Before replacing human workers, AI expands the total addressable market by making services economically viable for previously unserved segments. For instance, Intercom customers now offer AI support to their free users, something they could never afford with human agents.

The primary economic incentive driving AI development is not replacing software, but automating the vastly larger human labor market. This includes high-skill jobs like accountants, lawyers, and auditors, representing a multi-trillion dollar opportunity that dwarfs the SaaS industry and dictates where investment will flow.

Companies like Sierra can't justify a 100x ARR valuation by targeting the existing software market (e.g., $8B Service Cloud). The bet is that they will capture a significant portion of the much larger human labor market ($200B+ for support agents). This represents a fundamental transition of spend from human capital to software.

The economic incentive for VCs funding AI is replacing human labor, a $13 trillion market in the US alone. This dwarfs the $300 billion SaaS market, revealing the ultimate goal is automating knowledge work, not just building software.

Traditional software automated standardized processes but struggled with complex human interactions like call center support. Generative AI's ability to understand natural language allows software to automate these nuanced tasks, dramatically expanding the total addressable market by tackling problems that were previously impossible to solve with code.

Unlike SaaS which sells to limited software budgets (e.g., 1% of revenue), vertical AI agents automate core business functions. This allows them to tap into much larger operational and labor budgets. Companies can capture 4-10% of a customer's total spend by replacing expensive human-led tasks like customer support.

The transition from AI as a productivity tool (co-pilot) to an autonomous agent integrated into team workflows represents a quantum leap in value creation. This shift from efficiency enhancement to completing material tasks independently is where massive revenue opportunities lie.

The fundamental shift from AI isn't about replacing foundational model companies like OpenAI. Instead, AI creates a new technological substrate—productized intelligence—that will engender an entirely new breed of software companies, marking the end of the traditional SaaS playbook.

The paradigm shift with AI agents is from "tools to click buttons in" (like CRMs) to autonomous systems that work for you in the background. This is a new form of productivity, akin to delegating tasks to a team member rather than just using a better tool yourself.