Now venture capital firms are increasing their investments in AI-driven companies. To us, these investments are an opportunity to increase both productivity and profitability. Most notably in the managed services area. General Catalyst recently invested $74 million in Titan MSP, a company poised to revolutionize service provision through AI tools designed specifically for managed service providers. This investment fits into broader trend where legacy companies are looking to automate and disrupt their current business models.
Elad Gil, a prominent venture capitalist, has been championing a strategy that focuses on acquiring mature businesses and applying AI to drive their transformation for the past three years. That’s because he thinks it’s easier—and produces quicker, bigger wins—to incorporate AI into established businesses. This approach is immensely superior to the usual door-to-door peddling of software silver bullets. This change in investment strategy marks the latest acknowledgement that AI has the potential to deliver transformational change and efficiency at unprecedented scale and depth.
In our AI era 2nd development, Seattle-based Mayfield Fund has set aside $100 million to invest exclusively in what they call “AI-powered teammates. This program is intended to fund companies that build interactive, generative AI models, which will help workers be their most productive selves. One of the main success stories that has been flagged is Gruve, an IT consulting startup funded by Mayfield. Within six months, they tripled their security consulting business from $5 million to $15 million, with a stellar gross margin of 80%.
AI’s potential impact on the US economy is staggering. The software market in and of itself is worth $1 trillion, and the services market overall is over $16 trillion each year. In fact, experts anticipate that AI will be able to automate 30% – 50% of tasks within firms that are focused on services. In the more than $335 billion call centers industry alone, automation has the potential to automate up to 70% of the repetitive, core functions, creating greater efficiency.
General Catalyst’s Titan MSP has shown that it works. Through successful pilot programs, it automated 38% of the average managed service provider’s mundane tasks. This powerful capability is perfectly timed with the increasing desire within the industry. For most companies the AI-powered gross margins shoot up to 80-90%.
Navin Chaddha, a venture capitalist at Mayfield, underscored the dollar savings AI tools offer when integrated with existing infrastructure. He noted, “If 80% of the work will be done by AI, it can have an 80% to 90% gross margin.” This enormous margin opportunity is part of the reason why so many investors are eager to help AI-driven transformations take place across more traditional industries.
The efficiency gains go far beyond dollar savings. Employees generally waste close to two hours fixing cases of “workslop,” or poor work processes. For an organization of 10,000 employees, this wasted time costs nearly $9 million annually in productivity lost to congestion. By digitizing and automating these processes, companies can begin to reclaim lost time and money.
Marc Bhargava, a partner at General Catalyst, pointed out the difficulty of integrating this new AI technology into existing business models. He stressed the challenges involved with doing so. He stated, “I think it kind of shows the opportunity, which is, it’s not easy to apply AI technology to these businesses.” He highlighted the necessity for specialized talent in this field: “You really need these applied AI engineers from places like Rippling and Ramp and Figma and Scale.”
This rapid expansion of AI applications isn’t just happening in legacy spaces. Eudia uses the latest AI technology to provide predictable fixed-fee legal services. They have the distinct honor of serving dozens of Fortune 100 clients including Chevron, Southwest Airlines, and Stripe. By leveraging AI tools, Eudia improves the core services they offer, but almost more importantly, they lower the cost burden on their clients drastically.
As investors such as Elad Gil have been vigorously pitching, it is imperative to own assets that can quickly be augmented by technology. “If you own the asset, you can transform it much more rapidly than if you’re just selling software as a vendor,” he explained. This feeling is echoed across the board with a lot of venture capitalists looking for shorter timeframes on their IRR.
The financial landscape is rapidly changing as industries across the board begin to see the transformative potential of AI. As Marc Bhargava noted, “As long as AI technology continues to improve, and we see this massive investment and improvement in the models, I think there’ll just be more and more industries for us to help incubate companies.”