1Mby1M Virtual Accelerator AI Investor Forum: With Gaurav Chaturvedi, Partner at Kae Capital (Part 3)

Sramana Mitra: That’s yet another nuance on it. That is basically developing, having AI platforms, AI technology tools, and then developing solutions for people. So that’s more of a traditional solution services companies that are now AI enabled solution services.

If you look at the history of the beginning of AI in our industry, companies like Palantir for instance, have been actually solution services companies on top of their own platforms – understanding how to use their own technologies to provide solutions for their customers.

There’s another company called Machinify that has followed exactly that same approach in the healthcare domain. I think that you could create centers of excellence with real domain knowledge in a particular domain, have a set of technologies and provide solution engineering or solution services companies. That’s another category of companies that are being built.

Now, India stands at a very strategic position because there is this long history of building services companies. Interestingly, the venture capital industry was never interested in funding services companies, but now with AI, they are becoming interested.

So talk more about what you are seeing, what you’re investing in with that thesis.

Gaurav Chaturvedi: Absolutely. So coming back to pure services as a software, or software and services thesis, where you make services productized; we have very recently invested in a company that’s building a performance marketing agency for SMBs. The whole thesis being that billions of dollars are spent by by enterprises and small and medium businesses across sectors on marketing – brands, B2B brands, and services – all of them do marketing.

However, marketing agencies have not changed over the years while marketing in itself has changed. They built a proper platform which automates every facet of marketing using AI. It starts by actually understanding what kind of ads are working in the market. It’s more of analysis kind of an AI, synthesizing that what kind of ads are working. Then of course, it creates the right ad copy, adds social media videos, which are automated by AI.

Again, very interestingly, they have put human in the loop and they are creating it as a services business wherein they are saying that if you are small services company with a revenue of $5 million, you don’t have access to quality agencies that an enterprise has. But today, because I’m automating most of this stuff, my cost of serving you is very small and a lot of the heavy lifting is being done by AI. I can provide you the same data-driven marketing insights and creators and agencies as an AI platform plus services company.

So that’s another example of where you are actually taking a services industry, putting it, wrapping it around a AI product, custom-built product, and then creating a company out of it. Now, interestingly, you said we’re never typically interested in the services industry. If you automate a lot of stuff by using AI, its gross margin can go closer to a typical software gross margin. If you are able to provide real value to the customers, and if you are able to retain the customer, it starts measuring a typical software business model where the cash flow profiles also become like that.

Sramana Mitra: Well, the scalability of the business goes up, right? Services businesses typically lack scalability, although we have seen very large services companies being built by using various kinds of best practices, but I think AI just takes that to a different level of scalability. I do think services business models are going to be a very big part of this do-it-for-me (DIFM) model; business models are going to be a very big part of the AI revolution. As such, VCs should invest in services companies.

Gaurav Chaturvedi: Absolutely.

Sramana Mitra: Your focus is in the Indian industry, of course, global markets often, but the deal flow is all Indian. Can you talk a little bit about what are you seeing – in the deal flow, in the trends, in the numbers? How many AI startups are in India right now? And what are the trends of those?

Gaurav Chaturvedi: Interesting question. Unfortunately, I don’t have exact numbers, but I can give you a rough estimate. We’ve seen a significant rise in AI startups over the past year, especially after the ChatGPT revolution began. This growth has come in waves. The first wave, which we saw globally as well, involved what you might loosely call “wrappers”—companies taking OpenAI’s API and building wrappers around it. These were useful to some extent, but faced challenges with retention and issues like hallucinations.

The second wave involved companies in the LLM ops space—middleware platforms that help manage LLM applications. Many of these have emerged over the last six to nine months. In the last six months, we’ve started seeing more applications focused on specific solutions or services.

We’ve seen a range of applications across different sectors. Sales and marketing have been popular areas, as they tend to be the low-hanging fruit. But given India’s strong history in dev tools, we’re also seeing a lot of development tools for LLM applications, as well as products using AI in the software development life cycle. So that’s another emerging category.

In general, it comes in waves, but if I were to think broadly about the B2B software space, most of the entrepreneurs are now building AI-powered products. The deal flow in AI today is very similar to what we used to see in traditional SaaS two years ago in terms of volume.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: With Gaurav Chaturvedi, Partner at Kae Capital
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