Why AI startups have different economics from classic SaaS startups

Can we expect AI startups to bear out similar economic gains as traditional SaaS businesses? Or are there unique qualities to AI startups that warrant a different set of expectations from investors and entrepreneurs?

Paul Zhao
Paul Zhao
Mar 14, 2020 · 10 min read

But First, A Bit of History

Let’s rewind the clock a bit. Back in the day, software vendors would write code, package it, and often distribute physically (through those nifty things called CDs). In this old world, buyers were shouldering most of the operational costs, such as running the applications that they bought on their own local data and compute centers (or laptops and desktops).

Technological differences drive different cost structures: Training & Inference.

1) Data and Model Training Drive Up Costs
In ASR, building speech recognition models requires a vast amount of training data. Not only would you need the audio data, but you’d also need corresponding ground-truth annotations to build an ASR engine. The thing about training data is that it’s not a one-time cost. It’s actually an ongoing expense. Even if you were to employ continuous user-data ingestion as part of your overall training pipeline, you’d still have to spend on data selection, structuring, re-training, etc. to make it useable.

Operational differences drive different cost structures, too.

As much as we hope, AI isn’t quite at the level that Hollywood likes to portray. Speech recognition, image recognition, text analytics, etc. are not perfect (although it’s all improving very quickly).

AI Startups face a different type of growing pain, translating to different expectations for the top-line (e.g. revenue and scale).

As a startup of any kind, one of the key metrics you’re measured by is your growth. To grow fast, or have fast adoption, your product needs to embody many characteristics. One of them needs to be quality.

What’s the future for AI startups?

Frankly, I think the verdict is still out. But if you’re an investor, I think it’s important to temper your expectations on the financial bottom lines of AI startups compared to your traditional SaaS investments. I’m not saying that AI startups won’t be good investments, or even great investments. I’m just saying, you’ll have to balance your expectations.

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Paul Zhao

Written by

Paul Zhao

Father, husband, entrepreneur. All perspectives and opinions are mine only.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +792K followers.

Paul Zhao

Written by

Paul Zhao

Father, husband, entrepreneur. All perspectives and opinions are mine only.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +792K followers.

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