Has it finally happened? Have fledgling  AI “experiments” inside companies finally morphed into real technology deployments, paving the way for big new efficiencies and streamlined workflows across all manner of industries and business processes?

The answer, according to our Battery Ventures 2024 “State of the OpenCloud” report, is yes—to a point. Our research finds there’s still a big gap between expectations and reality when it comes to actually deploying generative AI inside enterprises. But those deployments are increasing, we found.

And with the market’s mega-cloud computing providers continuing to invest massively in AI infrastructure—particularly since the second quarter of 2023—we see growing capacity to handle a coming AI “supercycle”, a technology platform shift just as big as previous mobile and cloud-computing revolutions led by Apple and Amazon Web Services, respectively. Our estimate is that $4 trillion or more in market value is up for grabs as AI moves toward disrupting software, services and certain labor markets in the coming years.

Some of our other, specific findings:

• Led by AI chipmaker Nvidia, big-name cloud computing and infrastructure companies are laying the groundwork for the AI revolution—and are driving the stock market to new highs. So far this year, Nvidia shares are up 168%, as of Oct. 31, while the S&P 500 is up 20%.
• AI is dramatically lifting the fortunes of the public cloud providers, namely AWS, Microsoft Azure and Google Cloud. We estimate that by 2030, cloud providers could capture an extra $2 trillion in cumulative revenue from AI. Other cloud-software application and infrastructure companies will benefit, too.
• After marked volatility in the software market through 2021 and much of 2022, valuation multiples for a basket of software-as-a-service (SaaS) companies we track has stabilized. BUT: The software industry remains challenged, with ARR increases lagging continued spending on sales and marketing at many companies. Private software companies continue to trade at a premium—which is likely not broadly sustainable.
• This means there are still gobs of B2B software cloud unicorns that may never grow into their ZIRP-era valuations. By our estimates, the backlog of these U.S. based unicorns has grown three times since 2020. AI may not be able to save them, as large-scale software IPOs and M&A events aren’t keeping up.

In this environment, we still remain optimistic about the potential for founders to build durable cloud companies—with an AI twist.

Best practices for founders today run the gamut from focusing on product design and user experience—which we view as an offensive force to drive fast product adoption—while simultaneously doubling down on product innovation and R&D to unlock new market opportunities and fuel growth. One example is ServiceNow, which has seen a 38% compound annual growth rate in the last 10 years as it’s focused on “product velocity”. Other recommendations from our team include:

• Focusing on value-based pricing, whether that’s per-seat, consumption-based or tying pricing directly to the cost of displaced human labor.
• Adopting new, AI-focused product metrics, in addition to traditional SaaS metrics. Some of these new metrics include the percent of valid or accurate AI responses your product delivers, and the specific revenue your product added, or the time/cost it saved.
• Re-thinking your sales compensation models to align with new, AI value-based pricing. This might require a higher base salary versus traditional models and reducing variable comp to offset delayed revenue realization.
• Using AI agents to automate high-value, professional work, including inside call centers, law office and architecture/engineering/construction workflows.

AI represents a profound technology-platform shift, but overall we view it as a major catalyst for cloud software and infrastructure. We look forward to partnering with forward-thinking entrepreneurs who are pushing the edges of AI innovation.

For more insights, please see our full 2024 State of the OpenCloud report below.

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