AI rubber hits road, when?

10+ charts on the transformation of AI promise into AI results (or the lack thereof)

Apologies for the scheduled-send snafu…pacific time is not the same as eastern time.

• AI tailwinds are real, but you also have to squint to see them(?)

• key to AI ROI: keep it simple

• AI the jobmaker, not job-taker

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AI rubber hits road, when?

Three vignettes on the AI promise v. AI results.

AI tailwinds are real, but also you have to squint to see them(?)

Random Walk (and others) is on-record for expecting legacy software companies to be early beneficiaries of AI.

They’ve got distribution, they’ve got visibility into client-needs, and they’ve got plenty of capital. Plus, unless you’re actually making a foundation model, you don’t really need any technical super-powers to “build with AI,” (which is part of the whole appeal). If anyone is in a good position to experiment with a mix of incremental wins and the occasional big-swing (both internally, and externally), it’d be big SaaS.

Anyways, that legacy SaaS would win has kind of played out, but not really? Or at least, it’s too soon to tell.

Clearly, when investors perceive that a SaaSCo is possessed of an “AI Tailwind,” they respond accordingly:

Meritech

“AI Tailwind Cos” have nearly 2X the LTM revenue growth, their valuations are higher, they’re bigger companies, and unsurprisingly, they have generated far better returns over the past ~2 year.

Now, Meritech is exercising some judgement in who to include in this AI tailwind list, and obviously, there’s some circularity involved. But, Meritech is pretty smart, and it strikes me as a reasonably sound list.

So, good news, AI is already translating into additional revenue for software companies!

Well, sort of.

There’s a version of this story that focuses on the “enablement” layer, i.e. companies are getting paid to help other companies experiment with AI, but that doesn’t necessarily mean that AI is ‘revenue-generating,’ in the sense of earning its keep. It might mean that, but it also might not.

Eventually, of course, that experimenting will have to translate into results that justify the cost, but for now, AI demand appears to be mostly a feature of promise (rather than results).¹

Zoom out for a moment, and the point is even more salient.