said.
“All of the backward numbers look great in fixed income,” Mesman said. “The typical advisor portfolio looks amazing but, at current yields and current duration, it makes sense to be a little more creative.”
Taylor said investors can look to investment-grade corporate bonds to find yield through active management. Beyond that, he said investors will have to consider alternative strategies such as options writing and private debt, as well as hard assets such as real estate, infrastructure and precious metals.
“We think there’s going to be a rework of the traditional 60-40 portfolio,” he said.
Mesman said he’s focused on long and short opportunities in developed-market BBB- to B-grade bonds.
The Federal Reserve’s willingness to purchase corporate bonds has made the market more expensive and masked credit risk, he said. This has created opportunities on the short side to both protect the portfolio and provide alpha in cases “where the real economy’s impact on financial assets has yet to be felt,” he said.
Jonathan Hausman, managing director and head of global strategic relationships with the Ontario Teachers’ Pension Plan, warned about the risks of wading into high-yield credit.
“That works until it doesn’t,” he said earlier this month on a panel at the Global Risk Institute’s summit.
Rating agency Moody’s warned investors this week that a record number of companies are in danger of slipping from investment grade to junk territory due to the uneven economic recovery.
Speaking on a webinar earlier this month, FTSE Russell director of fixed income research Robin Marshall also expressed concerns about a “high-yield value trap.” Canadian credit spreads were wider during the economic downturn in 2015-16 than they are now, he said — a “conundrum” given the depth of recession investors are now facing.
High-yield valuations have moved to “demanding” levels relative to current default risks, he said.
Hausman also pointed to strategies such as infrastructure and real assets to provide protection as well as some return on the fixed income side, which is hard to come by.
“That requires some creativity,” he said, “but not much creativity because that’s how folks get into trouble.”
A report from Richardson GMP this month also warned against relying on government bonds and made the case for long-short credit strategies. It pointed to Japanese and German bonds, which started the year with lower yields and “provided nearly no ballast at all” in March.
“With the U.S. and Canada yields now at similarly low starting points, it is unlikely that they can provide anywhere near the same historical hedging properties as in previous downturns,” the report said.
Rather than diving into lower-quality assets to find yield, the report recommended long-short strategies for investment-grade credit.
Mesman also warned about duration risk on government bonds.
“I think the risk of government bond yields going higher, particularly in the long end of the market — longer-dated government bond yields — that’s something that’s underappreciated,” he said.
Artis Real Estate Investment Trust announces changes to its board and committee composition – Canada NewsWire
WINNIPEG, MB, Oct. 29, 2020 /CNW/ – Artis Real Estate Investment Trust (TSX: AX.UN) (“Artis” or the “REIT”) announced today that as part of its Board renewal initiative and its ongoing commitment to enhanced governance initiatives, the Board has undertaken a review of its composition. Based on new information obtained during this review, the Board has determined that Mr. Victor Thielmann is not independent and should not continue as a member of the Audit Committee and the Governance and Compensation Committee. Mr. Thielmann has provided his resignation from the Board of Artis effective immediately. On behalf of Artis, Mr. Warkentin, the Chair of the Board, extends his appreciation to Mr. Thielmann for his numerous years of valued service to Artis. Lauren Zucker, Bruce Jack and Ben Rodney will continue to serve as independent trustees on the Audit Committee.
Other changes include Mr. Wayne Townsend voluntarily stepping down as a member of the Governance and Compensation Committee, Mr. Ben Rodney replacing him on this committee and stepping down as a member of the Investment Committee, and Ms. Lauren Zucker being added to the Investment Committee as successor to Mr. Ben Rodney.
The vacancy left by Mr. Thielmann’s resignation will be filled by the Board as part of its Board renewal initiative. The Board has retained Rosin Executive Search to advise on new suitable Trustee candidates.
Artis is a diversified Canadian real estate investment trust investing primarily in industrial and office properties in select markets in Canada and the United States. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of commercial properties which, as of June 30, 2020, comprised approximately 23.8 million square feet of leasable area. Artis is focused on growing its industrial portfolio through strategic development projects in its target markets.
The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this press release.
SOURCE Artis Real Estate Investment Trust
For further information: please contact Mr. Armin Martens, President and Chief Executive Officer, Mr. Jim Green, Chief Financial Officer or Ms. Heather Nikkel, Vice-President – Investor Relations of the REIT at 1.204.947.1250
G2S2 Capital Inc. Announces Investment in Cominar Real Estate Investment Trust – Canada NewsWire
MONTRÉAL, Oct. 28, 2020 /CNW/ – G2S2 Capital Inc. (“G2S2”) announces today that it has increased its ownership of trust units (“Units”) of Cominar Real Estate Investment Trust (“Cominar”) to over 10% of Cominar’s outstanding Units.
On October 28, 2020, G2S2 acquired 600,000 Units of Cominar through the facilities of the Chi-X alternative trading system at a price of CDN$7.30 per Unit (the “Acquisition”), representing approximately 0.34% of the outstanding Units. Prior to the Acquisition, G2S2 owned and exercised control over an aggregate of 18,245,100 Units of Cominar, representing approximately 9.99% of the outstanding Units. Immediately after the Acquisition, G2S2 owns and exercises control over an aggregate of 18,845,100 Units of Cominar, representing 10.33% of the outstanding Units.
G2S2 acquired the Units for investment purposes. G2S2 may, from time to time, depending on market and other conditions, increase or decrease its beneficial ownership, control or direction over Units of Cominar through market transactions, private agreements, or otherwise.
In accordance with National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, G2S2 has filed an early warning report regarding these transactions on the System for Electronic Document Analysis and Review (SEDAR) at www.sedar.com under Cominar’s issuer profile. Cominar’s head office is located at 2820 Laurier Blvd., suite 850 Quebec City, Québec G1V 0C1.
G2S2 Capital Inc. is a privately held investment holding company focused on creating value across a variety of businesses with a long term horizon. G2S2 is incorporated under the laws of Canada. G2S2 is controlled
by George & Simé Armoyan.
SOURCE G2S2 Capital Inc.
For further information: or to obtain a copy of the early warning report, please contact George Armoyan, Executive Chairman of G2S2 at 514-333-8800, extension 1925.
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