Eye On AI: Startups Should Heed ‘AI-Washing’ Warnings

It’s become difficult to hear a CEO talk about their company or read a description of a business in a press release that doesn’t mention how it’s “AI-infused,” “AI-enhanced” or some other AI descriptor.

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While that verbiage may be shrugged off by most, it seems like some people who get paid to keep an eye on such claims are looking very closely at what companies tell folks — especially potential investors — and startups would be wise to take note.

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The U.S. Securities and Exchange Commission settled charges this week against two investment advisers — Delphia and Global Predictions — for allegedly making false statements about their use of AI. The firms agreed to pay a total of $400 million in civil penalties, without admitting or denying the allegations.

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Those settlements came about four months after SEC Chair Gary Gensler warned businesses about what he called “AI washing,” or making false artificial intelligence-related claims related to their business. The term can refer to AI capabilities a company may not have or even if AI is actually incorporated into a product at all.

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Startups may have been dismissive of that warning, since the SEC tends to focus on the public market and may not concern itself with how a small VC-backed firm describes itself in the age of AI.

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However, it became a lot harder to be dismissive of possible enforcement against AI washing after Reuters reported this week that Ismail Ramsey, the U.S. attorney for the Northern District of California based in San Francisco, said he will be targeting tech startups that mislead investors about key information, including their use of AI, to try to defraud investors.

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Of course, such tactics to attract attention — and dollars — in the startup world is nothing new.

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Once upon a time, every company was a “dotcom” — even if it just had a stagnant, text-heavy website — and a decade or so later every firm became a data company of some sort. Back in December, Gensler himself compared AI washing to “greenwashing,” a term that refers to companies making misrepresentations about sustainability.

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However, times are changing as the private market is flooded with more investors and money than ever. Regulators are looking harder at the VC world and attempting to ratchet up disclosure rules to help create more transparency for investors.

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FTX’s collapse more than a year ago and the sentencing of Theranos’ Elizabeth Holmes and Sunny Balwani around the same time are still fresh in people’s minds, as are some of the epic implosions of valuations investors have seen post-2021.

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It’s a good bet those falls from grace have prompted law enforcement and regulators to now take an even closer look at an erupting market that saw more than $50 billion invested last year in the private market alone.

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Telling an AI story doesn’t differentiate startups anymore. More should just try telling their story — especially now that they’re being watched.

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Things that caught our eye and other stuff:

There was no shortage of AI news this week, from Nvidia debuting its next-generation Blackwell AI chip to Microsoft hiring Mustafa Suleyman, who previously co-founded Google’s DeepMind artificial intelligence lab and AI-startup Inflection, it’s been a busy week in the land of AI.

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However, what caught our attention was the exploding intersection of AI and healthcare. While not completely new, the deal pace — and money involved — seems to be picking up.

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Just last week, McLean, Virginia-based healthcare startup Zephyr AI closed a $111 million Series A from investors that included Revolution Growth and Eli Lilly & Co. The company pairs its healthcare dataset with artificial intelligence algorithms to create insights in the areas of oncology and cardiometabolic disease.

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Then this week, Carlsbad, California-based Carlsmed, an AI-enabled personalized spinal surgery medtech company, locked up a $52.5 million Series C co-led by B Capital and U.S. Venture Partners, while Palo Alto, California-based AI healthcare agent developer Hippocratic AI raised a $53 million Series A co-led by PremjiInvest and General Catalyst.

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Lastly, even Nvidia got into the AI healthcare act when Johnson & Johnson announced it would work with the chip giant to develop new AI applications for surgery.

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Healthcare is big business, and it looks as if AI will make it even bigger.

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Reference: https://news.crunchbase.com/ai/startups-sec-ai-washing-warnings/