Over 30 years of investing in start-ups, including: Scale enterprise partners founder Rory O’Driscoll has ridden the SaaS wave, investing in some of the biggest software brands of the last few a long time, including Bill.com, Box, DocumentDocuSign AND WalkMe. Now he and his company are investing in what he sees as the next big technology shift eclipsing SaaS: the third wave of artificial intelligence corporations.
We recently spoke with O’Driscoll about his a long time of experience as an investor and his vision for developing the next wave of artificial intelligence.
To underscore the importance of AI, O’Driscoll noted that 80% of his company’s transactions now include a strong AI element, whether at the application or infrastructure level.
Artificial intelligence dominated each the firm’s $600 million seventh fund in 2020 and its $900 million eighth fund in 2022.
The Hunger Games SaaS
In 2019, O’Driscoll raised the alarm over an increasingly competitive and demanding environment for investing in cloud computingafter an investor streak of over a decade. He predicted slower growth and lower enterprise profits.
These predictions were borne out by the slowdown in the enterprise capital sector that followed the Covid-19-led surge in 2020 and 2021.
“As the SaaS S-curve flattens out and Silicon Valley looks lonely, sad and scared, the AI curve emerges,” said O’Driscoll, who predicts the latest S-curve will take time to implement.
He notes that the buzz around artificial intelligence ebbs and flows. “Without a doubt, it will take 10-20 years to finance the implementation of artificial intelligence in enterprises,” he said. “That’s the big picture because some of it happens quickly and some of it takes time — just like SaaS.”
Breaking one other wave
O’Driscoll focuses on investments in applications or applied AI, while the remainder of the Scale team focuses on AI infrastructure.
“I think we’ll make real money by seeing which applications get done first,” he said. “Part of that is understanding how companies evaluate success.”
And by extension, “how willing they are to live with the inherently probabilistic nature of AI – in other words, how catastrophic failure is.”
In the SaaS era, enterprise users typically interacted with the software by typing things into a computer and receiving a report.
However, in the era of artificial intelligence, it is completely different. “It speaks, listens, sees, writes; these are very human tasks,” O’Driscoll said. “There are a whole range of human tasks that AI can now perform to some level of merit, and I think a lot of the success will be judging when it’s good enough and when it’s not good enough.”
AI waves
O’Driscoll said he has seen three waves of AI investing.
The first was early in his profession, in the mid-to-late Nineties, and focused on neural networks, natural language processing, and voice recognition.
“Then you were 20 years old and you just took ‘x’ and moved it to the cloud. It was great and wonderful and simple, and with probably two or three funds there was little or no investment in AI,” O’Driscoll said.
Before SaaS, the dominant corporations were SAP, Oracle; financial ledger was a big application.
In the cloud era, compelling applications were customer-facing applications. The dominant application was Salesforce 1.
“The non-trivial fact is that the dominant cloud company is a sales tool. However, the dominant on-prem company was an accounting tool. I think the reason for this is the essential nature of what is [Salesforce] the platform did that – it made it cheaper to implement.”
Scale began investing in artificial intelligence again around 2015 and 2016, which O’Driscoll sees as a second wave for the industry.
Around this time, the company invested in robotics, computer vision, natural language processing, and predictive analytics. That included Fortsbank card fraud prevention startup; Safeguardwhich focuses on online identity verification; robotics start-ups Locus Robotics; AND Follow.AIwhich offers speech recognition for call centers. Many of those corporations have achieved revenues of $100 million or more and have expanded the capabilities of generative AI.
Publish chatGPT
The third wave of AI corporations are people who have been born or gained popularity since their mainstream launch OpenAI‘S ChatGPT in late 2022. In Scale’s case, these are sales and marketing content corporations Direction; Yourthat creates a conversational automated video interface; Benign artificial intelligencewhich offers automated telephone calls for customer support and sales; AND Claritywhich creates technology for reviewing financial contracts.
On the infrastructure side, the company has invested Galileo for model management and QA Wilk to ensure software quality.
O’Driscoll noted that after Salesforce’s 2004 IPO, no company funded a single non-SaaS software company.
“There will probably be a period in the next two or three years where we will all be a little disappointed with the traction and there will be a slight correction,” he said. But “walking away 10 years from now, no one will be building software without AI at its core.”