We are entering the next phase where start-ups harnessing generative artificial intelligence (AI) possess the potential to fundamentally re-invent the $65T services market. This opportunity represents more than half of global GDP, an order of magnitude larger than any previous technological platform shift.
We have described previously how, in order to invest behind AI today, investors have defaulted to those public mega-cap technology companies building the infrastructure required for AI to compute. The basket of stocks dubbed the Magnificent Seven (Mag 71) have appreciated by 131% since the beginning of 2023. While undoubtedly AI will continue to be a tailwind for these companies, investors have begun to question whether these companies will achieve a return on investment of this capex buildout, as evidenced by the recent market correction. So where do we go from here?
Consistent with prior innovation cycles, such as the internet, mobile, and cloud/SaaS waves, venture capitalists are investing behind innovative technology companies disrupting incumbent business models. However, armed with the capabilities of generative AI, start-ups are experimenting with products capable of transforming the chronically under-digitized services market, an opportunity set today that is approximately $65T, over 10x that of prior innovation cycles. To contextualize, Gartner estimates the total software spend in 2023 was $900B while total technology spend was $4.7T.
While surely $65T is a lofty goal, research analysts posit that by 2030, generative AI could increase global GDP by as much as $15.7T2, and we believe there remains significant white space across the technology stack which will be filled by the next generation of category defining start-ups. In our view, areas with the most promise are:
- Applications transforming the services economy across most sectors likely via the form of human prompted AI co-pilots/agents, which could become ubiquitous.
- AI-first data, security, and developer tools which serve a broad enterprise customer base.
Fields like legal, healthcare, finance, accounting, customer support, software programming, and content creation have just begun to harness AI to drive efficiency and augment existing services. Importantly, AI will likely create entirely new products and services to the benefit of the consumer, the vast majority of which haven't even been conceived yet.
So a seemingly boundless market exists, but it is important to remember AI is still rapidly evolving. Investors have and will likely continue to over-estimate the short-term impact of AI, but that should not detract from the medium-to-longer term potential. While there have been early successes thus far, the ultimate winning companies arising from the advent of AI have likely yet to be determined. Recall that the winners in mobile were not formed until years after the iPhone launched: WhatsApp (two years), Uber (two years), Instagram (three years), and Snap (four years). Similarly, Amazon, Google, and Facebook did not raise venture capital until two, six, and twelve years, respectively, after the internet browser launched. Generative AI will continue to be an accelerant but is just getting started, with profit pools ahead of start-ups that are larger than ever.
1. Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. 1/1/23 – 8/20/24.
2. PwC: https://www.pwc.com/gx/en/issues/data-and-analytics/publications/artificial-intelligence-study.html
