1Mby1M Virtual Accelerator AI Investor Forum: With Krishnakumar Natarajan, Co-Founder of Mela Ventures (Part 2)

Sramana Mitra: Very good. Just as ChatGPT broke into the mainstream consciousness and really put AI at the center of discussions, The first wave of startups that came out of that euphoria are mainly wrappers. To your point, wrappers don’t have a deep moat in terms of being an AI centric company that is really going to be able to take advantage of AI and build significant defensive advantage to in enterprise applications.

The other point you made, which actually resonates with me very much, is that this whole generative AI thing is relatively new, but AI is not that new. We’ve been covering AI use cases and startups since 2015-16. We have case study after case study of very solid AI companies with very solid use cases deep, whether it’s computer vision or whatever aspect of AI they’re addressing or taking advantage of.

So yes, things are accelerating, but things are accelerating more from an adoption point of view.

Krishnakumar Natarajan: That’s right.

Sramana Mitra: It’s also accelerating from the point of view that everybody who’s trying to now raise money is coming and putting an AI wrapper and pretending to be an AI company even if they’re not an AI company.

Krishnakumar Natarajan: Yes.

Sramana Mitra: You are probably one of the best people to answer this question about parsing the AI trends. You spent a very large chunk of your life in the IT services world. At this moment, IT services, or services industry in general but could be advertising services or creative services, have an in enormous opportunity to automate by using AI, right?

Krishnakumar Natarajan: Absolutely.

Sramana Mitra: There was the no-code movement, AI copilot movement, creative AI, Generative AI – so many components are coming together that can potentially do wonders with an IT services company or an advertising services company, or all these services companies in general.

Tell me how this opportunity or trend is informing your investment decisions. The history of venture capital in enterprise startups, for example, has always been that we don’t invest in IT services startups. But that doesn’t need to be the point of view anymore.

So, tell me how you are thinking about it.

Krishnakumar Natarajan: You are raising a very interesting point. As the transition happened, the investment thesis was that you look at more product companies, where once you create and put it on the cloud, many customers can use it. That’s how value gets generated.

I think this whole notion of product led growth, which used to be the mantra of some of the companies, but it’s not a straightforward 3TM strategy in the world of AI.

Sramana Mitra: That’s right. There is training data, there is training of the algorithm.

Krishnakumar Natarajan: It requires very customer specific data, and in a way you need to make a choice of what are the right models which will work for the customer, then help the customer evolve a data strategy where the quality of data becomes relevant so that the AI models can really be fine-tuned to give the right outputs on an ongoing basis, ensuring there’s a drift in terms of results.

How do you continue to play around with the weights to improve inferences so that it gives a lot more value to the client.

If you look at the use case for a client, it involves a lot of services. This is why one of our investment thesis is there is going to be a set of companies which will start focusing in terms of what we call making AI real for customers. It means doing several elements of services, which will make AI real for an end customer.

Sramana Mitra: Yes. I started in a different direction, but you are also bringing up a very important point on the services discussion, which is product alone is not going to extract the full value of AI. You need services to do that.

In fact, you can take that logic a little bit further. What we are also seeing is instead of do-it-yourself software companies, there’s also do it for me software companies where the AI startups are providing the people who would actually run the AI technology and provide the value.

Krishnakumar Natarajan: Absolutely.

Sramana Mitra: Now, the point that I was making though is also that if you look at companies that are services first companies like what you did previously, it’s a tremendous opportunity for automation and efficiency inside those companies.

So, the P&L of those companies typically tends to have much lower margin P&L, which was the complaint against services companies from the venture capital industry. But what if you have 30-40% savings by applying AI into that P&L structure?

Krishnakumar Natarajan: Definitely. See there are two trends happening here, and clearly not just for the IT services companies.

 I think every company should start thinking in terms of how I will deal with my internal functions by leveraging AI. So I’m just broadening little bit the scope of the discussion. You’re right. I’ve been talking to a few heads of engineering who say, “If I can really deploy AI in the context of service delivery to clients, my productivity is going to improve by 30-40%.” This means that the margin profiles are going to improve and I think the IT services companies are very well positioned to manage this transition.

Again, if we go back a few years when the automation platforms were becoming popular, many of the IT services companies really worked with the clients to say, “Hey, we automate how we deliver services to you and whatever are the savings, we’ll share that savings with you.”

So, customers gained, and the IT services companies also gained because though their revenues were a little bit impacted, they retained customers and were able to address a larger segment of customers. Hence, they still continued to grow – not probably at 20% plus, but at least a low single digit type of growth.

I think a lot of the IT services companies will apply a similar model even in the AI transition where in service delivery, whatever impact they have in terms of productivity improvement, they’re bound to share that with customers. So, customers see that as a win for them as well as clearly the margin profile of the service companies are bound to improve.

Sramana Mitra: I see what you’re saying. You’re saying that the margin is not going to entirely come to the companies. They’re going to share some of that gain with the customers and drop the price. Interesting. That’s very subtle and very appropriate.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: With Krishnakumar Natarajan, Co-Founder of Mela Ventures
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