Vertical AI Agents Could Be 10X Bigger Than SaaS

As AI models continue to rapidly improve and compete with one another, a new business model is coming into view: vertical AI agents. In this episode of the Lightcone, the hosts consider what effect vertical AI agents will have on incumbent SaaS companies, what use cases make the most sense, and how there could be 300 billion-dollar companies in this category alone.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harj Taggar?

  Every three months, things have just kept getting progressively better. And now we're at this point where we're talking about full-on vertical AI agents that are going to replace entire teams and functions and enterprises. That progression is still mind-blowing to me.

• 0:13Diana Hu?

  A lot of the foundation models are kind of coming head to head. There used to be only one player in town with OpenAI. But we've been seeing in the last batch, this has been changing.

• 0:23Garry Tan?

  Thank God. It's like competition is, you know, the soil for a very fertile marketplace ecosystem for which consumers will have choice and founders have a shot. And that's the world I want to live in.

• 0:45Garry Tan?

  Welcome to another episode of The Light Cone. I'm Gary, this is Jared, Harge and Diana. And collectively, we've funded hundreds of billions of dollars worth of startups right when they were just one or two people starting out. And today Jared is a man on fire and he's going to talk about vertical AI.

• 1:07Jared Friedman?

  Yes, I am. I am fired up about this because I think people, especially startup founders, especially

• 1:16Jared Friedman?

  young ones, are not fully appreciating just how big vertical AI agents are going to be. It's not a new idea. Some people are talking about vertical AI agents. We funded a bunch of them, but I think the world has not caught on to just how big it's going to get. And so I'm going to make the case for why I think there are going to be $300 billion plus companies started just in this one category.

• 1:39Garry Tan?

  Nice.

• 1:40Jared Friedman?

  I'm going to do it by analogy with SaaS. And I think in a similar fashion, people don't understand just how big SaaS is because most startup founders, especially young ones, tend to see the startup industry through the lens of the products that they use as a consumer. And as a consumer, you don't tend to use that many SaaS tools because they're mostly built for companies. And so I think a lot of people have missed the basic point that if you just look at what Silicon Valley has been funding for the most for like for the last 20 years, like we've mostly been producing SaaS companies, guys, like that's literally been like most of what has been coming out of Silicon Valley. It's over 40% of all venture capital dollars in that time period

• 2:21Jared Friedman?

  went to SaaS companies and we produced over 300 SaaS unicorns in that 20 year time period, which is way more than every other category.

• 2:29Garry Tan?

  Software is pretty awesome.

• 2:30Jared Friedman?

  Software is pretty awesome. I was thinking back to the history of this because we always like to talk about the sort of how the how the history of technology informs the future. And the real catalyst for the SaaS boom was, do you guys remember XML HTTP request?

• 2:49Garry Tan?

  Oh, my God.

• 2:50Jared Friedman?

  Like, I'd argue that that was quite literally the catalyst for the SaaS boom.

• 2:54Garry Tan?

  Like Ajax.

• 2:55Jared Friedman?

  Ajax, yeah. In 2004, browsers added this JavaScript function XML HTTP request, which was the missing piece that enabled you to build a rich internet application in a web browser. So for the first time, you could make things in websites that looked like desktop applications. And then that created Google Maps and Gmail and set up this whole like SaaS boom. Essentially, the the key technology unlock was that software moved from being a thing that you got on a CD-ROM and installed on your desktop to being something that you use through a website and on your phone.

• 3:25Garry Tan?

  Yeah. Paul Graham actually shares in that lineage in that he was one of the first people to realize that he could take the HTTP request and then actually hook it up to a Unix prompt. And you didn't actually have to, you know, have a separate

• 3:41Jared Friedman?

  Yeah.

• 3:41Garry Tan?

  computer program

• 3:42Jared Friedman?

  Yeah.

• 3:42Garry Tan?

  that would change a website. So ViaWeb was a online store, kind of like Shopify, but way back in the day.

• 3:49Jared Friedman?

  Yeah, it was basically like the first SaaS app ever. Like, like, PJ actually invented SaaS in like 1995. It's just that those first SaaS apps kind of suck because they didn't have XML HTTP request. And so every time you would like click a button, you would have to reload the whole page. And so it's just a shitty experience. And so it didn't really catch on until 2005 when XML HTTP request. Why it's right. Anyway, I see this. LLM thing as like actually very similar. It's like it's a new computing paradigm that makes it possible to just like do something fundamentally different. And in 2005, when cloud and mobile finally took off, there is this sort of like big open question of like, okay, well, this new technology exists, what should you do with it? Where is the value going to accrue? Where are the good opportunities for startups?

• 4:33Jared Friedman?

  I was going through the list of like all the billion dollar companies who were created. And I kind of had this realization that you could kind of bucket the the different paths that people took into like three buckets. There's there's a first bucket that people started with, which was like, I would call them obviously good ideas that could be mass consumer products. So that's like docs, photos, email, calendar, chat, all these things that like we used to do on our desktop, but that obviously could be moved to the browser into mobile. And the interesting thing is zero startups won in those categories. 100% of the value flowed to incumbents, right? Like Google, Facebook, Amazon, they own all all those businesses.

• 5:19Jared Friedman?

  Folks forget that like Google Docs wasn't the only company that tried to bring Microsoft Office Online. There are like 30 companies that tried to bring Microsoft Office Online, but they all lost. Google won. Then there was like a second category, which was like mass consumer ideas that were not obvious, that nobody predicted.

• 5:37Jared Friedman?

  That's like Uber, Instacart, DoorDash, Coinbase, Airbnb. Newland places. Those ones came out of left field, like the the dot, dot, dot between XML HTTP request and Airbnb is like very not obvious. Yeah. And so the incumbents didn't even try competing in those spaces until it was like too late. And so startups are able to win there. And then there's a third category, which is all the B2B SaaS companies. And that's like 300 of them. And so like, like by by by number of logos, way more billion dollar companies were created in that third category than the first two. I think one reason why that happened is like there is no. Like Microsoft of SaaS, like there is no company that somehow does like SaaS for like

• 6:22Jared Friedman?

  every vertical and every product. Like for structural reasons, it seems to be the case that like they're all different companies and that's why there's so many of them.

• 6:30Harj Taggar?

  I think Salesforce is probably like the first true SaaS company. And I remember Marc Benioff coming to speak at YC and he tells the story, it's just very early on, people just didn't believe you could build sophisticated enterprise applications like over the cloud or via SaaS. It was just so, there's just like a perception issue, right? It was like, no, like you don't, you buy like your box software and that's like the real software that you run your.

• 6:55Garry Tan?

  This is the way we always do it.

• 6:56Jared Friedman?

  It was, it was quite contrarian because the early web apps sucked.

• 6:59Harj Taggar?

  Yeah.

• 6:59Jared Friedman?

  They were like via web where you had to be a visionary like PG and understand that the browser was going to keep getting better and that eventually it'd be good.

• 7:06Harj Taggar?

  Which feels like quite reminiscent of today, right?

• 7:08Jared Friedman?

  Yeah.

• 7:08Harj Taggar?

  Where it's like, yeah, the same thing. Like, oh no, like you won't be able to build like sophisticated enterprise applications that use these LLM or AI tools because they hallucinate or they're not perfect or they, they're kind of like just toys. But yeah, that's like the early SaaS story, exactly the same.

• 7:25Jared Friedman?

  And so when I think about the parallels with LLMs, I could easily imagine this same thing happening, which is that there's a bunch of categories that are like mass consumer applications that are obviously huge opportunities, but probably the incumbents will win all of those. So that's something like a, like a general purpose AI voice assistant that you, you know, you can ask it to do anything and it'll like go do that thing. That's an obvious thing that should exist, but like all the big players are going to be competing to be that thing, right?

• 7:51Garry Tan?

  Wow. Apple's a little slow on that one. Why is Siri so stupid still? What year is it? It makes no sense.

• 7:57Harj Taggar?

  I mean, it's interesting. Like a counter to that is like the very obvious thing is search and maybe Google will still win on search, but perplexity is definitely give them a huge run for their money, right?

• 8:09Garry Tan?

  Yeah, this is the classic innovator's dilemma at the end of the day. I mean, you could argue, going back to what you said about Uber or Airbnb, these were actually really risky things from a regulatory standpoint. So if you're Google and you have basically a guaranteed Your giant pot of gold that you know sort of comes to you every single month like why would you endanger that pot of gold to sort of pursue these things that might be scary or might ruin the pot of gold?

• 8:35Jared Friedman?

  I think that's I think that's like probably the primary reason why the incumbents didn't end up building those products and didn't even clone them even after they got big. And it was obvious that they were going to work. Google never launched an Uber clone. They never launched an Airbnb clone. I was listening to this talk by Travis and one of the things that he said that really stuck with me is that in the in the first use of Uber, he was very scared that he was going to personally go to prison for like a long time. Like he was actually personally risking going to prison in order to build that company. And so, yeah, no highly paid Google exec was going to do that.

• 9:09Diana Hu?

  What do you think about why the incumbents didn't go into B two B SaaS? Is it part of the reason is that a lot of the use cases are very, there's a very wide distribution?

• 9:20Jared Friedman?

  I it's a great question. I love to hear what you guys think. My take is that it's just too hard to do that many things as a company, like each B two B SaaS company really requires like the people who are running the product and the business to be extremely deep in one domain and care very deeply about a lot of really obscure issues, you know, like take like Gusto for example, like why didn't Google build a Gusto competitor? Well, there's no one at Google who really understands payroll and has the patience to like deal with all the nuances of all these like stupid payroll regulations and like it's just like, like, it's just not worth it for them. It's easier for them to just focus on like a few really huge categories.

• 10:00Harj Taggar?

  In the B two B SaaS world, it's it's sort of about the unbundling bundling of software argument that comes up a lot as well, I think. And why didn't, why did all these vertical B two B SaaS products evolve versus just like Oracle or SAP or?

• 10:16Diana Hu?

  NetSuite.

• 10:17Harj Taggar?

  Yeah, NetSuite, just owning like everything.

• 10:21Harj Taggar?

  And I think it might be also is another thing that's attributable to the shift to like SaaS and the internet is in the old ways of selling software, again, like you had this box software that was really like expensive to install and you had like a whole ecosystem around it. And anytime you wanted something custom, like the integrators would just say, oh, no, like, we can like, just build you a custom like payroll feature or something like that. And then Salesforce comes along with like a SaaS solution. And it just seems like it could never be as powerful or sophisticated as like the expensive enterprise installation you just paid for. But they proved that it totally was the case. And I think that just like opened the gates for all of these like vertical SaaS solutions to emerge, doing exactly what you're saying.

• 11:04Diana Hu?

  You think the problem is that with a lot of this enterprise software, if you're a user of Oracle and the NetSuite, because they're they have to cover so much ground, the user experience is actually pretty bad. They're trying to be jack of all trades but master of none.

• 11:18Harj Taggar?

  Yeah.

• 11:18Diana Hu?

  So it ends up being a bit of a kitchen sink type of experience. And this is where if you go and build a B two B SaaS vertical company, you could do literally a 10x better experience and more delightful because there's this stark difference between consumer products and enterprise user experience.

• 11:36Harj Taggar?

  Yeah.

• 11:36Garry Tan?

  Well, there's only, what, three price points in software. It's $5 per seat, $500 per seat, or $5,000 per seat. And that maps directly to consumer SMB or enterprise sales. And then I think time immemorial has taught us that in the past, and this is less and less true with new software, thankfully, but enterprise is terrible software because it's not the user buying it. You know, some high up muckety muck inside Fortune 1000 is the person who's getting wind and dine for this, you know, mega seven figure contract. And, you know, they're going to choose something that maybe isn't that good actually for

• 12:20Garry Tan?

  the end user, the person who has to actually use the software day to day. And I'm sort of curious to see how this changes with L L M's actually. I mean, two Date, one of the more salient things that we've seen for both SMB and enterprise software companies is that, or all software companies, all startups, period, is like, you know, there's a sense that as revenue scales, the number of people you have to hire scales with it. And so when you look at unicorns, even in today's YC portfolio, it's quite routine to see a company that reached a hundred or $200 million a year in revenue, but they have like 500, 1,000, 2,000 employees already. And I'm just going

• 13:03Garry Tan?

  to be very curious, like even the advice that I'm starting to give companies that are, you know, a month or two out of the batch, it's feeling a little bit different than the kind of advice I would give last year or two years ago. In the past, you might say, you know, let me find the absolute smartest person in all of these other parts of the org, like customer success, or sales, or different things like that. And I want to find someone who I've worked with, who is, I know is great, and then I'm going to go sit on their, you know, on their doorstep until they quit their jobs and come work for me. And I want them to be someone who can, you know, build a team for me, hire a lot of people. That might still be true, but I'm starting to sense that the meta's

• 13:48Garry Tan?

  shifting a little bit. Like, you actually might want to hire more really good software engineers who understand large language models, who can actually automate the specific things that you need that are the bottlenecks to your growth. And so it might result in, you know, a very subtle, but, you know, significant change in the way startups grow their businesses, sort of post-product market fit. It means that I'm going to build LLM systems that bring down my costs, that cause me not to have to hire 1,000 people. I think we're right at the beginning of that revolution right now.

• 14:24Diana Hu?

  I mean, we talked about this in a previous episode. We talked about there will be a future unicorn company that's only run, if we take it to the limit, with only 10 employees. That's completely plausible.

• 14:36Jared Friedman?

  And they're writing the evals and the prompts.

• 14:38Diana Hu?

  That's it.

• 14:39Harj Taggar?

  I think what you're saying is like a trend that was already underway pre LLMs. Like, I remember when I was running Triplebyte, for example, we needed to like build marketing or customer, like user acquisition, basically. And especially after we raised our Series B, the like traditional way you were supposed to do that is to like hire a marketing executive and build out like a marketing team and, um, and just like basically spin up this machine to do like sales and marketing. But I'd actually met like a YC founder, um, Mike, who was, his company was basically building like a smart frying pan. Sounds like bizarre, but like he was a MIT engineer. Yeah, you remember this? Um, he's an MIT engineer and to sell the smart frying pan, he had to get really, really

• 15:21Harj Taggar?

  good at understanding like paid advertising and, um, uh, Google Ads and just the whole bunch of stuff. And so he, he'd taken this engineer's mindset approach to it. And I remember just talking to him about it and realizing this would be so much better to have an MIT engineer working on like our marketing efforts than any of the marketing candidates I've spoken to. And he was able to like scale us up to like, I mean, we were spending like one point, like a million dollars a month on just marketing and various like campaigns.

• 15:48Jared Friedman?

  And Triplebyte had great marketing. Like, I remember like the Caltrain system station takeover that you did, all like out of home stuff that you did. It was like really high quality stuff. It stuck with the, you could tell that he was not being done by some like VP marketing person.

• 16:02Harj Taggar?

  And that was all Mike. And like the comment I would often get when people would ask me around that time, like, how big is Triplebyte? And we were like 50 people. And people would be like.

• 16:11Jared Friedman?

  It felt so much better.

• 16:11Harj Taggar?

  Yeah, yeah. People would be like, I thought this was like hundreds of people. I was like, no, it's all because if you put a really smart engineer on some of these like tasks, they just find ways to make. They find leverage and now like L L Ms can go even way beyond like the leverage you had with just pure software.

• 16:25Jared Friedman?

  Okay, so here's my pitch for 300 vertical AI agent unicorns. Literally every company that is a SaaS unicorn, you could imagine there's a vertical AI unicorn equivalent in like some new universe. Cause like most of these SaaS unicorns beforehand, there were some like box software company that was making the same thing. That got disrupted by a SaaS company and you could easily imagine the same thing happening again. Where now basically every, every SaaS company builds some software that some group of people use. The vertical AI equivalent is just going to be the software plus the people in one product.

• 17:00Harj Taggar?

  One thing might be just enterprises in general right now are a little unsure about what exactly they like, what agents they need. And one approach I've seen from especially more experienced founders like Brett Taylor, the CTO of Facebook, started his company Sierra. I don't know all the details, but as far as I can tell, it's essentially more like broadly about letting enterprises like deploy these AI agents. And spinning them up like custom for the enterprise versus like, oh, hey, we have like this specific agent to do this. It's something I've seen from all my companies called Vector Shift that we funded about a year ago. They're two really smart like Harvard computer scientists and it's that what they found is that they're trying to build a platform to make it easy for enterprises to build their own like,

• 17:44Harj Taggar?

  use like no code or SDKs to build their own like internal L L M powered agents. But like enterprises often don't know exactly what they want to use these things for. And so bringing it back, I wonder if like in like the box software world, you started off with just like a few vendors who just basically were trying to convince people to use software at all. And it was just like, it does everything. And then it gets more sophisticated and higher resolution and you get lots of like vertical SaaS players. We go through that same period with L L Ms where the early winners might just be these like general purpose. Hey, like we'd like make it easy for you to do L L M stuff. And then the vertical agents will come in over time. Or do you think there's reasons it's different now and the vertical agents will take off on day one?

• 18:29Jared Friedman?

  Yeah, that's interesting because if you think about the history of SaaS, the consumer things worked first, like 2005 to 2010 was mostly consumer applications like email and chat and maps and people got, people as individuals got used to using these tools themselves. And I think that made it easier to sell SaaS tools to companies because you know, the same people are both employees and consumers.

• 18:51Harj Taggar?

  Yeah, I think the answer might just be like this is, this is all just a continuation of software. And just, there's no reason it has to reset back like LLMs don't have to reset back to a few general purpose, like enterprise LLM platforms doing everything because enterprises have already been trained on like the value of point solutions and vertical solutions. And like the user experience is not going to be that different. These things will just be a lot more powerful. And so if enterprises have already built the muscle of believing that like startups or vertical solutions can be better than like legacy broad platforms, they are probably going to be willing to take a bet on a startup promising a very good vertical AI agent solution today.

• 19:34Harj Taggar?

  And I feel like we're all seeing that in the batch now where some of our companies are getting faster traction in enterprises for these vertical AI agents than like we've ever seen before.

• 19:44Garry Tan?

  I think we're just early in the game, right? Like all software sort of starts quite vertical and then as the industries actually get much more developed, then, I mean, I just answered my earlier question. It's like, you know, why does a company end up having a thousand employees? It's actually that, you know, early, early in the game, everyone's making these specific point solutions and then at some point you've got to go horizontal. Like you're already doing this crazy spend on sales and marketing. And then the only way you can actually continue to grow, once you sort of get a hundred percent or, you know, some large majority of the market is you actually have to do like not just a point solution, but things that sort of work together.

• 20:28Diana Hu?

  Maybe the other point of why. The bull case for vertical AI agents could be even bigger than SaaS is that SaaS, you still needed an operations team or set of people to operate the software in order to get all the workflows to be done. I don't know, approval workflows, or you have to input the data. The argument here is that you will get not only replacing all that set of SaaS software, so that will be like one-to-one mapping, but it's also going to eat a lot of the payroll. Because you look at a lot of the spend for companies, big chunk is still a payroll and software is tiny.

• 21:02Jared Friedman?

  Exactly. They spend way more on employees than they do on software.

• 21:05Diana Hu?

  So will be these smaller companies that are way more efficient, that need way less humans to do random data entry or approvals or click the software.

• 21:14Jared Friedman?

  I agree. I think it's very possible that the vertical equivalence will be 10 times as large as the SaaS company that they are disrupting.

• 21:21Diana Hu?

  I mean, there's two cases. It could be that the vertical point solution could be just big enough and you don't need to do that breath thing, right? That could be a nice scenario.

• 21:31Jared Friedman?

  Should we give some examples? I feel like we've all been working with so many vertical AI agent companies. We've got like news from the front of how it's actually going.

• 21:41Garry Tan?

  Well, your former head of product, Aaron Cannon, is working on a YC company called Outset that I worked with. And basically, they're taking LLMs to the surveys and Qualtrics space. So Qualtrics is almost certainly not really going to build the best of breed large language model with reasoning. And then the funny thing about surveys is, you know, who's it actually for? It's for people who run products, for marketing teams, it's for people who are trying to make sense of like, what do our customers actually want? And what are surveys? Like, guess what? That's language. So, and then I feel like these types of businesses actually have to thread this needle. Because enterprise and SMB

• 22:24Garry Tan?

  software often is sold based on a particular person who is the key decision maker. And you have to go high enough in the organization so that the people you're selling to are not afraid that their whole, their job and/or their whole team's job is going to go away.

• 22:41Diana Hu?

  Totally. That's kind of the move that I've seen that a lot of companies that sell need to do because if you're going to go and sell to the team that's going to get replaced by AI.

• 22:50Garry Tan?

  They're going to sabotage it, man.

• 22:52Diana Hu?

  It just does not work. So I think this is an interesting way that a lot of these are top down and you have to go through at some point, even get the CEO to sign off on it.

• 23:01Harj Taggar?

  A company I'm working with, Momentic, that's essentially an AI agent, but for, at least where they're starting is like QA testing.

• 23:10Harj Taggar?

  They're getting really great traction right now. And it's interesting because you remember a decade ago, Y Combinator, we worked with Rainforest QA. Like Rainforest was a QA as a service company and that they had this exact tension of where they couldn't actually replace your QA team. And so they needed to build software that made the QA team more like efficient, but really that obviously meant trying to replace as many of them as possible. They couldn't replace the whole team. And so they were always on this sort of like tight rope between trying to sell the software to like the head of engineering. As if this will mean you'll need less QA people and great, but then you also have to go sell that to the QA team who don't want to be replaced. And so I think that was always like a friction for that business, for how it could like scale and grow.

• 23:55Harj Taggar?

  But now like Momentic with AI can actually just replace the QA people. So their pitch is not, oh, this like makes your QA people faster. It's like, this just means you don't need a QA team at all. So they can just focus the sell onto like engineering and engineering doesn't need buy-in from QA at this point. And you can also go in, I mean, to start with, you can go and sell to companies that don't even have big QA teams at the moment. They just use something like Momentic and then it will just like keep scaling with them.

• 24:21Jared Friedman?

  Scaling and they'll just never build a QA team ever. Yes. That is a real life case study of what Diana was saying about why these vertical AI agent companies can be 10 times as big as the SaaS companies.

• 24:31Harj Taggar?

  I'm seeing this interesting now, like in recruiting too. I had this exact same issue with Triplebyte where to build the software. To build software that makes it easy to like screen and hire software engineers, you need buy-in from both the engineering team that they're joining, but also the recruiting team. And effectively the software we were building was trying to replace the recruiters, but we couldn't completely replace the recruiters. But now with NYC.

• 24:54Jared Friedman?

  Yeah. And so the recruiters were always like.

• 24:58Jared Friedman?

  Opposing, opposing it because it was a threat to them.

• 25:00Harj Taggar?

  Yeah, so it was just always like friction on like how, on like how far you can get when the customer you're trying to sell to is worried about being replaced. But yeah, I think now it's still early days, but now with AI you can build things that do the whole stack like of recruiting. We have a company we worked with last batch, like Nico, working them A priora, which is actually just doing like the full like technical screen, the full initial recruiter screen and getting great traction. So I think as those things keep going, like they won't have the same thing. You won't have the friction of, oh, I need to convince recruiters to use this. You're probably just like not build a recruiting team in the same way that you used to.

• 25:40Diana Hu?

  I mean, other example is even for DevTools companies, they have to do a lot of developer support. And I work with this company called Capad AI that basically built one of the best chatbots that responds to a lot of the, a lot of the technical details that are hard to answer. And I think a lot of the companies that started using them, they actually ended up having DevRel teams that are a lot smaller because in just a lot of the developer documentations, even the YouTube videos that DevTools put up and even a lot of the chat history. So it just keeps getting better and better and is like gives really good answers, actually. It's one, one of the best I've seen.

• 26:25Jared Friedman?

  Yeah, I also worked with a customer support, like an AI customer support agent company called PowerHelp. Well, actually, we both did last batch. And I learned a couple of interesting things from PowerHelp. The first is customer, like AI agents for customer support was like the category that's like famously crowded where there's like supposedly like, you know, a hundred of them. And if you go and you Google like AI customer support agent, you'll get like a hundred results on Google. But what I learned through working with PowerHelp is like, it's actually kind of bullshit. Like, like almost all of those companies are doing very simple, like zero shot LLM prompting that can't actually replace a real customer. Support team that does a lot of really complicated workflows.

• 27:10Jared Friedman?

  It just kind of makes for like a nice demo. To actually replace a customer support team for like an at scale company that has like 100 customer support reps to do lots of complicated things every day. You like really complicated software that does all the stuff that like Jake Heller was talking about. And there's only, there were only like three or four companies that were even attempting to do that. And cumulative, they had cumulatively, they had like less than 1% market penetration. And so the market was just completely open.

• 27:34Garry Tan?

  I could also see that being another case of hyper specialization or hyper verticalization. Like there's not going to be, I mean, maybe eventually there could be a single general purpose customer support agent, software company. But we're like in inning, you know, that that'll be like an eighth or ninth inning kind of thing. And we're literally in the first inning. So, you know, instead, you know, you're going to have companies like Giga ML that, you know, it's doing it for Zepdo, doing 30,000 tickets. Every single day and replacing a team of 1,000 people. And but it's very specific and it has, you know, it's not a general purpose demo ware kind of thing.

• 28:14Garry Tan?

  Like it's 10,000 test cases and a very detailed eval set that, you know, is basically just for Zepdo and things like Zepdo. But if you are, you know, any of the other marketplace companies, you're probably going to use it. Cause like, that's a very well defined kind of marketplace that's, you know, instant delivery marketplace.

• 28:36Jared Friedman?

  I think this is the kind of dynamic that led there to be like $300 billion SaaS companies rather than like one like $10 trillion like meta SaaS thing that provides all the software for the world. It's just like, the customers just require really heavily like tailored solutions. And it's hard to build one that like works for everyone.

• 28:53Diana Hu?

  Exactly. I mean, we already gave three examples of customer support, but they're very different verticals. It's like DevTool companies, very different kind of support that you need and the training set to marketplaces, very different, right?

• 29:04Garry Tan?

  Yeah, I guess whether you have agents or real human beings working for you, you end up with the same problem, which is every company bumps up against Coase's theory of the firm. Which says that any given firm will grow only. Only so much to the point where it becomes inefficient to be larger than that. And then that's why there are sort of networks and ecosystems and, you know, a full blown economy. You know, like every firm will sort of specialize to do what it is particularly good at. And then the limits, the outer limits of what those firms can be, it's actually based on your ability as a manager. So yeah, that that part a little bit breaks my brain because, you know, when we spend time with Parker Conrad at Rippling,

• 29:49Garry Tan?

  one of his favorite points is actually, well, you know, everyone's very obsessed with with the fact that the rocks can talk. And, you know, maybe they can draw, but the more interesting thing for him, you know, running HR IT software that, you know, he spends a lot of time thinking about HR, like actually the coolest thing about the LMS is that the rocks can read. And from his perspective, like, you know, he's, I think he has 3,000 employees. He still runs payroll for all 3,000 employees through Rippling. So I think he spends a lot of time thinking about like, how can one person extend their ability as a manager? And I think we're going to see a lot more there. That would be in a reverse argument that if we're at this moment where

• 30:33Garry Tan?

  tools for managers and CEOs are going to get much more powerful.

• 30:40Jared Friedman?

  Oh, it could, it could, it could increase the scale of the firm that you can run.

• 30:43Garry Tan?

  Right.

• 30:43Jared Friedman?

  And that's certainly what Rippling is trying to do.

• 30:45Garry Tan?

  Yeah, this is sort of the war, right?

• 30:46Jared Friedman?

  He's attempting to build this like suite of HR tools where if he wins, he's gonna eat a whole bunch of billion dollar SaaS companies in like one, one giant company.

• 30:53Diana Hu?

  It's a very interesting point, Gary. I think what made me think about this is that with having all these AI SaaS tools, it's gonna give the ability to all these leaders and all these orgs to basically open the aperture of the context window of how much information they can parse. Because there's a limit of how much as humans we can have meaningful relationship. There's like the whole thing with the the mark number. It's about 300 people that you can

• 31:19Garry Tan?

  Hundred fifty.

• 31:20Diana Hu?

  Hundred fifty that you can have a meaningful relationship with. But with AI, because all of these rocks now can read. I think we will be able to extend that Dunbar limit that we have.

• 31:31Garry Tan?

  Yeah, I think Flo Crivello had this interesting post on Twitter that went viral around. I think someone had made a voice chat, like just weekend project as a CEO, but it would call all 1,500 of their employees.

• 31:48Jared Friedman?

  Yeah.

• 31:49Garry Tan?

  And, you know, it was, you know, a very short call, like, kind of sounded like it was from the CEO just asking kind of personally. I mean, it sort of reminds me of that scene in Her where it zooms out and actually, you know, you're following the experience of one person using the Her OS, but actually that Her OS is actually speaking to 15, you know, thousands or tens of thousands of people all at one time. How many others?

• 32:15Speaker 04

  8,316.

• 32:17Garry Tan?

  Yeah, I mean, large language models can talk and can have conversations. And then to what extent can, you know, this power actually extend the capability of one or a few people to understand what's going on?

• 32:32Harj Taggar?

  I heard about that yesterday. It definitely got me thinking because as I understood it, the product is something like it just, it will call up all your employees and then your employees can just like ramble about what they've been doing and it will just extract the meaning out of it and give the CEO like a bullet point summary of here's the most important stuff.

• 32:48Jared Friedman?

  And there were a bunch of like SaaS companies that attempted to do these sort of like weekly pulses pulses from employees using like traditional SaaS software. But like that version is is literally 100 times better than the pre LLM version of this idea.

• 33:02Harj Taggar?

  But I wonder with like that particular tool, just like it's not, it's going beyond just like reading and summarizing. Like this, this is the argument of like if writing is thinking, then like there's actually just a huge amount of work that's involved in the effort of figuring out like who's an effective communicator and like what are the most important things to be like, what are the key things to be focused on as a company? And I just wonder if that at some point do the LLMs do like, they go beyond just like summarizing and reading and doing actual thinking, at which point like who's actually running the the organization?

• 33:38Harj Taggar?

  Interesting thought.

• 33:40Garry Tan?

  I guess the other thing that's kind of interesting about how Parker Conrad's thinking about it is I found out about this recently off an interview with Matt McGinnis, the COO, that there are more than 100 founders who work at Rippling now as sort of specific people who run like an entire SaaS vertical inside Rippling.

• 33:59Jared Friedman?

  It's super cool, the way he's built the team. Har Har probably knows a lot about it because you've done a bunch of interviews with him.

• 34:06Harj Taggar?

  Yeah, I mean, it's definitely very focused on recruiting founders. And I mean, Parker, like Rippling is essentially the the case against vertical, like or verticalization of software.

• 34:20Garry Tan?

  He's actively trying to horizontalize and take over all of HR and IT software.

• 34:24Harj Taggar?

  Yeah, like the whole thesis is basically there's this underlying platform that has like lots of value and he wants to recruit founders and teams that build on top of the platform. Like it's almost a little bit more sort of like Amazon-esque, whereas like shared infrastructure.

• 34:37Garry Tan?

  Yeah, I think every product that they've released, I mean, things like time tracking and whatnot. I mean, basically, they launch a thing and it hits like multi millions of dollars in ARR on day one of launching. And that's exactly what we were talking about earlier. Like, once you, once you have a vertical, once you have a toehold, what you're saying is, well, I have to spend this money on sales and marketing anyway. Can I, you know, basically get higher LTV and hold my CAC constant? And that's sort of what if you look at all the top software companies today, it's like, that's what Oracle is, that's what Microsoft is, that's what Salesforce is. Rippling, knock on wood, going to be the next. But it's it's an interesting alternative to going from zero to one totally on your own.

• 35:22Jared Friedman?

  Do you guys want to talk about some of the voice companies that we have? I think that's like an interesting, like, subcategory of this of this stuff that's like really blowing up now.

• 35:31Diana Hu?

  I have a company that I work with called Salient that basically does

• 35:38Diana Hu?

  AI voice calling to automate a lot of debt collection in the auto lending space, which traditionally-

• 35:44Jared Friedman?

  So they like call up people and they're like, hey, you owe a thousand dollars on your car.

• 35:48Diana Hu?

  Yeah, which actually-

• 35:50Jared Friedman?

  What's up with that?

• 35:51Diana Hu?

  Actually, this kind of job is one of those butter passing job. It kind of sucks because a lot of these low wage workers work in all these call centers and it's like a terrible, boring job. So very high churn and giant headcount to run these because there's just so many accounts with these banks that have to do that. And this is a perfect task that AI could automate. And what Salient has done is has been able to actually get very, very accurate and it has been going live with a lot of big banks, which is super exciting. And this was a company from last year and demonstrating that that part of it that they were able to get in because they sold through top down.

• 36:31Garry Tan?

  I guess the space feels like it's moving very quickly and that we have incredible companies that are voice infra companies like Vappi. And then people can sort of get started right away and retail also. I mean, these are companies that have reached pretty fast scale just because it's one of the more exciting, like mind blowing things that you can get up and running within, I mean, literally the course of hours.

• 36:56Garry Tan?

  And then some of the question that, you know, remains unanswered and we hope they figure it out is how do you hold on to them, especially as you run into things like the new OpenAI voice APIs? You know, do you go direct? Like you probably, it's probably way more work to try to use the underlying APIs off the bat, but these platforms are clearly low bar. And then the question is, can you keep raising the ceiling so that you can hold on to customers forever?

• 37:25Jared Friedman?

  Harj, you were making an interesting point earlier about like how the apps that people have built on top of LLMs has changed from like early 2023 when it started until now.

• 37:34Harj Taggar?

  Yeah, voice, which we were just talking about is a great example of this. I think even if you went six months back, it felt like the voices were not realistic enough yet, the latency was too high, like there was, it felt like we were probably a ways of having AI voice apps that could meaningfully like replace like humans calling people up and like here we are. And yeah, it was just- Zooming out, thinking back to the first YC batch where LLM powered apps first came in, it was probably winter 2023, you know, almost two years ago now. And the apps were essentially just things that spat out some text and not even like perfect text.

• 38:14Garry Tan?

  The Roxitalk, that's about it.

• 38:15Harj Taggar?

  Yeah.

• 38:16Diana Hu?

  Sort of more like copy editing, marketing edit, email edits. It was just a kind of more like, just like incremental.

• 38:22Harj Taggar?

  Yeah, like I had a company, I mean, the one that sticks in my head is a company called Speedy Brand. And what they did is make it very easy for like a small business to just generate a blog and spit out content marketing. It was like a very obvious idea and it wasn't perfect, but it was pretty cool at the time. And that's what we've talked about a bunch of the show, but that's like the chat GPT wrapper turned out around that time. So, hey, like this is what an LLM app looks like. It's just a chat GPT wrapper. It does very basics, spits out some text, like it's going to get crushed by OpenAI in their next release.

• 38:54Jared Friedman?

  And it did.

• 38:55Harj Taggar?

  Yeah.

• 38:55Jared Friedman?

  Well, I don't know if that one did, but, but the, that, that first, that first wave of LLM apps mostly did get crushed by the next wave of GPT.

• 39:04Harj Taggar?

  But I, I feel like we've had this sort of boiling of the frog effect where from our, it's sort of like every three months, things have just kept getting progressively better. And now we're at this point where we're talking about like full on vertical AI agents that are going to replace entire teams and functions and enterprises. And just that progression is still mind blowing to me. Like with two years in, which is still relatively early and the rate of progress is just like unlike anything we've seen before.

• 39:33Diana Hu?

  And I think what's interesting to see is we discussed this in the last episode is a lot of the foundation models are kind of coming head to head. There used to be only one player in town with OpenAI, but we've been seeing in the last batch, this has been changing and Claude is a huge contender.

• 39:49Garry Tan?

  Thank God.

• 39:51Garry Tan?

  It's like competition is, you know, the, the soil for a very fertile marketplace ecosystem for which consumers will have choice and founders have a shot. And that's the world I want to live in. So people are watching and thinking about starting a startup or maybe have already started. And they're hearing all of this. How do you know what the right vertical is for you?

• 40:14Harj Taggar?

  You're going to find some. Boring repetitive admin work somewhere. And that seems to be just like the common thread across all of the stuff is if you can find a boring repetitive admin task, there is likely going to be a billion dollar AI agent startup if you keep digging deep enough into it.

• 40:35Garry Tan?

  But it sounds like you should go after something that you directly have some sort of experience or relationship to.

• 40:42Harj Taggar?

  There is a common, there is definitely a common thread I've seen in the companies that I'm seeing promise with. And another one just pops into my head, sweet spot. I think I mentioned on this before, like they're basically building an AI agent to bid on government contracts. And the way they found that idea, and this is a year ago, was they just had a friend whose full time job was to sit there on like a government website, like refreshing the page, like looking for new proposals to bid on. And they, they were pivoting and they're like, ah, like that seems like something an LLM could do. A company from a recent batch which pivoted into a new idea that's getting great traction. Like they're basically building an AI agent to do process like medical billing for dental clinics. And the way they found the idea was, one of the founder's mothers is a dentist. And so he just decided to go to work with her for a day and just sit there seeing what

• 41:25Harj Taggar?

  she did. And she's like, oh, like all of that, like processing claims seems like really boring. Like an LLM should totally be able to do that. And he just started writing software for like his mother's dental clinic.

• 41:35Garry Tan?

  So I guess, I mean, in robotics, the classic maxim is, you know, the robots that are going to be profitable and that are going to work are going to be dirty and dangerous jobs. And in this case, for vertical SaaS, look for boring butter passing jobs. Well, with that, we're out of time for today. We'll catch you on the light cone next time.