As we head into the 4th quarter of 2024, we are energized by the innovation and ideas we’re seeing, particularly as AI improves and permeates more industries (though sadly not yet flying cars - SO to my favorite movies, Back to the Future). The expansion of AI continues to reduce 0 to 1 barriers, intensifying competition and increasing the importance of customer insight, inflections and GTM. However, we are incredibly bullish around software and how AI will reshape the way businesses operate and grow. AI will continue to touch every industry but there are a few areas where we are seeing the most exciting inflections and potential for opportunity. 

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Verticalized SaaS to Verticalized Co-Pilots to Agents 

Verticalized industries and horizontal-specific use cases are prime adopters of AI. We are most excited about traditionally overlooked, old school or “unsexy” industries, as these businesses tend to be inefficient, have high human capital costs, and operate with typically low margins. These industries have seen little tech adoption to date, which provides ample opportunity for AI not just to incrementally improve existing processes, but to create entirely new possibilities that were previously unattainable. 

Opportunities that once required extensive human involvement or were constrained by unstructured, disparate data are now ripe for transformation. This can be across both front office tasks (i.e. sales, customer mgmt, CS, etc) or back office (documentation, accounting, transactions, etc). AI is enabling businesses to create new data, as well as standardize and centralize existing data in ways that were previously near impossible, turning these challenges into productizable and scalable opportunities. 

The initial wave we are seeing are these verticalized AI co-pilots, augmenting humans, allowing them to work faster and spend more time on high value tasks. Unlike some vertical Saas platforms where adoption can sometimes be friction-filled because of the need to change human behavior or integration challenges, AI co-pilots are often able to ease that transition by working alongside humans in their existing workflow and continuously adapting over time. These AI-driven operating systems not only improve efficiency but also can serve as new systems of record, creating new data streams so that we are not only relying on existing data sources to build and train models but continuously creating new data, making these models even more powerful. Like traditional vertical SaaS, these co-pilots act as wedges into the market and continue to expand their value and reach throughout an org. and industry. 

As AI continues to progress, co-pilots will evolve into agents, able to act more autonomously. Further value and excitement comes from the evolution of these agents handling low-value, low-risk tasks to tackling increasingly complex and higher value work streams. This is when businesses and workforces completely change. 

As the vertical AI space continues to evolve, we are excited to back companies part of this evolution and across sectors. 

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Service as Software to Reimagined Services Businesses 

We are already seeing software that aims to help services businesses productize, improve their margins and scale - whether its law firms, accountants, consultants, etc. AI is making these traditionally human-centric businesses more efficient by enhancing the productivity of their revenue-generating and front-line employees.

Some of these businesses will continue to provide software solutions, leading this shift toward “service as software.” However, we also see a huge opportunity for AI to completely revamp the service industries. Instead of merely building software to scale existing service models and improve efficiencies by some %, AI can reimagine the services themselves, offering more automated, data-driven, and scalable solutions from the ground up.  This could lead to the emergence of a new breed of services businesses that were previously not seen as venture scalable businesses, but now have the potential to become highly efficient and evolve with tech on the forefront. 

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AIxFintech

Regulated industries are particularly interesting opportunities for a range of AI use cases. Whether it’s improving internal services, making employees across operations more efficient, or deriving actionable insights from internal or customer data, there are huge abilities for AI to have a massive impact on regulated industries such as financial institutions, or fintechs, which have traditionally been slower to adopt new technologies. 

AI not only offers opportunities to improve operations, but also introduces new and heightened risks, particularly in regulated businesses where caution is vital. This actually creates more opportunities for companies building in these areas. New forms of phishing, compliance concerns, identity, fraud and risk have emerged with the rise of AI within financial institutions. Businesses have had to change which platforms they use, add additional painstaking hurdles for both internal and external communications, and yet these challenges and costs associated only continue to grow. 

Many enterprises have to rely on growing human teams to protect themselves and monitor activities while simultaneously spend compliance and security tooling. But these efforts often fall short, not keeping up with growth and evolving threats, costing companies even more money as they deal with economic and reputational repercussions of fraud and attacks. These challenges are even more crucial for FIs which also face the added burden of complying with constantly changing regulatory requirements.  

While these challenges affect various industries, we see the financial services industry as necessary adopters of AI solutions that can help address these issues more effectively. AI-enabled offerings in this space have the potential to drastically improve efficacy, provide better preventative solutions and improve business operations while lowering costs.

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Modern Alternatives to Aging Incumbents

We are also excited about companies that are building new platforms that replace decades old, incumbents that have low NPS yet significant market share. There are massive incumbents that customers hate because their technology is outdated and provide terrible service, yet have the sticking power because of the industry trust and the idea that “nobody gets fired for buying IBM”. 

Companies like Computershare (a $15bn market cap transfer agent), Tyler Technologies (a $25 market cap gov tech platform) or Workday (a $65bn market cap workforce mgmt platform) and ServiceNow (a $190bn market cap IT operations platform) continue to dominate their markets. However, as you speak to their customers, it becomes increasingly clear they are desperate for alternatives. Most of these companies were founded 20+ years ago, started by specializing on a use case, but as they have expanded, the experience has declined as much as the tech has aged. They lack flexibility, are unable to keep up with the needs of their customers, have outdated tech and often poor customer service. A startup that can address even a single business line in one of these industries has the potential to build a massive company by delivering a superior experience that meets customer needs. However, gaining trust in industries dominated by long-standing incumbents will be a crucial hurdle.

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Improving Healthcare Services Especially for an Aging Population 

In a previous post, I wrote about the lack of innovation for elder tech and the great wealth transfer to come. While we still see gaps in that market, an increasingly pressing and undervalued issue is the rising cost of aging, which has a significant economic impact on current and future wealth generation, government spending, in addition to overall productivity.  

As the population ages, the pressure on healthcare services is intensifying. Costs are rising for both patients, hospitals, while Medicare has reduced payment rates over the past five years. More costs have been moved out-of-pocket due to declining coverage and the growth of the acute home health care and hospital-at-home markets shifting more care outside of the traditional medical facilities. At the same time, the access and quality of care continues to decline. Patients are shouldering more out-pocket-expenses within and outside of traditional healthcare, however, overall quality of care and access declines. The demand for nursing homes, hospice care, home health agencies is outpacing supply, exacerbated by high caregiver turnover  and declining service quality. 

As our aging population grows, this only continues to worsen. Aging adults are forced to use their savings or take out home equity loans to pay for care as annual costs can be $250k-$450k, especially if one is looking to age at home. Meanwhile, children of aging parents may have to quit their jobs or tap into their own savings in order to care for their loved ones, creating a ripple effect across generations.

The healthcare system, particularly these facilities that are labor-intensive, faces severe challenges with cash flow and management due to lumpy revenue cycles and insufficient resources dedicated to actual care. These present a tremendous opportunity for improvement on all fronts across facilities, providers, and payers. 

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If you are building or ideating across any of these areas we’d love to chat - my email is Jillian@cowboy.vc! We are a seed stage venture fund and love working with founders and operators from the earliest stages. 

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