Editor’s note: This article is part of an ongoing series in which Crunchbase News interviews active investors in artificial intelligence. Read 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 and Menlo Ventures as well as highlights from these stories from 2023.
In his 30 years investing in startups, Scale Venture Partners founder Rory O’Driscoll has ridden the SaaS wave, investing in some of the biggest software names of the past few decades, including Bill.com, Box, DocuSign and WalkMe. Now he and his firm are investing in what he sees as the next big technological shift eclipsing SaaS: The third wave of artificial intelligence companies.
We recently spoke with O’Driscoll about his decades-long experience as an investor and how he sees the new AI wave playing out.
To underline how significant AI has become, O’Driscoll pointed out that 80% of his firm’s deals now have a strong AI component, either at the apps or the infrastructure level.
AI has dominated both the firm’s seventh fund of $600 million in 2020, as well as its $900 million eighth fund in 2022.
SaaS “Hunger Games”
In 2019, O’Driscoll sounded the alarm on what he saw as an increasingly competitive and challenging environment for investing in cloud computing, after a more than decade-long success streak for investors. He foresaw slower growth and lower venture returns.
That prediction has been borne out in the venture capital slowdown that followed the COVID-led surge of 2020 and 2021.
“Just as the SaaS S-curve levels out, and Silicon Valley looks alone, sad and scared, along comes the AI curve,” said O’Driscoll, who anticipates this new S-curve taking time to play out.
AI hype cycles ebb and flow, he notes. “It’s clearly going to take 10 or 20 years to finance the adoption of AI across the board in enterprise,” he said. “That is the big picture with some of it happening quickly and some will take time — just like SaaS.”
Breaking the next wave
O’Driscoll’s investment focus is in apps or applied AI, while other members of the Scale team focus on AI infrastructure.
“I think the real money is going to be made by figuring out which apps are going to get done first,” he said. “Part of that is to understand how enterprises judge success.”
And with that, “how willing they are to live with the intrinsically probabilistic nature of AI — in other words, how catastrophic is failure.”
In the SaaS era, enterprise users typically interacted with a piece of software by typing some stuff into a computer and receiving a report back.
However, in the age of AI it’s quite different. “It’s speaking, it’s listening, it’s seeing, it’s writing; they’re very human tasks,” said O’Driscoll. “There’s a whole range of human tasks that AI can now do at some level of merit, and I think a lot of the success will be about judging when it’s good enough and when it’s not.”
AI waves
O’Driscoll said he has seen three waves of AI investing.
The first was early in his career in the mid to late ’90s and focused on neural networks, natural language processing and voice recognition.
“Then you had 20 years, where it was just, take ‘x’ and move it to the cloud. And it was great, and it was wonderful, and it was simple, and with probably two or three funds there was little or no AI investing,” said O’Driscoll.
Pre-SaaS, the dominant companies were SAP, Oracle; the financial ledger was the big app.
In the cloud era, the compelling apps were front-facing customer apps. The dominant app was Salesforce 1.
“It’s a nontrivial fact that the dominant cloud company is a sales tool. While the dominant on-prem company was an accounting tool. And I think the reason for that goes to the essential nature of what the [Salesforce] platform did — it made it cheaper to adopt.”
Scale began investing in AI again starting around 2015 and 2016, which O’Driscoll sees as the second wave for the industry.
Around that time, the firm made investments in robotics, computer vision, natural language processing and predictive analytics. That included Forter, a credit card fraud prevention startup; Socure, which focuses on online identity verification; robotics startups Locus Robotics; and Observe.AI, which offers speech recognition for call centers. Many of these companies have scaled to $100 million or more in revenue, and have folded in generative AI capabilities.
Post ChatGPT
The third wave of AI companies are those that were born or have gained traction since the mainstream launch of OpenAI’s ChatGPT in late 2022. For Scale, those include sales and marketing content company Regie; Tavus, which makes a conversational automated video interface; Bland AI, which offers automated phone calls for customer support and sales service; and Klarity, which makes technology for financial contract review.
On the infrastructure side, the firm has invested in Galileo for model management and QA Wolf for software quality assurance.
O’Driscoll noted that after the 2004 Salesforce IPO no firm funded a single non-SaaS software company.
“There is probably going to be a period in the next two or three years where we all get a little disappointed at the traction, and there’s a little bit of a correction,” he said. But, “zoom out 10 years, no one’s going to be building software without AI at the core.”
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Illustration: Dom Guzman
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