The AI Mirage: How We Investors Are Being Blindfolded by ‘AI Washing’
Last year, a startup founder pitched me with great energy and a really nice-looking deck.
But there was a problem. Every third slide said “AI.”
And the product? Basically a glorified chatbot.
The tech? Zapier glued to ChatGPT.
And the valuation? $12 million pre-revenue.
I smiled and passed.
But three angels I knew didn’t.
Six months later, the company shut down.
No traction. No IP. Just smoke, mirrors—and a lot of AI washing.
What’s this trend of AI Washing?
AI washing is when startups misrepresent basic automation layers and bots as Artificial Intelligence, in order to inflate value and raise funds.
Startups exaggerate and falsely claim the use of artificial intelligence in products or services to attract investor and consumer interest.
Just like the “greenwashing” of environmental claims, and the dot-com hype, this is a new version – only now, it sounds smarter and cutting edge.
In fact, a 2023 MMC Ventures report found that 40% of European startups that claimed to use AI had no evidence of any AI use at all. Worse? Many didn’t even have technical staff. (Source: MMC Ventures)
And, it’s not just Europe.
In the US, CB Insights reported that over 50% of AI startups failed to meet investor expectations post-funding due to overclaimed capabilities.
(Source: CB Insights AI Report 2023)
And, it’s not only startups!
In early 2024, Amazon’s “Just Walk Out” technology was hailed as a revolutionary leap in retail—allowing customers to grab items and leave stores without traditional checkouts, thanks to advanced AI.
The reality? Behind the scenes, over 1,000 workers in India were manually reviewing transactions, with human intervention required in approximately 70% of sales.
The Money Trap We Investors Keep Falling Into
See, we investors are humans too.
And nothing is triggering our FOMO like AI + billion-dollar market potential.
As a data point, after OpenAI’s ChatGPT launch in late 2022, VC funding into AI startups surged to $42.5 billion in 2023, but here’s the catch: most of that funding went to hype-chasers, not problem-solvers.
The Investment Surge and Its Pitfalls
In 2024, global funding for AI-related startups soared to over $100 billion, marking an 80% increase from the previous year.
However, this influx of capital has made it challenging for us to distinguish genuine AI innovations from superficial claims.
Nearly 1 in 4 new startups now positions itself as an AI company, and this just smells of AI washing in the market.
So, How Do We Spot Real AI from Just Hype?
If a startup says “AI,” ask these five questions:
-
01
What specific AI model are you using or training?
-
02
Who on your team has actual AI/ML expertise?
-
03
How is AI central to your moat, not just a feature?
-
04
Is there a working demo or traction tied to the AI layer?
-
05
What would the product look like without the AI?
And we can separate signal from noise real fast.
As investors, we need to be aware. We need to look for founders solving real problems—with or without AI.
Remember:
Hype raises money.
But only real value creates returns.