The Great AI Rebrand

It seems every pitch deck that crosses our view now prominently features the AI designation, regardless of whether artificial intelligence represents the company's core innovation or merely a marginal enhancement to an existing business model. This isn't surprising. In a competitive funding environment currently wrought with misinterpreted policy directions, LPs are harmed when investors and GPs are not honest about the difference. We operate with a simple framework that separates truly innovative AI from marginal implementations.

What Makes a True AI Company?

At Loyalty Ventures, we believe that authentic AI companies broadly fall into two categories:

  1. Foundational AI Technology Developers: Companies creating novel machine learning architectures, training methodologies, or core AI infrastructure that advances the field itself.
  2. AI Ecosystem Enablers: Organizations building essential tools, platforms, or services that make AI technology more accessible, reliable, or effective across industries.

Outside these categories, we encounter many businesses that are AI-enhanced rather than AI-native. These companies employ artificial intelligence as a feature rather than as their fundamental innovation. While this approach can certainly improve products and services, it doesn't necessarily warrant the "AI company" classification.

Real-World Examples

To illustrate this distinction, let's examine some examples from our investment landscape:

True AI Companies

  • Anthropic: Developing foundational AI safety research and building next-generation large language models with a focus on constitutional AI and alignment.
  • Hugging Face: Creating an open-source AI ecosystem and infrastructure for developers to share, train, and deploy models.
  • Scale AI: Building the data foundation and tools necessary for AI development across multiple industries.
  • Cohere: Developing enterprise-focused foundation models and APIs that enable businesses to build AI applications.
  • Pluralis AI: Pluralis is developing a protocol that facilitates decentralized training and ownership of foundation models.

AI-Enhanced Companies (Not True AI Companies)

  • A logistics startup using machine learning algorithms to optimize routing but fundamentally still operating as a logistics business.
  • An educational platform that integrates AI tutoring features but primarily functions as a content delivery system.
  • A healthcare diagnostic tool leveraging AI for image analysis but essentially serving as specialized medical software.
  • A manufacturing optimization system using predictive maintenance algorithms but fundamentally selling industrial management software.

Why Proper Categorization Matters

This distinction isn't merely semantic—it directly impacts investment strategies and outcomes:

  1. Valuation Appropriateness: True AI companies may justify higher valuations based on their intellectual property and market potential, while AI-enhanced companies should be valued according to their primary industry benchmarks. Companies applying AI for marginal enhancements or productivity gains should attract valuations appropriate to their vertical and applicable revenue model.
  2. Risk Assessment: Foundational AI companies carry different risk profiles than businesses simply incorporating AI features. The technologies may or may not get adoped, may be purely research-oriented, or may be acquisition-level businesses only
  3. Market Potential: Understanding whether a company is truly innovating in AI or simply applying existing AI capabilities helps forecast its long-term growth trajectory.

Our Approach: Looking Beyond Labels

In our deal flow analysis, we've witnessed a striking increase in companies describing themselves as "AI-first" or "AI-native." Yet when we examine their technology and business models, many are simply traditional businesses in established verticals that have incorporated some level of machine learning functionality.

At Loyalty Ventures, we maintain our disciplined approach by:

  1. Focusing on fundamentals: We evaluate companies based on their core value proposition and competitive advantage, regardless of whether AI is involved. Customer adoption, iteration speed, sustainable revenue generation and ultimately profitability all matter.
  2. Assessing technological differentiation: We distinguish between companies creating new AI capabilities versus those implementing existing AI technologies. There's nothing wrong with white-labeling well-build solutions customized to a specific business niche, but does that application enhance customer adoption or create a unique growth position?
  3. Considering vertical-specific metrics: We apply industry-standard valuation models appropriate to each company's actual sector. If a SaaS company implements or uses AI, we still care about margin profiles and customer adoption. If AI breaks a good margin profile for marginal benefit, does the company really benefit? Does said AI implementation increase ACV?
  4. Measuring AI impact: When AI is present, we quantify its contribution to the company's value creation—is it transformative or incremental?

The Future of AI Investment

We remain tremendously excited about AI's potential to transform industries. The proper application of AI can create significant competitive advantages and unlock new possibilities across our investment thesis areas.

However, we believe the most successful AI investments will come from maintaining categorical clarity. In fact, some industries may not be ready to adopt productivity enhancements provided by AI because they have not begun to figure out their labor model beyond implementation.

By distinguishing between true AI innovators and companies that simply leverage AI as a productivity enhancer, we can more accurately assess value, potential, and fit within our portfolio. As the hype cycle inevitably evolves, this disciplined approach will serve both investors and founders well, ensuring capital flows to genuinely transformative technologies, as this will not be the last hype cycle.

Loyalty Ventures invests in American Dynamism companies across aerospace, defense, manufacturing, education, healthcare, supply chain, and logistics sectors. Our mission is to support entrepreneurs building technologies that strengthen American competitiveness, resilience, and prosperity.