How Investment and Finance Firms Are Using AI to Make Better Decisions
Building an investment portfolio is difficult, and consistently finding strong investments is even harder. There are so many choices to choose from, and it's hard to know which ones will continue to grow, and which ones will wither.
Not only is finding good investments difficult, but so is finding good acquisitions, for four main reasons.
The first reason is that the market is globally competitive, which means that a hot potential acquisitions could get picked up by someone around the world before you have time for due diligence. Secondly, with many hot startups competing for acquisition, prices are driven up. The third reason is that it's inherently hard to find good acquisitions, because they tend to be small companies with no history. By the time a potential acquisition is hot in the market, it may be overpriced. Finally, it's hard to find good acquisitions because they can be difficult to value and track over time, given the inconsistency and lack of uniformity in startup valuations.
How AI Can Build Better Investment Portfolios
Using AI to help build investment portfolios is advantageous because it can provide insights into how to diversify assets and maximize potential profit.
This can be done by conducting quantitative analysis, which is the process of extracting information from large data sets in order to make predictions about future trends. By using AI to analyze large investment data sets, investment firms can gain a more in-depth understanding of potential acquisitions and investments, and how they can make changes to increase profits.
The Upside of Strong Acquisitions
The potential upside of good acquisitions is that they can grow your portfolio significantly. It's important to note that when you invest in a company, you're investing in its future success, so you need to be patient, even if your original investment doesn't seem like it's going anywhere. Good acquisitions can also be a way to diversify your portfolio, which can help make it more robust.
Last year, there were nearly 50,000 acquisitions around the world, with a total value of almost $3 trillion USD. Since 2000, mergers and acquisitions have had a known value of over 57 trillion USD, making successful M&A a crucial part of the global economy.
For instance, Google's acquisition of YouTube is often cited as a very successful acquisition. YouTube was founded in 2005 and acquired by Google in 2006 for a reported $1.65 billion. Today, YouTube is the second most popular search engine in the world, and has an estimated valuation ranging from $200 billion to as much as $300 billion, indicating up to 18,000%+ return on investment.
The Challenges of Acquisitions
In contrast, Google's acquisition of Motorola Mobility for $12.5 billion in 2012 was a poor acquisition. Within two years, Google sold it off to Lenovo for under $3 billion—a loss of almost 80%.
Clearly, there are varying degrees of success when it comes to company acquisitions. It's difficult to predict which company will be successful when you're considering an acquisition. The only way to know if your purchase is a good one is after the fact—you find out if the company grew and prospered or if it floundered and fell into decline.
The difficulty in finding a good company to purchase is a primary reason for the high failure rate of acquisitions. There are just so many companies to choose from - there are only so many potential acquisitions that can be made, which makes it hard to be sure you're making a good decision.
How AI Enables Better Acquisitions
One way AI is used in finance is by finding the next investment or acquisition before the market moves. To do this, a company must first understand its customer base and its competitors' customer base.
Once they understand who their target customer is, they can then use a “data engine” that finds potential investments and acquisitions based on that customer's interests and needs, and their investment thesis, or any other input given to the data engine. This agent then analyses each potential investment or acquisition before it's made so that it doesn't make an uninformed decision.
By doing this, the company can find a new investment or acquisition before their competitors do, which will help them stay ahead of the game.
Investment and finance firms have a tough job in building successful portfolios and acquiring strong companies, as they have to sift through thousands, or even millions of data points.
With Commerce.AI’s data engine, investment and finance firms can gain unparalleled insights, enabling stronger portfolios and acquisitions.