Generative AI has opened up a plethora of new avenues and use cases for SaaS. While many software companies stand to benefit from the advent of advanced AI solutions, others face significant disruption. Understanding the source and impact of AI-associated risks will allow SaaS entrepreneurs to insulate their businesses and protect their financial viability. Below are some factors that we believe SaaS entrepreneurs should consider when making short-term and long-term decisions in an environment with such rapid technological change.
Evaluating Business Risks:
Assessing the impact of AI on the vertical market within which you operate, the functional areas your product serves, and the end-users who consume your product are all crucial when evaluating the potential impact of generative AI on your business. Below are some potential mitigation strategies:
- Vertical-specific risks: Verticals in which processes can be easily automated are at a high risk of disruption. If operating in one of these verticals, doubling down on the niche nature of the vertical or pivoting should be considered.
- Functional risks: Products designed to service departments that may cease to exist as a result of AI are at high risk. In this case, pivoting or developing a solution that allows for the replacement of said department is a potential mitigation strategy.
- End-user risk: Products designed for specific end-users, whose future employment status is drawn into question because of AI, carry a lower level of risk that can be mitigated. Companies in this position should seek to move up the organizational value chain.
Evaluating Technology Risks:
Critically assessing how much of your company’s sustainable competitive advantage is due to technology is of crucial importance. Below is our assessment of which companies are at risk:
- Low risk: Solutions that are regulatory and compliance-driven carry a low risk. These businesses are likely safe from significant disruption.
- Medium risk: Competitive advantages based on development processes carry a medium level of risk. One key benefit of AI will be the acceleration of programming efforts.
- High risk: Competitive advantages based on algorithms, such as NLP and machine learning, are under immediate threat.
Despite the potential for disruption within SaaS due to generative AI, certain verticals will emerge unscathed, notably Systems of Record (SoR) and marketplaces reliant on physical user interaction. Solutions whose revenue generation opportunities result from human interaction will be less susceptible to AI advancements. Conversely, several categories of solutions, including knowledge and task management, stand to be significantly disrupted by AI due to efficiency gains.
Warning signs of imminent disruption by AI are numerous; however, the most obvious ones are likely to be reflected in corporate income statements and KPIs. Businesses in the process of being disrupted will likely face pressure on Gross and Net Revenue Retention. Other impacts, including lengthening sales cycles, lower close rates, slowing growth, and an eventual increase in churn, are all telltale signs of looming disruption.
While AI does have the potential to significantly change the SaaS landscape, it also presents technologists with immense opportunities to innovate and make their solutions more robust and efficient. It will be interesting to see how companies throughout the ecosystem continue to evolve as a result of the rapidly changing AI environment.