Solo Episode: B2B SaaS is dead. Here's what the best AI founders are doing instead.

Pablo Srugo (00:00:00):
The world has really changed and few are the founders who are really thinking from first principles, and understanding what has now opened up. If you were one of the first, it's a massive edge.

Previous Guests (00:00:12):
That's product market fit. Product market fit. Product market fit. I called it the product market fit question. Product market fit. Product market fit. Product market fit. Product market fit. I mean the name of the show is product market fit.

Pablo Srugo (00:00:24):
Do you think the product market fit show, has product market fit? Cause if you do, then there's something you just have to do. You have to take out your phone. You have to leave the show five stars. It lets us reach more founders and it lets us get better guests, thank you.

I've been a VC now for seven years and a founder since 2013, and the Gen AI revolution. I would say, is the first tech shift that I've seen firsthand. Because even if you think about 2013. I mean, the last shift was really cloud and mobile. And that started in, let's say, the late 2000s. The iPhone comes out in 2007, or so. The App Store comes out later. The top fifteen mobile app companies were all started between 2008, and 2012, 2013.

So by the time that I got into entrepreneurship, by the time that I became a founder and started Gymtrack. Which was in 2013, that wave was not gone and if you think about Gymtrack. It was IoT with a mobile app. But the window of creating the biggest companies in that space, and certainly of the low-hanging fruit, had come and gone. With Gen AI, I got to see the GPT kind of underlayer happening in the background and then the explosion of opportunities that came post-ChatGPT in late 2022. And frankly, the world has changed completely as I think we all know and we all experience in many different ways by how we use and see AI every day. And certainly we hear about it in the news all the time.

Pablo Srugo (00:01:57):
I wanted to maybe take some time because I've been obviously chatting with a lot of founders as I always do and I've realized that not everybody has really fully clicked into what the difference is when it comes to building startups. And certainly zero to one, finding product market fit and just Seed-stage in general, pre and post Gen AI. And I'm going to draw the line at ChatGPT late 2022. And I'm going to make it way more simple.

Let's talk 2023, and on. And then compare that period to the four or five years before that ChatGPT moment. So maybe 2017, 2018 to 2022, and here's the difference I noticed. I started being a VC in 2018, and so right at the beginning of this first period that I'm talking about. This pre Gen AI period, because if you think about it from 2008 until 2012, a lot of huge mobile companies were born.

A lot of B2B SaaS, massive companies were also born in the early 2010s. By the late 2010s, and I'm going to pick again 2017, 2018, as this time frame. these are rough time frames, but by the late 2010s. What was happening is that a lot of the low hanging fruit had really already been picked off. Take CRM, Salesforce, then comes HubSpot. These are horizontal CRMs worth tens, hundreds of billions of dollars. Massive, massive opportunities and then what happens is you have, for example, a Jobber or a ServiceTitan. Which is a CRM focused on a specific vertical, in their case, home services. Still, though a massive market.

Pablo Srugo (00:03:23):
By the late 2010s, you might have a CRM focused on a very niche, small vertical and so I'm going to make this up. It's not a company that I saw, but just to give you an example. Imagine a CRM for recruiters. I mean, recruiting is a pretty big market, but it's not as big as the home services market. There's not as many differences in what a recruiter would need from a CRM than what HubSpot or Salesforce offers out of the box. But somebody probably had the idea to build a CRM for recruiters and tailor fit it to the recruiting vertical. And instead of having opportunities, and closed loss. To have more terminology that's specific, like candidates and profiles. And different language that's more specific to recruiting. And then they probably would have built different workflows that are very specific to recruiting. But what you see here is that the first massive opportunity. Which was just to bring the CRM to the cloud, was Salesforce. Then the opportunity of being a CRM for inbound and marketing was HubSpot. Then the CRM for large vertical home services being one example was ServiceTitan, Jobber, etc. And then the low hanging fruit is gone. And you start having to find smaller, and smaller, and more, and more niche opportunities.

And this is what was happening in the last five years of the B2B SaaS era. If you want to call it that, pre-Gen AI, 2018 to 2022 and the biggest thing. Me as an investor, and I'm listening to founders who are presenting their ideas, and talking about what they're going to do. The number one thing that I had to think about was the value prop.

So in this period, in this final phase of B2B SaaS. If you want to think of it that way, the biggest challenge was that most of the value props that were being presented were often incremental. They were nice to have. This example of the CRM for recruitment that I made up, would be such example. If you're a recruiter, you could use HubSpot, you could use Salesforce. But maybe you're marginally better off using this tailor made vertical specific CRM. But it's not a huge leap, it's not a 2x  or 10x better experience. It's not 10x faster, it's not 10x cheaper, it's none of these massive leaps. It's not this huge value unlock. It's really just an incremental, nice to have unlock.

Pablo Srugo (00:05:25):
The other types of value unlocks, that I was seeing a lot of were these kind of time save ROIs. So, okay, right now you're probably using Excel or Word, or these kind of horizontal tools. Maybe it's a Notion or whatever, to do some sort of workflow in the enterprise. Now, what we've built is, again, a custom made, tailor specific tool that bakes this workflow in. So again, let's think about this recruiting example. You might be a recruiter, and maybe you put your candidate list in an Excel spreadsheet. And maybe you write some stuff in Word, and maybe you use PowerPoint. You're using these horizontal tools for whatever your use case is. Some company would have come along and said, instead, you can pay us $10 per month or $50 per seat per month. Whatever it might be and, you no longer need to use Excel and Word, and all these tools that are not really made for you. You can use our tool and yeah, we also have maybe table-like format thing. That's kind of like a spreadsheet, but not really. We also have a word editor type thing, where you can write your notes and whatever. But it's all tailor made for recruitment and the ROI here really is marginally better experience. And maybe what used to take you four hours a week now takes you two hours a week. So I've saved you two hours a week.

These are very often, these kind of value propositions around time saved. We're not taking something that's your full-time job, forty hours, and making it twenty hours. They were taking something that is a small part of what your overall job is and lowering that by some amount. Such that the overall value to you as a worker was incremental and this was the number one thing that we had to look for was, is this new product, is this opportunity really unlocking undeniable value?

Post-Gen AI, this has completely changed. It is almost standard that the opportunities in front of us unlock undeniable, must-have value and the reason is because there's been a huge tech shift. Which has unlocked a whole new garden of low hanging fruit, if you want to go maybe too deep on that analogy. But all of a sudden, there are so many opportunities because of what this new tech opens up to offer incredible value and the simplest example, the one that I go to always because everybody gets it.

Take voice AI as an example. There are countless number of workflows, of situations where it is somebody answering a call and going through almost the exact same pattern or a very repeatable pattern of dialogue. I've seen it in logistics where, for example, a truck carrier will call into some call center and tell them what cargo they're able to carry, and try to figure out if there's cargo suitable for them on the road they're going. I mean, that call is literally, here's my number, here's my truck, here's where I'm going, do you have something for me? Such a very, very specific conversation.

Pablo Srugo (00:08:05):
I've seen another one in the emergency space, a company called Hyper. For example, is taking this over but you think about call centers and 911 or 311. And if you think about the non-emergency side, so it's like, oh, somebody messed with my garbage last night. I mean, it's a very simple call. So you can see voice AI all of a sudden, on the one hand, you can think about eliminating many jobs. You can also think about it freeing time, but regardless of the impact. In terms of value unlock, it's undeniable.

There are so many places where what used to cost $20 an hour, because it was a human. Now is going to cost $2 an hour, because it's an AI. In terms of value unlock, that's completely undeniable. But what has changed as a result of that is the second kind of dimension to think about the opportunities that we're seeing at Seed-stage and the opportunities that founders have at Seed-stage. Which is that competition has totally shifted. It used to be in this kind of pre-Gen AI world 2018 to 2022, that competition mattered, of course but it was a secondary concern. The primary concern really was, is this true undeniable value that they're providing? Is the value creation truly 10x, truly undeniable, however you want to frame it?

Competition was something that, of course, we would think about. Who else is doing this? Who are maybe the startups competing against and who are the incumbents in the space? And frankly, the main competition that you had to worry about was just the incumbents in your space. Because, you know, do they just add this as a feature? Because obviously they have way more distribution than you.

So the worry was always, do they just kind of add this as a feature? And all of a sudden your whole reason to exist goes away. That's completely changed, because now competition is extremely intense and it comes in so many different formats. Of course, you still have the incumbents. You still have the worry that they could, whatever AI product that you've put out. They could just add AI to their product, which is probably a B2B SaaS product and all of a sudden again, remove your whole reason to exist.

Pablo Srugo (00:09:55):
You now have the foundation models, which depending on which one. You know, you look at Anthropic, which is more enterprise focused. You look at ChatGPT, which is more consumer focused, and the use cases that they're enabling on a frankly weekly, monthly basis. Are suited to where they're focusing. Gemini being another one that is kind of across both spaces. But the point being that if you're a founder building an AI, you always have to worry about is the thing that you're doing differentiated enough, integrated enough, verticalized enough. Such that it's unlikely that the massive foundational models are just going to do what I do and all of a sudden destroy me. Because it's probably gonna be better, it's certainly gonna be better distributed, and they're gonna have a much bigger brand, much bigger budget, et cetera. So you have foundational models, you have incumbents, and you also have new entrants.

Because this is the other thing, if you think about B2B SaaS. If you can be first to market or first, let's say, of two or three to market and you can build, you know, a few million in ARR and a fully featured product. New entrants are no longer that big of a worry. Because the reality is, if you start in 2018, and some new entrant starts in 2020, to make it up. They're two years late. Their product is going to be probably much worse, much less feature rich than yours is. Their brand and distribution is going to be worse than yours is. And so they're not really going to have a clear way, not to say never happens but there isn't a clear way for them to just leapfrog you. It's hard to do and so you really can build this kind of a time in market mode.

Today that completely changes, because the problem is oftentimes if you started two years ago building. You had the AI of two years ago and in order to deliver the value that you wanted deliver. You might have had to build a lot of things around that AI just for your product to work the way that you want it to work. Take voice AI again as the example, if you wanted voice AI to really be able to handle. Let's say, a complex conversation for the latency to be smoother and faster. You not only had to use some AI model, but you probably had to build a lot of things around it and have a lot of new innovations in order to be able to make it good enough for the real world. Of course what happens is over time, all the models just constantly get better and a new entrant coming in today can probably out of the box have a product that is equally as good as yours. And so your time in market mode frankly doesn't exist. So now you've got to compete with incumbents, foundational models and new entrants. So competition becomes a primary risk. All of a sudden the ability to deliver incredible value is not nearly as hard as it used to be. But the counter to that is competition is much harder than it was.

Now I'll say this, as a founder I would much rather be in a situation, where I'm delivering insane value and have to compete than a situation where my product might be nice to have and I don't have any competitors. Because pushing a nice staff product is really pushing a boulder up a hill and it's a painful, painful exercise. Which often, especially if you go down the venture route. Ends up very poorly because you tend to over raise, your growth curve slows down and honestly there's not that much you can do about it. Whereas in a highly competitive market where you're adding crazy value, you still have that beautiful product market fit. That market pull that kind of keeps you going in the right direction. But it is exceptionally fast paced and so you have to somehow in order to not fall behind. You have to really worry a lot about cycle speed and this is something that has become so much more important than. It always has been important. Obviously how fast you move has always been important and the cycle speed of having an idea, putting it out, testing it has always been a huge asset.

Pablo Srugo (00:13:14):
But it's importance has risen to the top today, because things are moving so fast. Because competition is so multifaceted that one of the ways to stay on top is to just be that much faster than your competitors, and that has two pieces. One is literally the cycle speed. How fast you are able to have an idea, put something out and test it out. The second piece is how well do you understand your ICP, your customers. Because, of course, if you understand your customers that much better than competitors. You will more likely just build the right thing most of the time and that alone increases your cycle speed, and lets you stay a little bit ahead. If you think about it from a customer's perspective if there are many different options. The one that is always one step ahead is more valuable because yes, maybe next month or in two months your competitors will be where you are today. But if you're one or two months ahead at that point, the thing that you're delivering actually benefit from. I'm going to take you on a tangent but if you haven't read Ben Thompson and Stratechery. You really should, you should sign up, I read it every day. He talks about something really interesting, which is, he has a subscription product. So you pay a membership fee in order to be able to read his articles and what he said was, the value he delivers is not any given one article. The value that he delivers is a constant stream of articles. You might like the one article of today, or you might not. You pay the membership because you want a constant stream of Ben Thompson articles, and that's the thing that you're paying for. And it's similar if you think about a customer buying a product annually or whatever for multiple years.

They're not just buying the product of today and your vision. They're also buying the product as it improves over time. So if your product is always one or two months ahead than competitors. It will always continue to be an edge, because if you're signing up and you're thinking about signing up recurring. Then you'd rather be on the product that was always marginally ahead than the product that is marginally behind.

The last thing I want to talk about, because this has totally changed. Completely changed is business models. By the time that we're in the final era of B2B SaaS, the business model was B2B SaaS. It was clearly, you just go in and you charge per person per month. Oh, how many users? Ten users? Okay, it's gonna be $50 per user per month, maybe you give a discount. You certainly give a discount if they sign up annually. You might give a discount depending on how big they are and that is the business model. Sometimes, depending on what it is, if you're adding revenue, there might be a transactional element on top of it. You think of Shopify as an example. You pay a monthly fee, but also they take a percentage of your sales. So maybe that's the one thing that you change.

Today, everything is up for grabs. There are people that are still charging when they're delivering AI on a kind of per user per month basis. There are people that are talking on a usage basis like token basis. There are people that are charging transactional. There are people that are charging on the delivery of the ultimate output. So as an example, if you think about the voice AI examples that we've been talking about throughout. You might charge on, okay, how many AI agents do you want? Or you might have it on how many people are using AI. As kind of part of what, how many people do you have in the call center that are now going to add AI maybe as a pre-filter.

Pablo Srugo (00:16:06):
You might have it on a per output, which would be like on a per conversation. You know, we're going to charge you X dollars a minute, or we're going to charge you X dollars per completed conversation, and the other thing that is really changing. And this is something that I, because of the Product Market Fit Show. I've really seen a few examples of this. The latest one is this company called TENEX that is doing it in cybersecurity. But what I've noticed is that it used to be that if you wanted to have a venture backed business. You need to be able to have something that's highly scalable. Software, of course, is highly scalable and it's got very, very high margins as a result. Services are, by its definition, not highly scalable. Because to deliver services, think about accounting, like accountants, right? Or lawyers, or external CFO. In order to deliver those services, you actually need a human delivering and doing that work. Which means that if you want to scale that business, you have to scale humans, you have to create a massive organization, your margins are thin, and the ability to scale is low. Because you run into these problems where it's like, it's easy to manage ten people but a hundred people is way harder, a thousand people. And then the quality goes down because with software, you can scale it. And the quality of the product for the 1,000th customer is the same as the first customer. But when you scale a services organization, it's very hard to keep that quality standard the same.

What AI is doing is a totally changing game and it's allowing founders to all of a sudden deliver services. Create services companies that are AI first. So if you look at TENEX growing from $0 to $40 million ARR in one year. Which is insane, it's literally on a track to be the next Wiz. What they're doing is instead of selling AI to MSPs. MSPs are managed service providers, which you can think of as like outsourced IT firms, right? So a company that either needs, in this case, it's more security, right? But, let's say, a company is too small to have their in-house cybersecurity team. So they will outsource their cybersecurity to an MSP or an MSSP anyways, a managed service provider.

What this founder could have done is say, OK, I'm going to make these managed service providers more efficient and this would have been the old way to think. I'm going to build AI, I'm going to sell it to these MSPs and I'm going to tell them, listen, if you use my AI, you'll be ten times more productive. Maybe you can fire people or if you want to grow, you don't need to hire anybody else. Whatever it is, your productivity goes up and that's one way to do it. Instead, what he chose to do it is, no, no, no. I'm just going to become an MSP. But I'm going to become an AI-first, highly scalable MSP. I won't have the same margins as if I was purely selling AI. But the speed of go to market is going to be orders and orders of magnitude faster. And so he can go to a customer and say, listen, you're paying half a million, a million dollars a year today for an outsourced MSP. These are not your employees. This is just an outsourced company that you don't really care about. I'm going to do the job way better than them. I'm going to have more coverage, I'm going to be faster, resolve the tickets, et cetera, and I'm going to do a twenty to thirty percent cheaper. And it's so easy for customers to make that decision because you're solving the whole problem for them.

This is the thing that is new and I think very few founders are actually thinking that way. Because they don't realize that this is the opportunity. They're stuck in B2B SaaS mindset and they want these really high margins. They don't want to do anything service related, because services tend to be very unsexy and very challenging to scale. But it's really been flipped on its head. Imagine this for example, you could sell AI to fractional CFO firms to help them be more productive, or tomorrow, you could start an AI-first fractional CFO. Where you go to companies and you say, you're using a CFO right now. They take fifteen days to close the month and they charge you $5,000 a month or whatever it might be. I'm going to take a day to close the month and I'm going to charge you $4,000 a month.

Pablo Srugo (00:19:29):
That demand is there. That is an existing market where you can go and disrupt it. And the ability to go to market, and close customers is going to be much faster. Now that's one idea, maybe that idea works, maybe it doesn't and this is happening. We're seeing it in roll-ups too. So there's a lot of companies that, what they're doing is they're actually buying, for example, accounting firms, buying fractional CFO firms. They're basically getting the distribution of their customers, and they're adding AI to increase productivity. That's one way to do it, but you got to buy these companies, you got to raise money, it's not for everybody.

Instead, what you could do, what anybody could in theory do, is take any services company that is delivering. Obviously not something manual, where you have to be there like a hairdresser. But something that is ultimately a digital end product, like, spreadsheets or you know whether it's legal, or accounting, or finance, or whatever it might be security, right? In the managed security provider example and how can you just build a firm exactly like that. Which is going to tap into huge existing demand, you're never going to run out of market. But instead you do it AI first, you do with better margins and you have full scalability. The world has really changed and few are the founders who are really thinking from first principles. And understanding what has now opened up. If you were one of the first, it's a massive edge.

Wow, what an episode. You're probably in awe. You're in absolute shock. You're like, that helped me so much. So guess what? Now it's your turn to help someone else. Share the episode in the WhatsApp group you have with founders. Share it on that Slack channel. Send it to your founder friends and help them out. Trust me, they will love you for it.