Over the years, Bessemer Venture Partners has put copious effort into branding itself around all things cloud. The firm has a Nasdaq-traded Cloud Index and a large portfolio of prominent cloud startups.
So, when Bessemer calls its latest annual State of the Cloud report “a eulogy for the legacy cloud,” it warrants attention.
In its latest report, published Thursday, the firm makes the case that startups are moving out of what it describes as legacy SaaS business models and embracing a new paradigm: vertical AI. While this isn’t a death knell for the enterprise software companies that have been its bread-and-butter for years, it does mean they’ll have to evolve with the times.
“It is a big deal, particularly coming from Bessemer. I think it is reflective of just how big of a movement and paradigm shift this is,” said firm partner Sameer Dholakia, referring to the rise of large language models and AI-enabled tools that are reshaping the enterprise software landscape. “This is an extinction event for companies that are not on the early side of adoption.”
All about vertical AI
If cloud was the perennial buzzword of years’ past, this time Bessemer is pushing to popularize the concept of vertical AI as the next big thing. It defines this as applications that “target the high cost repetitive language-based tasks that dominate numerous verticals and large sectors of the economy.”
Bessemer, which cites over a dozen of its own portfolio companies as vertical AI exemplars, isn’t the only one highlighting the trend. Late last year, for instance Cowboy Ventures 1 published a Vertical AI Market Map, and Greylock listed standout startups in the space for healthcare, finance and professional services.
Per Dholakia, some of the most promising startups in vertical AI use cases are well beyond seed stage by now. Many secured initial funding well before the late 2022 launch of ChatGPT established the power of large language models for the masses.
While we’re probably at least a couple years away from seeing vertical AI IPOs at scale, Dholakia is already seeing early entrants shake up prevailing business models in the enterprise software space. One shift that AI is enabling, he said, is the propensity to charge customers based on work rather than number of users engaging the software.
“You’re seeing people price the delivery of their capability differently,” he said. “They’re solving a piece of work, and charging per work product.”
Dholakia cites legal tech AI portfolio company EvenUp as an example, with the firm currently able to charge personal injury lawyers for demand letters created with its offering.
Exits and valuations
While Bessemer is enthused about the promise of vertical AI offerings, the firm is also cognizant of the reality that startups in the space are mostly a ways from exit. Meanwhile, there remains a vast swathe of still-private, later-stage enterprise software companies formed before the all-about-AI era.
The backlog of not-yet-exited unicorns, in particular, is amassing amid a sluggish period for IPOs and large M&A deals involving private, venture-backed software companies. And with the traditionally languid summer IPO season upon us, the slow streak looks set to continue.
Dholakia, for his part, said he’s optimistic the offering pace will pick up, likely by next year. For the past couple years, he said, the software startups have held off going public, given the post-2021 market contraction, several quarters of subsequent belt-tightening, and pressure to update with AI capabilities.
As a result, there’s now a “once in a generation, maybe once in a lifetime backlog of companies” that are worthy of going public but are still private, he said.
Hopefully, soon we’ll see them making their way to market.
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Illustration: Dom Guzman
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