Why Has It Become Risky To Be An AI-Based Software Startup?

In the last two decades, the software industry provided a healthy breeding ground for incubating new businesses and ideas. From solving the day-to-day problems of end-users to building complementary tools for software developed by large companies, startups thrive in the disruptive market. They compete to differentiate based on the value they deliver to customers.

But the changing dynamics of the industry have made it extremely risky to be an independent software vendor or a startup in the cloud and AI market.

There was a time when large platform companies delivering enterprise software chose not to compete with ISVs. The primary reason for this move was to let the partners survive while focusing on solving complex problems for enterprise customers. For example, many companies were complementing Microsoft Office suite through additional tools and plugins. Microsoft enabled and encouraged the ecosystem to grow around the office platform which directly helped the industry. Same was the case with Oracle and SAP when they shipped shrink-wrapped enterprise software while closing million-dollar licensing deals.

The other reason that influenced the growth of 3rd party ISVs was that the large platform companies were secretive of their differentiating factor. The secret sauce provided by internal research teams was used to improve the products and platforms but was never directly exposed to customers. Startups could deliver a less sophisticated version of the same feature as a standalone product for an affordable price. Multiple software components that were embedded in enterprise software were available from ISVs for a price. Enterprise software companies never bothered to productize those features as standalone products as they wanted to stay focused on the larger platform than spreading themselves too thin.