Unlike cloud or mobile, which incumbents initially ignored, AI adoption is consensus. Startups can't rely on incumbents being slow. The new 'white space' for disruption exists in niche markets large companies still deem too small to enter.

Established SaaS firms avoid AI-native products because they operate at lower gross margins (e.g., 40%) compared to traditional software (80%+). This parallels brick-and-mortar retail's fatal hesitation with e-commerce, creating an opportunity for AI-native startups to capture the market by embracing different unit economics.

The current fundraising environment is the most binary in recent memory. Startups with the "right" narrative—AI-native, elite incubator pedigree, explosive growth—get funded easily. Companies with solid but non-hype metrics, like classic SaaS growers, are finding it nearly impossible to raise capital. The middle market has vanished.

For established software companies with sluggish growth, the path forward is clear: find a way to become relevant in the age of AI. While they may not become the next Harvey, attaching to AI spend can boost growth from 15% to 25%, the difference between a viable public company and a sale to a private equity firm.

In the current market, AI companies see explosive growth through two primary vectors: attaching to the massive AI compute spend or directly replacing human labor. Companies merely using AI to improve an existing product without hitting one of these drivers risk being discounted as they lack a clear, exponential growth narrative.

AI is making core software functionality nearly free, creating an existential crisis for traditional SaaS companies. The old model of 90%+ gross margins is disappearing. The future will be dominated by a few large AI players with lower margins, alongside a strategic shift towards monetizing high-value services.

Aggregate venture capital investment figures are misleading. The market is becoming bimodal: a handful of elite AI companies absorb a disproportionate share of capital, while the vast majority of other startups, including 900+ unicorns, face a tougher fundraising and exit environment.

For venture capitalists investing in AI, the primary success indicator is massive Total Addressable Market (TAM) expansion. Traditional concerns like entry price become secondary when a company is fundamentally redefining its market size. Without this expansion, the investment is not worthwhile in the current AI landscape.

Recent acquisitions of slow-growth public SaaS companies are not just value grabs but turnaround plays. Acquirers believe these companies' distribution can be revitalized by injecting AI-native products, creating a path back to high growth and higher multiples.