Indian venture capital (VC) funds are increasingly integrating Artificial Intelligence (AI) into their core operations, marking a significant shift in how deals are evaluated and workflows are managed. Once considered an add-on, AI is now becoming an integral part of the routines of VC firms, streamlining processes and enhancing decision-making.

According to a recent Inc42 survey, a remarkable 70% of Indian VC firms are currently leveraging AI in key aspects of their operations. This widespread adoption signals that AI is not merely a temporary experiment but a fundamental change in the venture capital landscape. This trend is driven by the need to improve efficiency, gain deeper insights, and ultimately make better investment decisions.

The integration of AI in Indian VC funds often begins organically, driven by curiosity and the need to solve specific challenges. Many firms started by using general-purpose AI tools like ChatGPT for research and data analysis. For example, Cornerstone Ventures initially used ChatGPT for research, but quickly expanded its use across the team to improve workflow and decision-making. Similarly, Good Capital's adoption of AI stemmed from a combination of interest and necessity, highlighting the grassroots nature of this technological shift.

AI is being applied across various functions within VC firms. One of the primary use cases is deal sourcing and evaluation. AI algorithms can analyze vast amounts of data, including market trends, company financials, and team backgrounds, to identify promising investment opportunities. This automation significantly reduces the time and resources required for initial screening, allowing VC professionals to focus on more in-depth analysis of high-potential deals.

Furthermore, AI is enhancing due diligence processes. By leveraging AI-powered tools, VC firms can conduct more thorough market research, assess competitive landscapes, and predict future performance with greater accuracy. This deeper understanding of potential investments helps mitigate risks and improve the likelihood of successful outcomes. The new 'AI stack' for VC firms includes tools like Jasper for content creation and communication, and Canva AI for visual materials. Slack and Notion are also used for collaboration, with AI features to further streamline work.

AI is also transforming internal workflows within VC firms. Tasks that were traditionally handled by junior staff and analysts, such as data entry, report generation, and basic research, are now being automated using AI. This not only frees up human capital for more strategic activities but also accelerates the overall pace of operations, compressing week-long processes into a matter of days.

Despite the rapid adoption of AI, Indian VC firms are still catching up to their global counterparts. It is estimated that Indian firms are approximately two years behind global peers in their utilization of AI. This gap is partly due to the slower development of proprietary AI models and full-stack systems in India, unlike Silicon Valley, where innovation in these areas is more advanced. However, Indian startups are proving effective in building on global platforms.

Looking ahead, the trend of AI adoption in Indian VC is expected to continue, with increased investments in startups focusing on application-layer AI solutions. These are companies that leverage existing AI models to build practical tools for businesses and consumers across various industries, including healthcare, finance, and logistics. Lightspeed Venture Partners, for instance, anticipates weighing its investments more heavily towards such application-layer pitches from founders.

BAT VC, a New York-based venture capital firm, recently announced its entry into India with a $100 million AI-focused Fund II, targeting Indian startups specializing in AI and DeepTech disruptions in FinTech and B2B SaaS. This move underscores the growing confidence in India's AI sector, which is projected to reach $23 billion by 2027.

While AI offers numerous benefits, it is important to acknowledge its limitations. AI should be viewed as a tool to augment human judgment, not replace it entirely. The most successful VC firms will be those that strike the right balance between leveraging AI's capabilities and relying on the expertise and insights of their investment professionals.