AI is producing thousands of new SaaS companies, and renewed interest in forgotten sectors

AI’s transformative impact on SaaS: The rise of artificial intelligence has sparked a significant surge in competition across various software-as-a-service (SaaS) categories, with thousands of new AI-driven startups entering the market.

• Venture capital investments in AI have fueled the creation of numerous new competitors in previously established SaaS categories.
• Entrepreneurs are leveraging AI technology to reimagine and disrupt existing software solutions across industries.

The emergence of AI-native platforms: Traditional SaaS companies are facing competition from a new wave of AI-first startups that are positioning themselves as innovative alternatives in various sectors.

• Sequoia Capital described Drift, a new AI-powered customer success startup, as having no competitors, highlighting the distinction between AI-native platforms and established players.
• While existing companies like Gainsight, ChurnZero, and Vitally operate in the customer success space, they may not be considered direct competitors from a venture capital perspective due to their lack of an AI-first approach.

Unprecedented competition in SaaS: The influx of AI-driven startups has created a highly competitive landscape, even in previously stable markets with few competitors.

• A SaaStr Fund portfolio company crossing $100 million in annual recurring revenue (ARR) is now facing approximately 100 AI-native competitors, according to a corporate VC board member.
• This surge in competition is pushing established companies to innovate and improve their offerings, ushering in an era of “Hyperfunctional SaaS.”

Revitalization of previously overlooked industries: AI has breathed new life into sectors that were once considered uninteresting or out of fashion for investors.

• Search APIs, such as Algolia, have become one of the hottest areas in the AI world, despite limited interest in 2014.
• Call center technology, exemplified by companies like Talkdesk and Gorgias, has seen a resurgence with the advent of AI-powered voice agents and customer service solutions.
• Sales tools, once a neglected category, now boast hundreds of AI-driven solutions targeting various aspects of the sales process.
• Legal tech, previously considered a “No Invest” space, is now attracting significant venture capital interest for AI-powered tools designed for lawyers.

Disruption in established categories: Even SaaS categories that were thought to be mature and settled are experiencing renewed competition and innovation.

• Customer Relationship Management (CRM) and Customer Success, once considered “done” categories, are now seeing an influx of AI-first startups challenging established players.
• The explosion of AI-driven functionality and automation has led to unprecedented levels of creativity and competition across various SaaS sectors.

Implications for existing SaaS companies: The rapid proliferation of AI-powered competitors presents both challenges and opportunities for established SaaS providers.

• Existing companies may be able to rely on their net revenue retention (NRR) for a while, but they will need to adapt to the changing landscape to remain competitive.
• The mantra for established SaaS providers becomes “step up, or step aside” as they face pressure to innovate and incorporate AI capabilities into their offerings.

Looking ahead: As AI continues to evolve, its impact on the SaaS industry is expected to grow, potentially reshaping entire categories and creating new opportunities for innovation.

• The current wave of AI-driven competition is likely just the beginning, with further disruption and transformation expected in the coming years.
• SaaS companies that can successfully integrate AI capabilities and adapt to the changing competitive landscape will be better positioned for long-term success.