What we look for in AI companies (and why they are different)

With Generative AI’s budding reasoning capabilities, a new class of agentic applications is starting to emerge.

What shape do these application layer companies take? Interestingly, these companies look different than their cloud predecessors:

• Cloud companies targeted the software profit pool. AI companies target the services profit pool.


• Cloud compa

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Anecdotally, we have seen a surprisingly consistent pattern in the financial data of AI companies, with gross margins often in the 50-60% range – well below the 60-80%+ benchmark for comparable SaaS businesses. Early-stage private capital can hide these inefficiencies in the short term, especially as some investors push for growth over profitabilit... See more

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:

So right now, LLMs (Large Language Models) are all the rage. But in the future, it’s possible that the way we get things done is composing things with a combination of LLMs, SMMs (Small, Mighty Models), agents and tools.

It’s what I call Cognitive Composition (because it sounds cool and I have a longtime love affair with alliteration).

This is how we... See more