99% of AI companies are not going to work out: Elad Gil on what to build in AI
Big ideas from a serial entrepreneur
"99% of AI companies are not going to work out, but the 1% that will could be quite large."
Elad Gil is a prominent entrepreneur, investor, and advisor in the technology industry, known for his keen insights and successful ventures. He co-founded Mixer Labs, which was acquired by Twitter, where he then served as a Vice President.
As an angel investor, Elad has backed several high-profile companies, including Airbnb, Stripe, and Square. His extensive experience and strategic vision have made him a sought-after advisor for many of Silicon Valley's leading startups, solidifying his reputation as a key figure in the tech ecosystem.
In a conversation with Dave Morin and others, Elad Gil goes deeper into the current state and future potential of AI, highlighting investment strategies, enterprise adoption, and the transformative impact of AI across various industries.
A must read for those who are building in AI and are trying to understand the changing landscape.
Big Ideas from the hour-long conversation (video embedded in the end*)
Widespread AI Adoption
AI adoption is happening at multiple levels, with significant advancements in both consumer and enterprise applications. While only a small percentage of AI startups will succeed, those that do could have a massive impact.
"99% of AI companies are not going to work out, but the 1% that will could be quite large."
Revenue Growth in AI
Major cloud providers like Azure are seeing significant revenue growth attributed to AI services.
This trend underscores the commercial viability of AI technologies and their increasing integration into enterprise solutions, even as full-scale adoption is still on the horizon.
"Azure announced a $25 billion quarter of which 5% lift came from AI, adding a billion and a half per quarter in new revenue."
Sometimes the best thing you can do is just kind of quit and restart and go do something different. As a founder if you're able to go and start a company those are probably the best most productive years of your life in terms of ability to take risk and therefore if the thing isn't working, move quickly on to the next thing - Elad Gil
Diversification Within AI
The diversification within AI involves a broad search for product-market fit across numerous applications. This phase is characterized by experimentation and rapid iteration, similar to previous technology waves like mobile and the internet.
Despite the high failure rate, the successful ventures will define the next generation of AI-driven innovation.
"You suddenly have this blossoming of hundreds or thousands of companies all doing a giant search function in parallel."
The Role of Incumbents in AI Adoption
Large incumbent companies, particularly in the tech sector, may have a significant advantage in AI adoption due to their existing customer base, data resources, and distribution channels.
This could allow them to implement AI solutions more effectively and at a larger scale than startups, even if they enter the market later. However, this also raises questions about the potential for true disruption and the opportunities available for new entrants in the AI space.
AI-Driven Buyouts and Industry Transformation
Some investors are exploring AI-driven buyouts as a strategy to transform existing businesses and industries. This approach involves acquiring companies with the intention of fundamentally changing their operations through AI integration, rather than simply selling AI software to existing players.
This strategy reflects a belief in AI's potential to not just enhance but potentially reinvent entire business models and industry structures.
High Stakes and Capital Investment
The scale of capital being invested in AI today is unprecedented, with billions of dollars being funneled into development and deployment.
This level of investment reflects the high stakes and the potential for substantial returns, despite the inherent risks and the likelihood of misallocated resources.
"This is an era where billions and billions and billions of dollars are being thrown around."
Enterprise AI Adoption
Enterprise adoption of AI is multifaceted, encompassing internal tools, external products, and AI services from suppliers. Early use cases demonstrate substantial cost savings and efficiency gains, such as replacing large numbers of support staff with AI-driven solutions.
"Enterprises are adopting AI in demos, internal tools, external products, and buying AI from suppliers."
Strategic Investment in AI
Investment in AI-driven buyouts and vertical applications highlights the strategic approach needed to capitalize on AI's potential. Owning assets and transforming them with AI can lead to significant competitive advantages and market opportunities.
"I've backed some AI-driven buyouts because in some cases you do want to own the asset and really change how you're dealing with it."
Regulatory Challenges and M&A
The current regulatory environment poses challenges for mergers and acquisitions, particularly for large tech companies. However, strategic acquisitions while still private can provide a pathway for growth and innovation without the constraints of public scrutiny.
"It's going to get harder once you're public due to all the scrutiny."
The Role of AI in Healthcare
AI has the potential to revolutionize healthcare by augmenting services and addressing labor shortages. The integration of AI can lead to more efficient and cost-effective healthcare delivery, providing significant value to both providers and patients.
"There are big labor shortages in areas like nursing and accounting, driving the need for AI augmentation."
AI's Economic Impact
AI's impact on the global economy is profound, with the potential to convert significant portions of payroll into SaaS revenue. This transformation could recreate entire market segments, highlighting the economic potential of AI-driven automation and efficiency.
"If 10% of payroll in key services got converted into SaaS revenue, you'd recreate the entire SaaS market."
Differentiating AI from Past Tech Waves
Unlike previous technology waves, AI offers fundamentally new capabilities rather than just extensions of existing technologies. This distinction positions AI as a disruptive force capable of creating new markets and transforming existing ones.
"AI is fundamentally creating a new type of technology that can do new stuff, while mobile was largely an extension."
Entrepreneurial Opportunities in AI Entrepreneurs should focus on areas where AI can provide unique value, both commercially and socially. By leveraging AI's capabilities in diverse fields such as robotics, biology, and media, startups can drive innovation and address critical challenges.
"There's a huge spectrum of stuff coming, from robotics to medicine to media content."
The Future of AI-Driven Startups
Building successful AI startups requires resilience and adaptability. Founders should be prepared for a long-term journey, with the understanding that early failures can lead to valuable lessons and eventual success in the evolving AI landscape.
"If things aren't working, sometimes the best thing you can do is quit and restart."
The Role of Hyperscalers in AI
Hyperscalers like Google, Amazon, and Microsoft play a pivotal role in funding and advancing AI research and development. Their investment strategies and technological innovations are shaping the future of AI, driving both competition and collaboration within the industry.
"Most of the money funding foundation models is strategic, coming from the hyperscalers."
AI in Legal and Professional Services
AI is transforming professional services by automating routine tasks and augmenting human capabilities. This shift is leading to greater efficiency and new business models in fields such as legal, accounting, and consulting.
"If AI can work against just a fraction of the $3.5 to $5 trillion payroll in professional services, it could recreate entire markets."
Consumer Applications of AI
Consumer-facing AI applications are gaining traction, with products like ChatGPT, Perplexity, and MidJourney experiencing rapid growth. These applications demonstrate AI's ability to enhance user experiences and provide new forms of interaction and entertainment.
"There are consumer products that are clearly skyrocketing in ways we haven't seen in a long time."
Notable big ideas from this discussion (feel free to bookmark them)
"You suddenly have this blossoming of hundreds or thousands of companies all doing a giant search function in parallel."
"This is an era where billions and billions and billions of dollars are being thrown around."
"Azure announced a $25 billion quarter of which 5% lift came from AI, adding a billion and a half per quarter in new revenue."
"AI is fundamentally creating a new type of technology that can do new stuff, while mobile was largely an extension."
"If AI can work against just a fraction of the $3.5 to $5 trillion payroll in professional services, it could recreate entire markets."