In the ever-evolving world of technology, startups often face immense pressure to stand out and secure funding. Amid this, the phenomenon of “AI washing” has emerged—a devious marketing tactic wherein companies overstate or misrepresent their use of artificial intelligence to attract attention, and to appear more innovative or technologically advanced than they actually are. This involves companies using terms like “smart,” “machine-learning,” or “AI-powered” to promote products that don’t actually incorporate AI technology or only do so minimally. But is this a fleeting trend, or a problem that will persist in the long run?
AI washing is a growing concern, and while it might seem like a passing trend, it is likely to persist and intensify,” said Ashish Rane, Director, Valuation & Financial Advisory, Aranca. Drawing from his extensive experience valuing over 15,000 startups, Rane noted, “Merely telling an AI story no longer differentiates a company. The appeal of AI-driven solutions has incentivized many startups to overstate or misrepresent their use of AI—whether by branding simple automation as AI, exaggerating capabilities, or attaching AI labels to conventional products.”
The risks associated with this practice go beyond misleading investors and customers. According to Rane, “It can distort market expectations, erode trust, and ultimately hinder real innovation. Regulatory bodies are beginning to take notice, as seen in recent SEC actions against firms making false AI claims.” To combat this, he emphasized the need for increased scrutiny and transparency, adding, “For startups genuinely leveraging AI, ethical communication is key. Transparency about capabilities, limitations, and real-world applications is essential to maintaining credibility and fostering trust.”
While some experts predict a correction in the industry, others see this as a necessary phase for healthier growth. Vibhore Goyal, Founder of OneBanc, shared a broader perspective on the hype surrounding AI, remarking: “Artificial Intelligence (AI) is currently experiencing significant hype, which historically tends to fluctuate before stabilizing into mainstream adoption. According to Edge Delta (2024), approximately 90% of AI startups today rely primarily on third-party AI services, making incremental improvements rather than genuine innovations. Additionally, global forecasts suggest that around 85% of all AI startups may fail within the next three years (TheStreet, 2024). This scenario aligns with India’s recent experience, where AI startup funding sharply declined from a peak of approximately $5.2Bn in 2022 to about $747Mn in 2024. These data points clearly indicate an the speculative AI bubble is likely to burst soon. We expect 10-15% of startups genuinely innovating with AI and profitable business models will survive this downturn. However, this correction will lead to healthier foundations, enabling substantial and meaningful growth. Over the next five years, we expect AI adoption to rebound significantly, marking a more mature and impactful resurgence.”
For others, the problem lies in how AI is being marketed. Tushar Dhawan, Partner at Plus91Labs, said “AI washing is exploiting the gap in public knowledge about products and services, portraying them as much smarter than they actually are. As AI gains momentum, this has become a major problem, with start-ups falsely claiming to leverage AI in their offerings. This trend is making it difficult to distinguish between genuine AI advancements and marketing hype. At the same time, it is creating challenges for investors who struggle to identify which startups are truly driving AI innovation. For the ecosystem to thrive, transparency in products and services must become a core value. In a nutshell, startups must focus on their core value proposition rather than chasing AI trends. “
Government Regulatory Bodies Take Note of AI washing
The US Securities and Exchange Commission (SEC) has warned against “AI washing” and taken enforcement actions against companies making false claims about their use of AI. “We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors,” said Gary Gensler, Chair, SEC in press note. This statement was issued after settling two charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their purported use of artificial intelligence (AI). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.
“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” said Gurbir S Grewal, Director of the SEC’s Division of Enforcement on the case at the time.
