Justin Chia, the editor of the UCalgary Technology Law Association Blog, discusses the start-up landscape for Artificial Intelligence and the importance of legal counsel in this emerging area.
The emergence of artificial intelligence (AI) across many sectors of society has been a source of both excitement and concern, depending on who you ask. From a business standpoint, AI is thought to jumpstart the rise of start-ups developing innovative and creative ideas centering around this exciting technology and in turn generating upside in profits. So far, this prospect has not quite materialized to the extent anticipated. The multi-billion-dollar investments in AI are largely confined to a small bubble of start-ups in Silicon valley.[1] However, prominent Venture capitalists seem more than willing to invest in AI start-ups, meaning a boom in AI start-up investment in the near future is certainly not out of the question.[2] There are several potential barriers to a potential boom in AI start-up investments, but this discussion will be limited to 2 key sources: 1) greedy tech giants and 2) high costs of entry.
One of the more misguided propositions in the start-up space is that competition triggers innovation, which in turn leads to profits. This is partly true, but the majority of profits generated by competition and technological innovation, such as AI, go directly to the multi-national, multi-billion-dollar companies that have the resources to exploit this technology for profit. Tech giants, such as Google, Apple, Microsoft and Amazon have gotten significantly richer with advancements in AI and the subsequent hype amongst investors.[3] Efforts by growth companies to crack into the AI space and rake in some of these profits only boosts profits for these tech giants who use innovation as a means of creating barriers to entry for start-ups. This is of course not limited to AI but is instead a product of the corporate system. Established companies view new innovations as opportunities to generate profit, which leaves little room for start-ups to join the party.
A closely related explanation is the high costs for start-ups in accessing and developing AI technology and uncertainty amongst investors regarding the viability of AI start-ups. The high costs of developing and maintaining AI are significant barriers to growth for start-ups, especially when investments are flowing through at a consistent rate. Add to this the myriad of legal fees, including the costs associated with incorporation, filing a patent application, financing agreements and employment.
Lawyers play an important role in ensuring both the immediate and long-term success of AI start-ups. Critically, lawyers must help AI start-ups choose and implement a legal structure that reflects present needs and is capable of adapting to future circumstances.[4] Lawyers will also be key in ensuring that a start-up complies with the relevant legislation, as the last thing that a start-up needs is unnecessary litigation and the costs associated with it.
Another key area that a lawyer can be of use, especially in the context of AI, is ensuring that the start-ups’ intellectual property is adequately protected. Lawyers will help start-ups choose the type of IP that is most suitable for their invention or idea. In most cases involving technological innovations, a lawyer will assist start-ups in preparing and filing applications for patents, which grant inventors exclusive rights to their invention.[5]
In addition to protecting IP, lawyers will also help AI start-ups raise capital by ensuring that the minute book and other relevant documents are prepared in compliance with the law. Lastly, and maybe most importantly, lawyers will advise AI start-ups as to the appropriate exit transaction/strategy. A majority of tech and AI start-ups with sufficient funding tend to be acquired, as opposed to going public through an IPO, but a lawyer will be in the best position to determine which option is most viable for the company given the circumstances.[6]
Suffice to say, the AI start-up landscape remains uncertain, though promising in some respects. One thing that is for certain, however, is that lawyers will play an integral role in help AI start-ups to navigate this landscape and hopefully thrive amidst the challenges.
[1] “Silicon Valley Startups lean into AI boom” (9 September 2023), online: Axios <https://www.axios.com/2023/09/09/startups-ai-venture-capital> .
[2] “The big risk behind the AI investment boom” (23 October 2023), online: Axios https://www.axios.com/2023/10/23/venture-capital-ai-risk-investment.
[3] “AI gave tech giants a $2.4 trillion boost to their market caps in 2023”(17 October 2023), online: CNBC <https://www.cnbc.com/2023/10/17/amid-ai-buzz-big-us-tech-giants-add-2point5-trillion-in-market-cap.html>.
[4] Bryce C Tingle, Start-up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed(Toronto: LexisNexis, 2018) at 4.
[5] “Tips for Startups – Intellectual Property and its Value to Your Company” (August 2016), Online: McMillan LLP <https://mcmillan.ca/insights/tips-for-startups-intellectual-property-and-its-value-to-your-company/>.
[6] Ibid at 16.
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