Do AI startups have worse economics than SaaS shops?
0Reported today on TechCrunch
For the full article visit: https://techcrunch.com/2020/02/21/do-ai-startups-have-worse-economics-than-saas-shops/
Do AI startups have worse economics than SaaS shops?
A few days ago, Andreessen Horowitz's Martin Casado and Matt Bornstein published an interesting piece digging into the world of artificial intelligence (AI) startups, and, more specifically, how those companies perform as businesses. Core to the argument presented is that while founders and investors are wagering "that AI businesses will resemble traditional software companies," the well-known venture firm is "not so sure."
Given that TechCrunch cares a lot about startup business fundamentals, the notion that one oft-discussed and well-funded category of venture-backed startup might sport materially less attractive economics than we expected captured our attention.
The Andreessen Horowitz (a16z) perspective is straightforward, arguing that AI-focused companies have lesser gross margins than software companies due to cloud compute and human-input costs, endure issues stemming from "edge-cases" and enjoy less product differentiation from competing companies when compared to software concerns. Today, we're drilling into the gross margin point, as it's something inherently numerical that we can get other, informed market participants to weigh in on.
If a16z is correct about AI startups having slimmer gross margins than SaaS companies, they should - all other things held equal - be worth less per dollar of revenue generated; or in simpler terms, they should trade at a revenue multiple discount to SaaS companies, leaving the latter category of technology company still atop the valuation hierarchy.
This matters, given the amount of capital that AI-focused startups have raised.
Is a16z correct about AI gross margins? I wanted to find out. So this week I spoke to a number of investors from fir