What is the EU AI Act and how will it affect start-ups?

The EU AI Act is the first ever comprehensive legal framework on AI. It will have the same extra-territorial effect as the GDPR because most of the AI-driven tools will be available via the internet.


AI start-ups have expressed worries that the EU AI Act is too strict so potentially stifling innovation.

The new act places AI systems into four categories:

  • prohibited AI systems
  • high risk AI systems
  • limited risk AI systems
  • minimal risk AI systems


You can find a more detailed explanation about these AI categories in the table below.


So how will the new Act affect start-up businesses?  Here are five initial concerns:




International Market Access


The first thing to consider is that the impact of the EU AI Act extends well beyond the EU simply because companies outside the EU will need to align with its standards to access the EU market. Therefore start-ups proactively meeting these standards could gain a competitive advantage in international markets by demonstrating their adherence to ethical AI principles and regulatory compliance.




Compliance costs


Start-ups may face increased compliance costs due to the regulatory requirements of the EU AI Act, such as conducting risk assessments, ensuring transparency, drafting AI policies to meet requested standards. This could particularly impact smaller start-ups with limited resources. Many early stage start-ups cannot afford to have an in-house lawyer and legal firms costs. Regulations require the legal conditions must be met before the AI product is placed on EU market or put into service.


If a start-up has developed AI which is under the high risk category then it will have to run a number of assessments to prove compliance. Risk management, data governance,  fundamental rights impact and conformity assessments being some of the activities.  The start-up will need to maintain documentations describing  their AI functionality and recording all activities related to AI development during whole it's life cycle.




Innovation Focus


Many start-ups are now using AI to develop new products and tools based on large language models and generated AI. The EU AI Act places emphasis on ethical AI practices. It could encourage start-ups to prioritise innovation that aligns with these standards from the outset. This could lead to the development of more responsible and trustworthy AI solutions.




Competitive Landscape


Start-ups operating in AI will face a changing competitive landscape as larger companies and established players adapt to comply with the EU AI Act. This could create both challenges and opportunities for start-ups to differentiate themselves based on compliance and ethical considerations.


Although the act is going to create new obligations for businesses, the regulation seeks to reduce administrative and financial burdens for startups and SME. The new act takes into account the unequal opportunities and financial difficulties that start-ups may face. The Act will provide for a more simplified compliance system, and will also create AI regulatory sandboxes for start-ups, where the early stages companies will be able to conduct tests, update their tools, train and receive approval to their AI driven technologies.




Access to Funding


Compliance with the EU AI Act's requirements may become a major factor in securing funding for AI start-ups.


Investors will likely prioritise companies that demonstrate some commitment to ethical AI principles and compliance with regulatory standards from an early stage. Demonstrating awareness of the EU AI law and implementing good practice during product development will also assist in reducing costs of retrospective development. 


Below is a visual summary of the AI Act.