Expanding The SaaS 4.0 Framework And The Importance of First Principles

Enterprise software is having its generative AI moment. While we are still in the early days of what we’re calling SaaS 4.0, it’s something everyone who buys, sells, builds, or uses software needs to prepare for.

As noted in our previous post, we are entering the SaaS 4.0 era in software as generative AI finds its way into the enterprise technology stack. The ability of tools like ChatGPT, Google Bard, Midjourney, and many more to handle tasks like programming, document creation, image and video generation, and more will change SaaS from systems of engagement and intelligence to systems of cognition. These apps will evolve from being somewhat static with lightweight automation to instead having entire workflows fundamentally augmented with generative AI.

The implications of this are profound. The next generation of SaaS will change everything from how software is priced to what level of automation is expected within a workflow. The unit of work itself is changing and evolving, creating a fundamental opportunity for software entrepreneurs building today.

My initial thoughts on SaaS 4.0 sparked a lot of discussion and resonated with many entrepreneurs I met. To move the conversation forward, I’d like to take this opportunity to dive a little deeper on how companies looking to become generational software companies can frame the current environment.

Before we dive in, here’s a summary of how we view the evolution of software over the last 20+ years at Lightspeed with an expanded SaaS 4.0 framework.

We’re clearly in a new paradigm in software. Equally, some fundamental truths continue to hold, and building a successful SaaS company requires navigating this changing landscape. While the opportunity in software is fundamentally different in the SaaS 4.0 era, first principles still apply. Here are 5 areas we’ve noticed that the best entrepreneurs are focusing on right now:

1. Everyone will incorporate Gen AI into their offerings

Every single software CEO I’ve spoken with over the last six months — whether they’re running a $50 million company or a $50 billion enterprise — is sprinting to incorporate generative AI capabilities into their platforms, if they haven’t already. Generative alone will not be a sufficient differentiator. And while it may be easy to persuade a few early customers to try out an AI-enhanced service, that’s a much different proposition from scaling at large. Founders will need to think carefully about defensibility, go-to-market and access to proprietary data as they start with a wedge and drive greater value over time.

2. The most successful companies will be customer obsessed

Generative AI is attracting a lot of buzz, but the technology by itself isn’t enough to drive a buying decision. While interest remains high, we are already seeing early signs of Gen AI fatigue; traffic to ChatGPT has dropped nearly 10 percent since May. As the novelty wears off, practical applications that deliver real business value will come to the forefront. Startups that focus on using AI to solve important customer problems are the ones that will capture the attention (and market share) of busy IT executives.

This is a different starting point than addressing the novel technology first and foremost. Instead, work backwards from what problem the customer is looking to solve in a way that is clearly defined and articulated. PLG is a great motion that companies aspire to, but for most this will not be sufficient alone and will need to be complemented with product-led sales and a focus on customer success.

3. Integration into tech stacks is critical

Software never exists in a silo. How well a SaaS 4.0 solution fits into an enterprise technology stack may make the difference between a successful strategy and a missed opportunity. Founders need to focus on how they can enable seamless integration with an organization’s existing infrastructure.

This is particularly true given the absence of these integrations leads to lower switching costs and higher churn – particularly during this experimentation phase. To build a sustainable long-term company, it’s important to focus on the workflow and the automations and integrations that make them sticky.

4. Budgets are tighter than ever

Though every enterprise is eager to explore the potential benefits of generative AI, this will not be a trivial sell. CIOs are consolidating their tech stacks and prioritizing must-have over nice-to-have. Deals are taking longer and require more executive approval.

Though we do expect the market to eventually rebound, it may take longer for budgets to return to normal. This means that the need to demonstrate quick ROI in any SaaS offering is paramount – generative or not.

5. Privacy and security challenges must be dealt with early

Large language models like ChatGPT and Google Bard have already generated controversy around plagiarism, alleged trademark and copyright infringement, and their tendency to generate nonexistent ‘facts’ via hallucinations. Startups will need to consider issues like ethics, data privacy, bias and transparency, intellectual property, security, reliability, and other challenges. For founders in this space, it won’t be sufficient to create a minimum viable product and call it a day. They will need to take on these issues from day one.

These issues are why we believe that securing AI is a big platform opportunity.

Join us in exploring generative AI technology

It’s clear that enterprises have entered the era of generative AI. How this will all shake out, however, is yet to be determined. And while we certainly don’t have all the answers, Lightspeed has invested billions of dollars in generative AI across all of our regions and sectors of focus. We’re building with startups leading the AI-based transformation, and if you’re creating a startup in that category, we’d love to talk with you.

If you’re interested in learning more about the generative AI revolution, sign up to be notified about future editions of our Generative series of events, now taking place across the US and Europe. And if you can’t make it to an event, you can find recaps along with other news on our Stories page, along with more about the companies we are building with on our Companies page.

Thanks to John Komkov for assistance with this post.