Winning the AI Platform Shift
Winning the AI Platform Shift
If you set out to just survive then you will most likely die
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Software companies can’t just plan to survive during the AI platform shift. You either win or you just keep your head above water for a bit until you are exhausted and drown.
My article last week covered why investors are currently so bearish on the software industry. And there are a lot of valid concerns. But the software industry is not dead (I hope at least!)…however, the companies slow to adapt and change will die. There will be software winners in the AI shift but there certainly will be a lot more losers.
During every big AI event (like Apple’s event yesterday) there are hundreds of startups anxiously waiting to see if they will be killed. While social media may sensationalize the number of startups killed, if companies don’t adjust properly then the number of startups killed will be high.
Apple released an AI writing tool
Apple released a password manager
The Apple AI calculator tool is pretty cool
And many more releases and disrupted software companies from other AI events…
But are Grammarly, 1Password, and the rest actually dead? Maybe not, but these new features certainly won’t help them. The companies that are just thin AI wrappers or highly subject to AI disruption are obviously the most at risk.
Software Buyer Risk
Churn is increasing and new sales growth rates are slowing for the majority of software companies. The below visualization shows the trend of revenue growth for public software companies as of this week.
High-growth doesn’t mean what it used to…The number of high-growth companies and the median growth rate of just 11% are both at their lowest levels ever.
As you would also expect, new software tool purchasing has slowed at basically every company. Basically every company has been given a mandate (and budget) to purchase AI since no one wants to be left behind in the AI platform shift. But buyers are taking their time to figure out where to spend that money and resources.
The tech job market is tough right now and the risk to buyers is high. So the old saying (with an outdated company example) has become truer today.
No one got fired for buying IBM
Rather than IBM, it’s the big AI players today. The fear of startup AI companies getting disrupted and/or going out of business is high.
Buyers are looking at safer bets:
Well-funded or larger established companies
Shorter duration contracts. We don’t know what the AI future holds!
Solves immediate pain and does it quickly. Can’t have long time to value
Data and privacy risk are real. They don’t won’t their vendor ending up in the news.
Many of us also have some scare tissue that is still fresh from over hiring and overspending during the 2021 ZIRP era so we are taking a more cautious approach this time to opening up our wallets and committing.
As a side note, sellers (especially at startups) really need to be focused on de-risking the buying decision. While they always should have been doing that, the tolerated risk today is MUCH lower.
Surviving = Death
If your goal is to just survive the AI platform shift then you have already lost the battle.
Many companies will become so consumed with maintaining and become short-term focused that they will lose the long-term battle. Cash burn is still too high, they need to generate more sales now, increase NRR, etc in order to raise another round of financing. If you can’t continue to win in 12-18 months then it doesn’t matter.
They feel pressured and think they lack time to really implement AI in a way that will drive future sales. So they focus on what they have and make small changes to try to sell more. Then once they have good metrics and can raise more money they will focus on AI.
This will be a common losing strategy….an AI disrupted death spiral.
Burn will increase as sales remain slow, churn increases, runway will decrease, and they won’t have the product/metrics that get investors excited once they need more money.
How to Win
No one has a magical formula for what companies need to do to win in this AI platform shift. And you probably shouldn’t listen to anyone who says they do. The capabilities of AI are changing everyday so it’s hard to even keep up (I certainly can’t)
The companies that will die are the ones skating to where the puck was at (running the same old playbooks). The winners are trying to figure out where the puck is going.
Having the right people at the company has never been more important. Only with the right people will the company be able to use AI to further strengthen product/market fit. As a reminder, product market fit never rests….now more than ever is that true. It’s either getting stronger or weaker - there is no staying flat with product/market fit.
You also can’t win in a fast changing environment by relying on historical trends and information. A few examples:
A short CAC payback period is incredibly important right now. While 24+ month payback was acceptable not too long ago (and that’s what many of the current benchmarks show), a shorter CAC payback period is going to be required now. Investors are demanding it and customers may not stick around as long as they used to so your long-term success will depend on it.
Old pricing models may need to be changed. Don’t just set this and forget it. Many old pricing models are either killing sales deals now or will break the unit economics with AI being implemented. Revisit this regularly and iterate.
Don’t rely on previous financial metric standards - acceptable headcount ratios, popular software financial metrics, burn multiples, etc. Folks need to use their brains now and not just rely on historical benchmarks/trends. What was true one year ago may not be true today. This is a big reason why your team and having smart people is so important. They can adjust and adapt a lot quicker to the new reality
I am hopeful we can get back to traditional high revenue growth standards for software companies. We are in the middle of a big transition so the revenue softeness makes sense. What companies are doing now will determine how they come out on the other side.
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