In the first half of 2023, a significant influx of investments flowed into generative AI companies, a trend spearheaded by Microsoft’s colossal $10 billion investment in OpenAI. This development underscores a burgeoning interest in AI and machine learning solutions among investors, driven by their transformative potential in the tech sector.

Investor Dilemmas in the Age of AI

The rapid advancement of generative AI technologies, such as those seen in ChatGPT, has stirred both excitement and apprehension among investors. Key questions emerge: How will AI reshape existing tech portfolios? What new business models and opportunities will it spawn? How should investment strategies and due diligence evolve in response? And importantly, how can generative AI be harnessed to optimize internal operations?

Jensen Huang, CEO of Nvidia, famously said, “Software is eating the world, but AI is going to eat software.” This prediction is beginning to materialize as AI reshapes customer interactions and expectations in the software industry.

AI’s Impact across the Software Domain

Generative AI is set to revolutionize various aspects of the software industry:

• Enhanced User Experience: AI-powered chat interfaces will simplify and personalize user interactions, opening new market opportunities for everything.
• Automation and Augmentation: AI will automate tasks across various roles, such as coding assistance for software developers and support functions in customer service and sales, likely eliminating 75% of those job families in the process.
• Democratization and Reduced Barriers: Lower development costs and accessible AI models will reduce barriers to entry, intensifying competition and necessitating rapid action by established players to leverage their data assets and customer base.
• Risks and Opportunities: While AI features like ChatUX can enhance user engagement, they also present risks, such as market share erosion due to competing AI-enabled applications.

Evolving Competitive Landscape

The competitive landscape in the tech sector is poised for significant changes due to AI:

• Tools and Enablers: Consolidation is likely among providers of foundational AI models and related tools, benefiting large tech firms and cloud service providers like OpenAI and Nvidia.
• Software Applications: The software application domain will witness winners and losers, with early-stage innovators leveraging AI for new use cases. Incumbent software companies that adeptly deploy AI in relevant markets will likely maintain or enhance their market positions. Trust will play a huge role in determining market winners and losers.

Case Study: Healthcare IT Company Adapting to AI

Consider a healthcare IT company that realized the need to rapidly integrate generative AI features into its products to stay competitive. This move was crucial to maintain its edge as specialized providers in the face of larger competitors adopting AI technologies. Those who do will remain in business, while those who fail to adapt will not. Patients will demand their providers provide on-time medical exams in the comfort of their homes without paperwork, check-ins, legal releases and the rest. Those who accommodate will rise. Those who resist will disappear. Very few providers have the heft of the Mayo Clinic.

Investment Strategies in the AI Era

Top funds are actively reassessing their strategies in light of AI’s transformative impact. They are evaluating markets for disruption potential and structural barriers, assessing proprietary data that can enrich AI applications, and considering pricing models and execution capabilities.

Navigating Generative AI’s Potential and Risks

By understanding the potential for market changes due to generative AI and the ability of assets to adapt, leading funds are positioning themselves to capitalize on the opportunities presented by AI, while also mitigating the risks of disruption in a rapidly evolving tech landscape.

As always, rolling the dice and hedging bets with degrees of equanimity is tricky. At the end, luck tags the winners, but it always looks like skill.