Most AI startups are service businesses, pretending to be product companies

🌈 Abstract

The article discusses the challenges faced by enterprise AI startups in scaling their businesses. It highlights how selling AI automation to enterprises is more about consulting services than building software products, and how this makes it harder for AI startups to scale compared to traditional software companies.

🙋 Q&A

[01] Why are enterprise AI startups more about consulting than building software?

• Selling AI automation to enterprises is more about providing consulting services than just building software products
• This is because beyond simple use cases, it's almost impossible to build a "one-size-fits-all" AI agent, integration, workflow or chatbot that can work out-of-the-box for different customers
• Each enterprise customer has unique stakeholders, database schemas, policies and constraints that require custom solution engineering
• The "product" can only be sold with "forward deployed engineering" and hands-on support, which means the consulting component never goes away

[02] Why are AI startups hard to scale compared to traditional software companies?

• The consulting component required for selling AI automation means AI startups can only scale revenue by increasing the number of solution engineers or consultants, rather than just scaling the software product
• As AI infrastructure and low-code tools improve, it will become easier for enterprises to build their own automations, reducing the lock-in effect of AI agents and workflows
• This makes AI startups vulnerable to becoming glorified system integrators rather than the next big software unicorns

[03] What are the two paths AI startups can take to avoid becoming just consulting firms?

1. Developing point solutions that can be sold without heavy consulting component
2. Building AI agent/workflow builder infrastructure

However, the article notes that point solutions are easy for incumbents to copy, and building a platform like ServiceNow may still result in many smaller competitors operating in niches as consulting companies.