In recent years, the investment world has felt like a graveyard of themes that soared, then fizzled—outer-space tourism…NFTs (non-fungible token art)…the metaverse…Dogecoin. Most recently, investors are in a frenzy over artificial intelligence (AI). Will this be different?

Venture capitalist Peter S. Cohan hears hundreds of pitches for business investments. How does he tell the good ones from the bad ones? He uses the following three-part litmus test…

#1: Does it solve a critical problem that consumers are willing to pay to solve? Warren Buffett bought Apple stock years ago after one of his Berkshire Hathaway directors lost his iPhone and said it felt like losing a piece of his soul. Ideas that are merely interesting often cannot escape the challenges they face. Example: Cohan was pitched an idea that allowed people to rent out their cars—but there are millions of rental cars available, and the insurance and safety obstacles were likely to cause more problems than it solved.

#2: Is the investment theme going to be dominated by a few deep–pocketed, well-known companies? If so, it’s hard for a small investor to gain an edge over the rest of Wall Street.

#3: Are the companies behind this theme run by experienced management? Brilliant ideas need to be translated into real-world business basics such as hiring, sales and cash flow.

Cohan’s take on AI: It truly is a transformative technology like the Internet and smartphones—but it is unclear what must-have value it adds to our everyday lives, so it’s easy for investors to get burned.

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