The New Business of AI (and How It’s Different From Traditional Software)

 Martin Casado and Matt Bornstein, The New Business of AI (and How It’s Different From Traditional Software), a16z.com, February 16, 2020.

We are huge believers in the power of AI to transform business: We’ve put our money behind that thesis, and we will continue to invest heavily in both applied AI companies and AI infrastructure. However, we have noticed in many cases that AI companies simply don’t have the same economic construction as software businesses. At times, they can even look more like traditional services companies. In particular, many AI companies have:

1. Lower gross margins due to heavy cloud infrastructure usage and ongoing human support;
2. Scaling challenges due to the thorny problem of edge cases;
3. Weaker defensive moats due to the commoditization of AI models and challenges with data network effects....

 Building, scaling, and defending great AI companies – practical advice for founders 

• Eliminate model complexity as much as possible. 
• Choose problem domains carefully – and often narrowly – to reduce data complexity. 
• Plan for high variable costs.
• Embrace services.
• Plan for change in the tech stack. 
• Build defensibility the old-fashioned way.