AI’s Second Order Effects
Here’s a math puzzle:
A good salesperson can sell 50 widgets a year, earns $100,000 a year, and will not take a pay cut.
A company has an amazing new widget that needs to be sold (people will not find it on their own/aren’t looking for it).
Prospective customers of this company’s new widget will happily pay $500/year, but not a dollar more.
How will this company do?
To quote Mean Girls: “The limit does not exist!” Or, more accurately, the company cannot exist. A $20 product can work with a product-led growth strategy (think Dropbox, OpenAI, Midjourney, etc). A $1M product can work with an outside sales strategy (think Workday, ServiceNow, Databricks, etc). A $500 sales-led product normally cannot exist. Maybe it should exist, but it’s truly the “dead zone” of products. You can’t charge enough to support your sales team, much less the other fixed costs of the business.
There’s a whole category of AI tools that are fast-growing and everyone is rightfully excited about. AI music generation, website creation, support, and more…not to mention the vertical categories of AI lawyers, AI nurses, etc.
But there’s likely a whole category of non-AI companies and products that can FINALLY exist because of the productivity gains of AI.
AI will help sell your widget.
AI will provide 24/7 support for your widget.
AI will help retain people for your widget.
In venture capital, we always ask ourselves “why now?” If this is such a great idea, why didn’t it exist 5 or 10 years ago? The “why now” for something like Uber was the smartphone, the “why now” for something like Workday was acceptance of the Cloud, the “why now” for something like Adobe was the proliferation of the GUI PC.
Business models that were previously tried but didn’t work because of high support costs, sales costs, etc…might have found a “why now” in the dramatically new cost structure of AI tools.
There’s no question that AI will save incumbents money — along the lines of the Known Knowns here. But AI will likely spawn more classic software companies and marketplaces where AI isn’t the primary “offering,” but rather allows for a sustainable business to exist at a price point that consumers are willing to pay.
