The inverted U-shaped effect of artificial intelligence orientation on startup fundraising: a focus on the defense sector

Academic abstract Artificial intelligence (AI) has become increasingly salient in entrepreneurial ecosystems, yet its role in startup funding remains insufficiently understood. Prior research has focused mainly on AI adoption and use, while devoting less attention to how a startup’s AI orientation affects funding. In contrast, our study draws on signaling theory and the attention-based view to analyze the way in which AI orientation can heighten investor appeal by signaling innovativeness, technological focus, and growth potential. Yet, if taken beyond a certain threshold, an excessive emphasis on AI can also reduce credibility because it exacerbates the perception of gratuitous hype or “AI washing.” We have focused on Italian defense ecosystem startups to build a normalized AI orientation score that captures the relative prominence of AI-related content in venture capital descriptions. Our findings indicate that the impact of AI orientation on fundraising produces an inverted-U effect. As these findings identify the non-linear effects of AI orientation, they are a useful addition to the existing literature on entrepreneurial signaling and startup financing and they have practical implications for ventures enterprises that wish to optimize the communication strategies they use with investors. Practitioner abstract A large number of business startups highlight the importance of artificial intelligence (AI) in their communications in order to attract investors. Although our findings show that this can often be an effective strategy, this is only the case up to a certain point. When we analyzed a sample of Italian defense startups, we found that the business ventures that obtained the most funding had presented AI as an important part of their business without making it the dominant feature of their messages. If the AI element was stressed excessively, investors became more reluctant to contribute funds; this may be due to their perception that these messages were pushing unfounded hype. The result was the impression they were “AI washing” their communications instead of offering a trustworthy business strategy. Consequently, AI can be leveraged in founders’ messages to achieve positive effects, but only if this is done judiciously. For their part, investors should exercise caution when they assess the merits of startups that use communications replete with AI terminology, and they should check that these technological claims are actually backed up by a coherent strategy. Moreover, policymakers who propose initiatives to foster AI entrepreneurship should encourage startups to embrace AI but also be careful not to over-stress this component.