Editor’s note: This article is part of an ongoing series in which Crunchbase News interviews active investors in artificial intelligence. Previous interviews with Felicis, Battery Ventures, General Catalyst, Bessemer Venture Partners, Accel, Insight Partners, Index Ventures, Sequoia Capital, Section 32, M12, Sapphire Ventures, Bain Capital Ventures, Menlo Ventures and highlights of their 2023 stories. Read the lights.
Rory O’Driscoll, founder of Scale Venture Partners, has ridden the SaaS wave during his 30 years investing in startups, building some of the biggest companies of the past few decades, including Bill.com, Box, DocuSign, and WalkMe. I have invested in software names. Now, he and his company are investing in what he sees as the next big technological shift beyond SaaS: the third wave of artificial intelligence companies.
We recently spoke to O’Driscoll about his decades of experience as an investor and how he sees the new wave of AI unfolding.
To highlight how important AI has become, O’Driscoll said that 80% of his company’s deals now include a strong AI component, either at the app or infrastructure level. I pointed it out.
AI controlled both the firm’s $600 million seventh fund in 2020 and its $900 million eighth fund in 2022.
SaaS “Hunger Games”
In 2019, O’Driscoll sounded the alarm, seeing the cloud computing investment landscape as becoming increasingly competitive and difficult after more than a decade of success for investors. He expected slower growth and lower venture profits.
This prediction was borne out by the slump in venture capital following the coronavirus surge in 2020 and 2021.
“The AI curve will arrive just as the SaaS S-curve flattens out and Silicon Valley looks lonely, sad, and scared,” O’Driscoll said, adding that as this new S-curve unfolds, I expect it to take some time.
He points out that AI hype goes through cycles of rise and fall. “It’s clear that it will take 10 or 20 years to get the funding to deploy AI across the enterprise,” he said. “This is the big picture, and just like with SaaS, some things happen quickly and some things take time.”
break the next wave
O’Driscoll’s investment focus is on apps or applied AI, while other members of the Scale team focus on AI infrastructure.
“I think the real money comes from figuring out which apps get finished first,” he said. “Part of it is understanding how companies measure success.”
And that’s “how willing they are to accept the inherently probabilistic nature of AI; in other words, how catastrophic failure can be.”
In the SaaS era, enterprise users typically interacted with software by typing things into their computers and receiving reports.
However, in the age of AI, things are completely different. “It’s speaking, it’s listening, it’s seeing, it’s writing. It’s a very human job,” O’Driscoll said. “There’s a wide range of human tasks that AI can now perform with some benefit. I think a lot of the success will be in determining when it’s good enough and when it’s not good enough.”
AI wave
O’Driscoll said he has seen three waves of AI investment.
The first was early in his career in the mid-to-late 90s, when he focused on neural networks, natural language processing, and speech recognition.
“Then it took us 20 years to just get ‘x’ and move it to the cloud. And it was nice, nice, simple, maybe two or three funds, with little to no investment in AI,” O’Driscoll said.
Before SaaS, the leading companies were SAP and Oracle. Financial ledger was a big app.
In the cloud era, attractive apps were customer-facing front-facing apps. The most dominant application was Salesforce 1.
“It’s a truism that the dominant cloud companies are sales tools, whereas the dominant on-premises companies are accounting tools. The reason for that is the inherent nature of what the (Salesforce) platform did. As a result, the installation cost has been reduced.
Scale started investing in AI again around 2015-2016, which O’Driscoll sees as the second wave of the AI industry.
At the time, the company was investing in robotics, computer vision, natural language processing, and predictive analytics. Among them is Forter, a credit card fraud prevention startup. Socure focuses on online identity verification. Locus Robotics, a robotics startup. The other is Observe.AI, which provides voice recognition for call centers. Many of these companies have grown to $100 million or more in revenue and are incorporating generative AI capabilities.
Post chat GPT
The third wave of AI companies are those that have emerged or gained momentum since OpenAI’s ChatGPT went mainstream in late 2022. For Scale, these companies include Regie, a sales and marketing content company; Tavus creates conversational, automated video interfaces. Bland AI provides automated telephone calls for customer support and sales services. and Klarity, which develops technology for financial contract review.
On the infrastructure side, the company invested in Galileo for model management and QA Wolf for software quality assurance.
O’Driscoll noted that since the Salesforce IPO in 2004, no company has funded a single non-SaaS software company.
“There’s probably going to be a period in the next two or three years where everyone is a little bit disappointed in traction and it’s going to correct a little bit,” he said. But “if you look 10 years from now, no one will be building software without AI at the core.”
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Illustration: Dom Guzman
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