'Disrupted or dead': AI is crushing a generation of startups built before ChatGPT

In the past five years, a wave of venture capital surged into American startups, funding everything from subscription services to scheduling tools, often leading to billion-dollar valuations before profitability was even on the horizon. This was a period characterized by easy money and a pandemic-driven demand surge. However, the landscape began to shift dramatically with the introduction of ChatGPT in late 2022. Samir Kaul, a partner at Khosla Ventures and an early supporter of OpenAI, remarked on the profound changes brought by generative AI, stating, "The ChatGPT moment was when people realized that the next generation of entrepreneurs could code using spoken English." This new paradigm has allowed teams to operate with far fewer engineers, fundamentally altering how investors evaluate companies. While public software companies like Salesforce and Workday have seen their stock prices plummet due to AI competition, a more subdued crisis is unfolding in the private sector. The AI boom, which directed over $250 billion to firms like OpenAI and Anthropic, has left many startups founded before this technological shift struggling for funding. These companies, burdened by outdated technologies and inflated valuations, are not generating enough profits to attract public market interest. According to PitchBook, there are currently 857 U.S. startups categorized as "unicorns" with valuations exceeding $1 billion. Alarmingly, nearly half of these have not secured fresh funding in the last three years, leading to a stagnation in their valuations. Startups that last raised capital in 2021 are now valued at an average of 68% less, while those funded in 2022 have seen a 52% drop. This downturn has resulted in over 220 companies that once celebrated billion-dollar valuations now being labeled as "fallen unicorns." Many of these firms, like Glossier and Rothy's, thrived in a market that favored growth and high valuations based on the assumption that interest rates would remain low and that acquisitions would always be an option for talent acquisition. However, the rise of AI has reshaped the venture capital landscape, diverting funds toward AI-centric firms and leaving older startups struggling to justify their previous worth. Software-as-a-service (SaaS) companies have been particularly hard hit, with 75 of them listed among the fallen unicorns. This reflects the inflated valuations they enjoyed during the venture boom, now destabilized by the emergence of generative AI. David Zhu, a former engineering lead at DoorDash, predicts a significant upheaval in the enterprise SaaS sector, stating, "All workflow-driven enterprise SaaS companies will be either disrupted or dead in the next decade." The traditional SaaS model, which often relies on user-based pricing, faces challenges from AI-driven automation that threatens to render these frameworks obsolete. With many of these older companies encumbered by overstaffing and outdated software, a transformation may be essential for survival. Zhu asserts that without a complete overhaul of their business models, many will continue to decline. Several fallen unicorns have refrained from commenting on their situations, but some, like Skydio, dispute claims of diminished value, citing ongoing growth in revenue and customers. Conversely, AG1, another company in distress, is reportedly exploring a sale at a valuation significantly lower than previous funding rounds. Investors are growing skeptical about companies that haven't raised funds in recent years, viewing it as a clear warning sign of stagnation or decline. While there are exceptions where companies are thriving, the overall trend indicates a challenging market ahead. Recent acquisitions, such as Stash by Grab and Step by MrBeast, show that many startups are selling for much less than they were previously valued, indicating a shift in the market's expectations. Valuations have drastically decreased from the peak levels of 2021, with companies now valued at a fraction of their former worth. As AI continues to transform industries, the startup ecosystem may see a significant recalibration of expectations and valuations, leading to a potential shakeout in the months to come. The older software firms will need to adapt their business models to survive, shifting towards more innovative structures that align with the capabilities of AI technologies. Investors are increasingly asking why larger firms like OpenAI or Google wouldn’t be able to replicate a startup’s offerings, with many concluding that they indeed can.