Tomasz Tunguz on How AI is Changing the Future of SaaS

AI is not killing SaaS but creating a deflationary force in software, with AI companies pursuing labor budgets rather than traditional line-item software budgets

Most AI software companies are reporting 50-75% improvement in engineering productivity, with workflow changes leading to reduced headcount but increased revenue efficiency

Horizontal SaaS products face increasing pressure to incorporate AI features, with AI becoming table stakes rather than a differentiator

Modern AI companies can achieve strong growth with smaller market share due to targeting larger labor budgets (100-500x larger than traditional software budgets)

Customer acquisition costs in SaaS have increased significantly over the past 5 years, with the average spend per sales rep growing from $150/month to $750-850/month

Some companies are moving away from cloud services back to on-premise solutions for cost savings (e.g., Dropbox saved $400M/year by moving from cloud to on-prem)

AI companies in public markets are trading at 250x premium compared to non-AI companies, showing strong market preference for AI-first approaches

Vertical SaaS solutions with deep domain expertise and unique datasets remain defensible against AI commoditization

Legal and customer service roles are seeing significant AI automation, with estimates that 2/3 of these roles will be automated within 3-5 years

Successful AI-enabled SaaS companies need technical founders who can sell and understand their market, rather than just building broad horizontal products