Chances are, many of us will remember 2023 as the year Artificial Intelligence (AI) truly went mainstream. Over the past year, both consumers and businesses have rapidly adopted generative AI tools like ChatGPT, reaching a tipping point (and at lightning speed), with an estimated 40 percent of adults aware of the platform just two weeks after its official launch.
To that end, ChatGPT set records for consumer app adoption back in January when it reached over 100 million daily users. By April 2023, the platform was handling more than 10 million queries every day.
While the rapid rise of generative AI may have seemed like a novelty to some consumers, AI solutions are actually transforming the business world in significant ways.
In the Software-as-a-Service (SaaS) sector especially, companies are racing to leverage generative AI to boost productivity and integrate these tools into their own product offerings.
Although the most impactful use cases are still emerging, SaaS investors and lenders are already seeing real-world applications of generative AI that not only improve productivity but also transform product development.
Generative AI is taking on a bigger role in SaaS R&D
According to The SaaS MetricsThat Matter Most For Startups in 2024 report from SaaSCan Insights, generative AI is having a greater impact on how SaaS teams develop products than on overall productivity.
The report—which benchmarks SaaS business performance from the perspective of investors and lenders—found that 31 percent of respondents consider generative AI to be “transformative” for SaaS product development.
This trend is especially strong among very early-stage investors (with less than $1 million in ARR), with one SaaS investor noting in the study, “If you’re not using AI for development, you’re already falling behind.”
Examples of generative AI in R&D highlighted in the report include a developer who tripled their productivity using ChatGPT and Copilot, a chatbot created by Microsoft in partnership with OpenAI, ChatGPT’s parent company. One CTO even told the report’s authors that Copilot was “the most impactful development tool he’d seen in over 20 years of coding.”
By comparison, only 20 percent of respondents said generative AI was having a similarly transformative effect on productivity—though 70 percent agreed it was “somewhat” improving workflows.
Beyond product development and R&D, generative AI is also streamlining content creation for marketing and helping companies use ChatGPT to boost customer engagement.
Investors and lenders remain focused on core SaaS offerings
While generative AI is gaining traction as a tool for building solutions, companies promoting their own AI products shouldn’t lose sight of their core business, according to SaaSCan’s report.
“There’s a difference between companies that are truly AI-centric and those that just say they are. Deal flow from genuinely AI-centric companies is [greater than] 25 percent. Deal flow from companies that claim to be AI-centric (or at least have an AI component) is likely [less than] 75 percent,” one early-stage SaaS investor told SaaSCan researchers.
This underscores one of the main takeaways from the 2023 SaaS Benchmarks: Be Wary of Hype and Shallow Trends.
In short, investors and lenders recommend that SaaS companies avoid using AI just for the sake of buzz or to ride the current hype wave. Instead, the report urges founders to prioritize Strategic Adoption and Value Creation as the most compelling use cases continue to emerge.
Prioritize R&D to drive greater innovation
It’s encouraging to see early-stage companies focusing on enhancing their research and development with the latest generative AI tools. Research shows that even large corporations that prioritize R&D (over, say, Sales and Marketing) ultimately achieve higher long-term valuations.
As recently highlighted on the OnlyCFO blog, the 10 fastest-growing public companies by revenue spend 1.7 times more on Sales and Marketing (S&M) than on R&D, on average. In contrast, companies that spend 2-3 times more on S&M than R&D have an estimated valuation multiple of just 4.9x, compared to the market average of 7.2x—well below industry standards.
To drive the point home, mature companies that actually invest more in R&D than in S&M have an average valuation multiple of 8.7x, showing the massive growth potential of this approach.
Reinvesting in R&D to drive innovation faster
Companies that actively invest in R&D to improve their products and expand their offerings gain more than just a higher valuation. By funding their own innovation, they can stretch every dollar further.
Both in the United States and Canada, federal tax credits (plus state and provincial programs) are available to encourage unique R&D by letting businesses claim eligible activities and recover a portion of their costs.
With this cash back, founders can inject vital capital into their R&D, allowing them to pursue even more activities that qualify for credits. This creates a positive cycle of investment that leads to better products—and happier customers.
Connect with a Boast expert today to see how we help thousands of startups across North America tap into non-dilutive funding opportunities.
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