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For the past few days, I’ve been using the Mac ChatGPT app OpenAI demonstrated last Monday.

It’s unquestionably the future of human-computer interaction. Conversing with a computer is much more natural than typing. Imagine speaking t a colleague with the entire internet at their disposal. But also a verbose colleague without much sense of social cues.

Tapping a keyboard shortcut, the ChatGPT app loads & four little bars reminiscent of Google transcription software appear in the app. You can choose from 5 mellifluous voices who speak fluidly & naturally.

Ramp published its quarterly spending trends & revealed how businesses are spending on AI. There are many great data points that underscore the growth in AI but there are important nuances in the patterns.

First, AI growth rates across the most popular vendors have fallen 78% annually. On average, these AI businesses are growing customer counts 105% ; the median is 38%.¹

However, this isn’t a uniform trend. Some companies have seen contraction in customer counts. Both the companies with negative account retention still see relatively minor account churn : 15-25% account churn at these price points is common.

On Thursday May 30th at 9:30 Pacific time, Office Hours will host Benn Stancil.

Benn co-founded Mode, a analytics platform acquired by ThoughtSpot. He writes about the future of data & analytics on his blog & asks deep questions about core tenets of software including Do software companies actually have good margins? & Disband the analytics team.

With a unique lens on data & software, Benn will share his views on some of these bigger topics including BI’s third form.

The Theory AI Index of publicly traded companies continue to outperform more classical software companies since we published the index earlier this year.

In addition to the delta in absolute multiple, is there a difference in the factors that drive valuation?

Across the five most important metrics, AI companies’ valuation correlates isn’t that much different than non-AI companies.

Revenue growth, sales efficiency, & cash flow are all relatively similar. So is net income margin, although the AI correlate is about half. The only one that stands out is gross margin, where the correlate is mildly negative.

When a person asks a question of an LLM, the LLM responds. But there’s a good chance of an some error in the answer. Depending on the model or the question, it could be a 10% chance or 20% or much higher.

The inaccuracy could be a hallucination (a fabricated answer) or a wrong answer or a partially correct answer.

So a person can enter in many different types of questions & receive many different types of answers, some of which are correct & some of which are not.

The fastest growing category of US venture investment in 2024 is AI. Venture capitalists have invested $18.3 billion through the first four months of the year.

At this pace, we should expect AI startups to raise about $55b in 2024.

AI startups now command more than 20% share of all US venture dollars across categories, including healthcare, biotech, & software.

In the preceding eight years, that number was about 8% per year. But after the launch of ChatGPT in 2022, there’s a marked inflection point.

Amazon announced their earnings yesterday. Like Microsoft & Google, Amazon’s Web Service business is seeing a surge of growth, up from 13% annual to 17% annual growth (16% when excluding the leap year).

Aside from the overall growth of these clouds increasing, the massive investment in CapEx data centers, power plants, and GPUs is stunning.

These are not one-time investments, but part of a broader trend that started to occur after the introduction of GPT 3 in mid-2020 Amazon was the first to invest significantly.

What drives the acquisition market of startups? It’s the big deals.

In the last decade, the total number of venture backed software M&A by count has remained relatively constant. The black line shows the linear trend across US venture backed companies with disclosed values of $50m or more.

The average & median counts by year total 58 & 55 respectively.

If there are any increases, they tend to be in the bigger acquisitions of $500 million or more - although the sample size there is sufficiently small to conclude the trend is significant.

If it wasn’t clear before, AI is the single biggest revenue driver in cloud.

Microsoft’s Azure is winning share directly from Amazon. In Feburary, Microsoft grew 2% & Amazon lost 2%. Google is also taking share - 1% in the last year. A one percentage point share shift represents about $750 million of spend or about $5b in market cap.

“We’re fundamentally a share taker there because if you look at it from our perspective, at this point, Azure has become a port of call for pretty much anybody who is doing an AI project”

Enterprises spend more on security but aren’t benefitting from the extra spend. Palo Alto Networks’ customers who buy security across 3 platforms spend more than 40x those that secure just one.

Despite those dollars…

“Adding incremental point products is not necessarily driving a better security outcome for them.” - Nikesh Arora, CEO of Palo Alto Networks

The average enterprise uses upwards of 70 security products. Many of these products produce alerts identifying phishing emails or network access issues or odd device behavior.