VC Investors Tread With Caution Amid AI Hype And “AI Washing” Risks

by Rrita Osmani and Jiwook Jung

VC Investors Tread With Caution Amid AI Hype And “AI Washing” Risks

As artificial intelligence (“AI”) continues to transform markets and industries, venture capital (“VC”) investors navigate both unprecedented opportunities and emerging risks. According to a recent market analysis published by PitchBook, the excitement around artificial intelligence adoption and technology-fueled growth is maturing but not declining. Significant advancement in AI has been made, especially in the Fintech space.

AI Growth And Practical Limitations

While limited partners (“LPs”), who provide capital for the venture funds but do not directly control or manage the investment decisions, have grown more risk averse with the backdrop of recent tariffs and geopolitical uncertainties, VC investors surveyed believe the AI market is maturing, not cooling. Advances in fintech have been especially notable, where automated underwriting is now quickly replacing manual risk assessment process in traditional loans and insurance. Similarly, large language model (LLM)-based financial copilots are rapidly improving fraud detection and real-time financial forecasting.

But enthusiasm varies by sector. Interest in AI applications within transportation, for example, has cooled due to limited use cases, workforce skill gaps, high implementation costs, and compliance concerns. These industry-specific challenges are a reminder that AI is not a one-size-fits-all solution, and investors are becoming more discerning as a result.

That said, there are rising concerns in the VC community as some emerging companies attempt to mislead and, in some cases, even defraud investors. “AI Washing” is a deceptive tactic used by companies to overstate the role of AI in their products to promote them. This becomes increasingly concerning when in VC context because these affirmative misstatements by company founders can profoundly impact the valuation and investment decisions.

The Rise Of AI Washing

Recently, the Department of Justice (“DOJ”) brought an action with the U.S. Securities and Exchange Commission (“SEC”) against former CEO of Nate, Inc. (“Nate”) Albert Saniger, alleging AI washing. Nate was an e-commerce startup that promised intelligent, autonomous shopping experience to its users by using its proprietary artificial intelligence. Nate received over $40 million from VC funds. In its pitch deck, the company touts its AI capabilities to “transact online without human intervention.”

Allegedly, Saniger repeatedly used words like “deep learning” and “neural network” when soliciting investors and kept automation rate secret from both investors and most of his employees. The automation rate remained essentially at 0% according to Nate’s senior employee, Hiding behind the AI buzzwords, Saniger contracted with hundreds of call center workers in the Philippines to manually input customer information and complete the transaction.

“As alleged, Albert Saniger misled investors by exploiting the promise and allure of AI technology to build a false narrative about innovation that never existed,” said Matthew Podosky, acting U.S. attorney. “This type of deception not only victimizes innocent investors, it diverts capital from legitimate startups, makes investors skeptical of real breakthroughs, and ultimately impedes the progress of AI development. This Office and our partners at the FBI will continue to pursue those who seek to harm investors by touting false innovation”

Navigating Changes As VC Investors

With rising uncertainty presented by the tariffs and noble challenges presented by AI, it is important for investors to seek legal counsel that is equipped to provide critical knowledge for complex steps such as due diligence reports, terms sheet negotiations, legal and venture capital compliance, intellectual property protection, governance and control, shareholder agreements, and later stage business development such as an IPO.

Miller Shah has extensive experience advising clients in complex investment vehicles such as corporate transactions and mergers and acquisitions.  The team at Miller Shah also has deep knowledge of securities law and securities litigation, which is a vital component of venture capital compliance as companies grow.  Contact us today to learn how we can support your business venture.