Are we entering the golden era of AI productivity?
What happens when everyone can become an entrepreneur?
I consistently see news stories about how AI is going to take away everyone’s jobs and should be feared.
Several economists have even proposed the idea that we may be entering into a period of structurally higher unemployment as AI proliferates.
Others have speculated that the “average” person will never be able to compete with AI employees, and only the most exceptional humans will be able to retain employment.
Every day, there’s another AI doomsday story.
These scenarios are all possible, but I generally think the probabilities of these outcomes is overblown. After all, fear mongering and the villainization of big tech is almost always guaranteed to generate a lot of clicks.
The more time I spend with AI founders, the more and more I’m seeing that the real value of AI applications comes from their ability to allow us to make humans more productive, and free up time for us to do more of what we’re best at: communicating, thinking creatively, and problem solving.
Gone are the days of AI just being viewed as a tool to cut costs. Today, we’re seeing that the most valuable AI use cases are ones that allow businesses to grow faster than ever before.
Value Creation
When you make humans more productive, you generally have two choices: hire fewer of them to do the same amount of work, or have the same number of them do even more work than before.
While the math of the former is easier (for every dollar you save on headcount, you earn in EBITDA), good businesses are generally better off doing the latter. Assuming that there’s still work to be done and in a space, making your employees more productive allows you to capture more revenue and grow faster. This results in a higher valuation multiple, allows businesses to generate more operating leverage, and ultimately allows you to outcompete your competitors.
From an investors perspective, increasing EBITDA (earnings) by $1 via organic growth is always more valuable than by increasing it $1 by reducing headcount (this rule generally holds true for unprofitable companies too).
Savvy business executives have figured this out when it comes to deploying AI solutions too. Interestingly, however, it’s not giant enterprises who seem to being seeing the biggest productivity gains.
To create value via cutting costs, you naturally have to start off by being very big… but what happens when you create the most value by starting small?
The Entrepreneurial Revolution
One of the most surprising but exciting things we’ve seen in AI is that it doesn’t just make the biggest and largest companies better (as most historical innovations do).
Instead, we’re seeing that it actually has a disproportionate impact on making SMALLER businesses better. In fact, it seems to have a bigger impact the smaller a business is. In many fields, AI is democratizing access to advice, insights, and processes that historically were only present in the biggest and riches of companies.
Earlier this year, Sam Altman said that he thought we were entering the era of the one person unicorn (i.e., a unicorn with a single FTE). Silicon Valley leaders are often flamed for overpromising and underdelivering, but he might be at least directionally correct with this prediction.
It’s early, but we’re starting to see a wave of entrepreneurs emerge who are leveraging AI to do more with less.
In the last generation of startups, we saw the major cloud providers (AWS, GCP, Azure) unlock a new generation of startups by significantly reducing the costs of doing business.
Gone were the days of buying racks of servers and setting up databases for your small three person startup or family business. With modern cloud technology, it was easier for people to be entrepreneurial than ever before.
In short, it allowed people to be more entrepreneurial, and democratized access to a whole slew of resources.
We think we’re entering into a similar moment in AI, but with an added wrinkle: AI enables teams to be even smaller than ever before.
I don’t think we’re getting to Sam’s solo-employee unicorn era any time soon. But a post-PMF company with less than 5 employees? What about a company that raises venture capital once, without ever needing to raise again?
I think that these are the types of businesses we may begin to see.
Predictions for the new world
What would a thought piece be without predictions? If we are indeed moving into a world where AI unlocks even more efficiency, how does the world change? Below are a few of my hypotheses:
As the administrative burden to found and manage a company comes down with AI, more and more people will choose to take the entrepreneurial plunge (think the explosion of startups we saw in the post-cloud era)
AI-native Companies will inevitably become smaller (by headcount) as more and more tasks become outsourced to AI and service providers
While the numbers of startups / companies increases, many of these will never need to raise venture funding (or, at the very least, they can raise less than before)
As we move away from size and scale as an indicator of reliability, brand and trust become more important than ever before. As operating costs come down, relationships begin to differentiate vendor selection
ARR per FTE increases meaningfully across the board. While a bit of an overlooked statistic today, this becomes an increasingly important indicator of business quality in the coming years
Similarly, capital efficiency returns to prominence as a core KPI. While we have already left the era of “growth at all costs investing”, investors will begin to take an even more nuanced lens on what efficient growth looks like
Services businesses have a resurgence, as companies that “sell work instead of software” replace vertical SaaS productivity tools.
This thesis is hardly a new one in 2024, but true AI-native services businesses will differentiate by operating at meaningfully lower headcounts than their tech-enabled peers. Without the need to throw bodies at every problem, these businesses will finally scale like SaaS companies
While there’s plenty to be nervous about when it comes to AI, I for one am incredibly excited about a future where AI enables more people to be entrepreneurs and work for themselves.
For decades, white collar workers have slaved away in middle management roles in giant corporations, pushing forward monotonous and unfulfilling work. If we’re lucky, that may be beginning to change.
The beauty of technology is that it enables us to do more with less, and ultimately focus on what it means to be human: building relationships, thinking creatively, and solving problems.