The startup ecosystem is buzzing with the transformative potential of generative AI (GenAI), but a new report from my research firm. Startup Snapshot, suggests this enthusiasm may carry significant challenges.
In the report, Beyond the Buzz: The Real Impact of GenAI on Startup Building, we take an honest look at how startups are adopting AI—shedding light on the opportunities, risks, and hurdles tied to this technological shift. Drawing insights from surveys of over 220 founders and 85 GenAI experts, the findings emphasize the critical need for startups to strike a balance between innovation and effective governance.
Untapped Potential and Lack of AI Policies
The potential of GenAI to speed up product development and reduce time to market has captivated startup founders, with 66% of executives describing it as a transformative innovation.
However, the current landscape mirrors the Wild West, with over half (52%) of startups revealing that employees independently choose and use GenAI tools without organizational oversight. While this self-initiated adoption showcases entrepreneurial traits like agility, initiative, and rapid problem-solving, it also exposes startups to considerable risks, including security vulnerabilities and the potential misuse of AI tools.
“Startups are eager to harness GenAI’s immense potential, but without clear policies, they risk jeopardizing their own innovation,” said Netanella Treistman, partner at Arnon-Tadmor Levy. “It’s essential to implement a strategic, top-down approach from the outset, setting clear protocols for GenAI tool usage. While the current agile model—where employees select their own tools—might suffice in the short term, it could lead to significant challenges as the organization grows.”
To fully capitalize on the transformative potential of GenAI, startups must balance agility with governance, ensuring their innovation efforts remain both sustainable and secure.
An Unprepared Workforce for the Realities of GenAI
Workforce readiness has emerged as a significant barrier to GenAI adoption. According to the report, 55% of startups have fewer than half their employees trained in GenAI, and only 15% of executives have prioritized upskilling their teams.
This skills gap has driven startups to rely heavily on external AI expertise, placing them in direct competition with well-funded tech giants for a limited pool of top talent. While this approach may address short-term demands, it risks creating a knowledge void within organizations, threatening their capacity for sustainable innovation in the long run.
Raphael Ouzan, founder of A.Team, underscores this challenge: “The transition from prototype to production is not merely a technical hurdle — it’s a team challenge. Startups are learning that true AI-driven innovation requires not just adopting technology but also cultivating talent with proven expertise in building enterprise-ready GenAI applications.”
To remain competitive, startups need to move beyond short-term solutions and focus on developing internal talent. By investing in employee training and upskilling, they can build a solid foundation of expertise that drives innovation and ensures resilience as the organization grows.
Exaggerated Expectations and Misguided Investments
The report reveals a concerning trend; The buzz around GenAI has led some startups to overstate their AI capabilities in an effort to attract investor attention. Over 25% of surveyed founders admitted to exaggerating their use of GenAI in pitches. While this tactic has generated investor interest; with 76% of executives noting increased enthusiasm from investors — it also creates the risk of misaligned expectations and misguided investments.
Despite the growing excitement, many investors are moving forward without properly assessing risks. Only 7% of founders reported being asked to present their AI policies during funding discussions. This lack of scrutiny is due to a knowledge gap. Many investors swept up in the GenAI hype, lack the expertise to identify potential risks and fail to ask the necessary questions during due diligence.
The findings emphasize the importance for investors to approach GenAI investments with a stronger focus on governance and risk management, ensuring that excitement does not undermine long-term, sustainable growth.
Yael Benjamin, founder of Startup Snapshot, a research firm dedicated to enhancing transparency in the tech ecosystem, conducted the research based on data collected from Startup Snapshot’s global community of founders and investors. Her work covers crucial entrepreneurial topics, including fundraising, founder mental health, investor relations, compensation, and emerging technologies.
