Why AI startups’ economics will likely improve over time

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

If you can recall February, we dug into the question of AI startup gross margins. Venture shop a16z had published an interesting blog on the subject, arguing that it may be the case that AI-focused startups will enjoy strong gross margins, but perhaps not as strong as those posted by SaaS companies.

Modern software startups (SaaS companies) have some of the highest gross margins in business, delivering their digital services over the Internet at little cost. Their high-margin revenue has made them incredibly valuable to private and public investors alike. To see a16z draw a line for AI gross margins a little under SaaS, then, was notable. AI startups might earn long-term lower revenue multiples than SaaS firms, and, if so, they might need to adjust their valuation expectations.

Since that nerdy interlude, the world has fallen apart. The United States has accreted over 337,000 COVID-19 cases, the stock markets have fallen sharply and we’re somewhere between a bear market and a recession. Shit, as they say, has changed.

But after our first look at the world of AI margins, asking a number of VCs to weigh in on the matter, we wound up talking to one more VC, David Blumberg of Blumberg Capital, who had some interesting notes on the AI margin matter to share from his portfolio.

Since that conversation, TechCrunch covered Deepgram’s Series A, which brought the subject of AI startups and their margins back into our heads. So, before Q2 really gets under way, a little more on AI and COGS.

AI margins and the future