By Yael Benjamin

The startup ecosystem is abuzz with the transformative promise of generative AI, but a new report from my research firm, Startup Snapshot, reveals that this excitement may come at a cost.

In the report, Beyond the Buzz: The Real Impact of GenAI on Startup Building, we offer a candid look at how startups are leveraging AI — highlighting the opportunities, risks and challenges that accompany this revolution. Based on surveys of more than 220 founders and 85 GenAI experts, the findings underline an urgent need for startups to balance innovation with governance.

Unrealized potential and missing AI policies

Yael Benjamin, founder of Startup Snapshot

GenAI’s promise to accelerate product development and shorten time to market has captivated startup founders, with 66% of executives calling it a game changer.

Yet, the landscape resembles the Wild West, as more than half — 52% — of startups report their employees independently select and use GenAI tools without any organizational oversight. While this self-driven adoption reflects the entrepreneurial spirit — agility, initiative and fast problem-solving — it also exposes startups to significant risks, including security vulnerabilities and misuse of AI tools.

“Startups are rushing ahead with GenAI’s immense potential, but without clear policies, they risk undermining their own innovation,” said Netanella Treistman, partner at Arnon-Tadmor Levy. “It’s crucial to adopt a strategic, top-down approach from day one, establishing protocols for GenAI tool usage. The current agile model, where employees choose their own tools, may work in the short term but can create major challenges as the organization scales.”

For startups to fully harness the transformative power of GenAI, they must strike a balance between agility and governance, ensuring their innovation efforts are sustainable and secure.

A workforce unprepared for GenAI’s realities

Workforce readiness remains one of the biggest hurdles in GenAI adoption. According to the report, 55% of startups have fewer than half their employees trained in GenAI, and only 15% of executives have invested in upskilling their teams.

This skills gap is pushing startups to rely on external AI expertise, forcing them to compete with big tech companies with deeper pockets for the limited pool of top talent. While this strategy may address immediate needs, it risks creating a knowledge vacuum within organizations, jeopardizing their ability to innovate sustainably in the long term.

Raphael Ouzan, founder of A.Team, highlights the challenge: “The leap from prototype to production isn’t just a technical hurdle — it’s a team challenge. Startups are discovering that the key to AI-driven innovation isn’t just adopting the technology — it’s finding and fostering talent with proven experience in developing enterprise-ready GenAI applications.”

To stay competitive, startups must go beyond short-term fixes and prioritize internal talent development. Investing in training and upskilling employees can help create a foundation of expertise that supports innovation and resilience as companies scale.

Overhype and misaligned investment

The report uncovers a troubling trend: The hype surrounding GenAI has prompted some startups to exaggerate their AI capabilities in pursuit of investor attention. Over 25% of surveyed founders admitted to overstating their use of GenAI in pitches. While this strategy has spurred investor interest — 76% of executives reported increased enthusiasm from investors — it also sets the stage for misaligned expectations and misguided investments.

Despite the growing excitement, many investors are rushing ahead without sufficient risk identification. A mere 7% of founders reported being asked to present their AI policies during funding discussions. This lack of scrutiny stems from a knowledge gap: Many investors, caught up in the GenAI buzz, lack the expertise to identify potential pitfalls and fail to ask critical questions during due diligence.

The findings highlight the need for investors to approach GenAI investments with a sharper focus on governance and risk management, ensuring that enthusiasm doesn’t come at the expense of sustainable growth.

Yael Benjamin is the founder of Startup Snapshot, a research firm working to increase transparency in the tech ecosystem. Her research is based on data collected directly from Startup Snapshot’s global community of founders and investors, covering key entrepreneurial topics, such as fundraising, founder mental health, investor relations, compensation and new technologies.

Illustration: Dom Guzman