Last week we explored how SaaS companies should think about defensibility, as AI both speeds up innovation and lowers barriers to compete. (LINK)
But what about offense? As AI-powered tools enable dramatically faster (and cheaper) software development cycles, will more advantage accrue to the large entrenched incumbent company, or to the small, agile startup? The question may be best answered by considering which has more to lose, and harkens back to Clayton Christensen’s seminal work, “The Innovator’s Dilemma.”
Christensen notes, “Successful companies fail not because they make mistakes, but because they listen to their best customers and focus on highly profitable products instead of new, disruptive technologies.”
Smaller, more agile startups are often better positioned to attack incumbents because they have the luxury of not having a legacy business (and customer reputation) to protect. Christensen notes, “These start simpler, cheaper, and often worse than existing products. They appeal to small or overlooked customer groups. Over time, they improve quickly and take over the mainstream market.”
Incumbent companies will inevitably approach AI from a position of conservatism: AI will make their existing operations more productive, but they need to proceed with caution, given the risk that AI may make a mistake that causes negative reputation risk. As a result, the pace of innovation will be slower than a singularly focused startup that doesn’t risk the same downside.
Startups have the potential to accelerate without fear of jeopardizing their incumbent business. Startups also have the advantage of not being burdened by historical code bases, business processes, or cultures, which means they can architect their firms to be truly driven by AI, instead of simply leveraging AI as a productivity enhancer.
The industry’s disruptors won’t be incumbent companies overhauling how they work; rather, the true AI-native companies will be startups.
We believe the advantage from AI accrues more to the startup than to the incumbent, making it that much more important for incumbents to focus on shoring up their defense across the four areas we mentioned last week: Brand (Trust), Networks, Proprietary Data, and Channel Ownership.
