A few days ago, Andreessen Horowitzs 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 A Technology News Room cares a lot about startup business fundamentals, the notion that one oft-discussedand 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, were drilling into the gross margin point, as its 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 firms that have made AI-focused bets to get a handle on their views.
Read the full a16z piece, mind.
Its interesting and worth your time.Today were hearing from Rohit Sharma of True Ventures, Jeremy Kaufmann of Scale Venture Partners, Nick Washburn of Intel Capitaland Ben Blume of Atomico.
Well start with a digest of their responses to our questions, with their unedited notes at the end.We asked our group of venture investors(selected with the help of research from A Technology News Rooms Arman Tabatabai) three questions.
The first dealt with margins themselves, the second dealt with resulting valuations and, finally, we asked about their current optimism interval regarding AI-focused companies.