9 Top VCs Reveal Their Biggest AI Bets

Presented by GOTO Market Institute

Hey SaaS Sentinel reader. Legacy enterprise companies are seeing record high valuations, employee anxiety over AI continues to grow, and the tech industry's top VCs reveal what AI bets they’re willing to make. Here’s what else is happening in SaaS this week.

• SAP, Oracle, and IBM are experiencing significant valuation growth due to successful cloud migration and AI integration

• A recent study from BCG revealed that workers are growing increasingly anxious over AI job displacement

• In a roundup interview, 9 top VCs reveal what AI bets they’re making (and what they think is most overhyped)

SAP, Oracle, and IBM Have Just Reached Record Highs

While everyone is busy focusing on emerging technologies that are boasting billions of dollars in revenue within their first few years of launch, they’re missing a surprising growth trend that’s been building for the past few years: legacy software firm valuations are climbing higher than ever.

Kicking off the trend is SAP, whose shares topped over $200 for the first time this past week under the leadership of CEO Christian Klein. His focus on migrating customers to the cloud while forming partnerships with the likes of Google and Nvidia has driven substantial growth. In its latest earnings, SAP's cloud revenue expanded 24% year-over-year and Its "cloud backlog" also points to more momentum ahead.

But SAP isn’t the only legacy software company experiencing reinvigorated growth. Oracle has enjoyed similar success after migrating to cloud platforms capable of powering advanced AI—and its next-gen cloud infrastructure has become the preferred choice for AI heavyweights like Microsoft, Google and OpenAI.

In Oracle's most recent quarter, total cloud revenue finally surpassed its legacy support business to become the company's largest revenue stream. The enterprise company now anticipates sustained double-digit cloud growth this year amidst booming demand for AI compute power.

And if two legacy enterprise companies achieving transformational growth wasn’t enough, IBM has also been benefiting from these digital transformation efforts.

But the company’s recent success is just due to pure luck and circumstance—IBM CEO Arvind Krishna has spearheaded an aggressive transformation campaign since taking over in 2020 after years of inconsistent cloud results under previous leadership.

Now, cloud revenue now accounts for over a quarter of IBM's business and Krishna doubled down on the promise of AI via the launch of Watson capabilities for enterprise. IBM's recent $6.4 billion acquisition of DevOps leader HashiCorp was another bold bet on cloud-native software powering AI innovation.

Krishna's overriding focus on positioning IBM for the AI future also has Wall Street taking notice. As a result of the company’s strong profitability and cash flow stemming from this transition, share prices are up over 30% year-over-year. 

Of course having an existing customer base and resources for acquisitions gives these legacy companies an advantage over the more recent scrappy AI startups. 

As Gartner chief forecaster John-David Lovelock noted, "It is also hard to compete for attention when new AI companies are boasting multi-billion dollars of revenue within a few years of launch. However, traditional software markets have a combined annual revenue over $1 trillion in 2024—legacy software sales are growing strongly, and AI’s strong growth has obfuscated this fact for many."

Read more.

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As Employee Confidence in AI's Potential Grows, so Does Their Anxiety

Enterprise software giants aren't the only ones trying to navigate the AI revolution—their employees are facing a mix of excitement and concern as generative AI gains momentum.

A new report from Boston Consulting Group surveyed over 13,100 frontline workers, managers, and executives. It found a surge in confidence around AI's potential, with 16% more respondents confident in generative AI year-over-year. However, anxiety also spiked nearly 5% around the possibility of AI eliminating jobs.

The fears were most acute among frontline workers, 22% of whom worry their roles could be displaced by AI vs. 15% of leaders. And a knowledge gap seems to be exacerbating anxieties. While 50% of executives reported receiving AI training, only 28% of frontline employees could say the same.

The lack of resources for skilling up on AI was the #1 concern cited by individual contributors, followed by not getting enough time to learn about it. Bridging this chasm is crucial for legacy enterprise software companies to realize the upside of investments in AI capabilities.

Some larger firms are taking steps in that direction. PwC aims to train all 75,000 US employees on AI through an upskilling program focused on understanding use cases and informed decision making. But more commitment may be needed to empower individual contributors rather than increasing the divide.

Sure, SAP, Oracle and IBM may be riding high thanks to their bets on AI, but a failure to bring their workforce along could lead to resentment or disengagement from employees who don’t feel they’re able to adapt to this new reality of work.

Read more.

9 Top VCs Revealed What AI Bets They’re Most Excited About

In a tech industry facing downturns, job cuts, and VCs running out of money, AI is still teeming with new growth opportunities. But, not all AI startups are created equal.

In a recent survey of top AI investors, 100% said they are more excited about startups building infrastructure like vector databases instead of flashy language models. While giants like OpenAI and Anthropic grab headlines with new LLMs, VCs believe the enduring companies will focus on unique user experiences powered by robust underlying tech.

"The foundation model layer for LLMs is overfunded now and dominated by well-funded companies and cloud providers," explained Mayfield Fund's Navin Chaddha.

Unstructured data analysis tools are another hot area, as AI depends on messy real-world data. "The really smart founders are thinking uniquely about how they can leverage the building blocks to change user experiences completely," said Flybridge Capital's Chip Hazard.

Investors also want to see startups laser-focused on transforming specific verticals rather than offering generic horizontal solutions. For example, EvenUp harnesses AI to draft legal demands and Norm.ai tackles regulatory compliance.

Some of the areas investors are weary of include crowded spaces like marketing tools and notetaking apps. "You'd really have to stand out to be the N+1th company," said Obvious Ventures' Kahini Shah.

So while flashy demos still capture the public’s imagination, VCs are most bullish on picks-and-shovels companies equipping AI with the building blocks and real-world data needed to drive meaningful change across industries.

Read more.

Parting Thoughts

Well, that’s the tech news for this week. Hit reply and let us know — did you learn something from today’s newsletter?

Until next time!