Unlike traditional software that supports workflows, AI can execute them. This shifts the value proposition from optimizing IT budgets to replacing entire labor functions, massively expanding the total addressable market for software companies.
Previously, building 'just a feature' was a flawed strategy. Now, an AI feature that replaces a human role (e.g., a receptionist) can command a high enough price to be a viable company wedge, even before it becomes a full product.
AI capabilities offer strong differentiation against human alternatives. However, this is not a sustainable moat against competitors who can use the same AI models. Lasting defensibility still comes from traditional moats like workflow integration and network effects.
The stickiest software is critical but inexpensive relative to a customer's overall budget, like payroll services. This 'Goldilocks zone' makes the software too small a cost for C-suite review, yet too embedded to easily replace, creating a powerful moat.
The narrative of AI destroying jobs misses a key point: AI allows companies to 'hire software for a dollar' for tasks that were never economical to assign to humans. This will unlock new services and expand the economy, creating demand in areas that previously didn't exist.
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.
Large platforms focus on massive opportunities right in front of them ('gold bricks at their feet'). They consciously ignore even valuable markets that require more effort ('gold bricks 100 feet away'). This strategic neglect creates defensible spaces for startups in those niche areas.
The advantage from data network effects only materializes at immense scale. The difference between a startup with 3 customers and one with 4 is negligible. This means early-stage companies cannot rely on a data moat to win; the moat only becomes visible after a market leader is established.