YC Partner Harsh Taggar notes a strategic shift where new AI companies are not just selling software to incumbents (e.g., an AI tool for insurance). Instead, they are building "AI-native full stack" businesses that operate as the incumbent themselves (e.g., an AI-powered insurance brokerage).
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Instead of selling software to traditional industries, a more defensible approach is to build vertically integrated companies. This involves acquiring or starting a business in a non-sexy industry (e.g., a law firm, hospital) and rebuilding its entire operational stack with AI at its core, something a pure software vendor cannot do.
Incumbent companies are slowed by the need to retrofit AI into existing processes and tribal knowledge. AI-native startups, however, can build their entire operational model around agent-based, prompt-driven workflows from day one, creating a structural advantage that is difficult for larger companies to copy.
Despite the hype, YC's focus isn't just on pure AI startups. The accelerator is backing a diverse portfolio of companies in healthcare, finance, and deep tech, using AI as a disruptive tool to rewrite the rules of these traditional, 'dusty' industries, much like the internet did.
Most successful SaaS companies weren't built on new core tech, but by packaging existing tech (like databases or CRMs) into solutions for specific industries. AI is no different. The opportunity lies in unbundling a general tool like ChatGPT and rebundling its capabilities into vertical-specific products.
Counter to fears that foundation models will obsolete all apps, AI startups can build defensible businesses by embedding AI into unique workflows, owning the customer relationship, and creating network effects. This mirrors how top App Store apps succeeded despite Apple's platform dominance.
The true economic revolution from AI won't come from legacy companies using it as an "add-on." Instead, it will emerge over the next 20 years from new startups whose entire organizational structure and business model are built from the ground up around AI.
Incumbents face the innovator's dilemma; they can't afford to scrap existing infrastructure for AI. Startups can build "AI-native" from a clean sheet, creating a fundamental advantage that legacy players can't replicate by just bolting on features.
YC Partner Harsh Taggar suggests a durable competitive moat for startups exists in niche, B2B verticals like auditing or insurance. The top engineering talent at large labs like OpenAI or Anthropic are unlikely to be passionate about building these specific applications, leaving the market open for focused startups.
Most current AI tools are skeuomorphic—they just perform old tasks more efficiently. The real transformation will come from "AI-native" applications that create entirely new business models, just as Uber was an "iPhone-native" concept unimaginable before its time. The biggest winners will use AI to become the industry, not just sell to it.
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.
