AI-led automation is rewriting the rules of how companies—be they large software enterprises or scrappy startups—are seeing their market. And this is opening up new vistas where the next generation of ‘AI native’ software will be designed by default to replace not just legacy software but humans as well.
Software entrepreneur-turned-VC investor Manav Garg, founding partner at the early-stage venture capital firm Together, in Bengaluru, sat down with Forbes India to discuss what this means for Indian software startups. Edited excerpts.
Q. First, let’s talk about the tech itself. What’s different about this AI-led shift?
This is a fundamental shift. For example, let’s consider just the software TAM (total addressable market) for sales and marketing. Take Salesforce, which with its revenue of some $38 billion dominates the addressable market of maybe $80-90 billion for sales CRM (customer resource management software).
But you look at the overall sales and marketing spend including salaries, or people cost, which alone can be as much as 70-75 percent, and travel, admin and so on, pure software spend would be only 1-2 percent of the overall cost of the operations of running a sales and marketing machinery.
With AI-led workflow automation, or autonomous workflows, the TAM that you are looking at also includes the replacement of human work. So suddenly the addressable market is significantly bigger. Therefore, the shift is that we’re moving from just a software TAM to software + salary TAM, because of the automation that AI is bringing to human work.
The second shift because of that is, in the SaaS (software-as-a-service) era, you were seeing horizontal platforms, Salesforce, Freshworks, Workday and so on. Either you are going after a large function, or you were a horizontal platform company. So those were the ones that scaled. Vertical companies, in general, have not been able to break out and become billion-dollar businesses.
Now with the shift from software to software-plus-salary TAM, suddenly the verticals also are a bigger opportunity. Because now you will go to a customer saying, ‘I will give you so many AI agents and you pay me on the basis of efficiency.’
Let’s say your cost was $8 an hour, I will give you $2 an hour of a virtual agent. The market is now beginning to understand that verticals will also become big, and we are seeing this in the kind of deals that we are getting (as VCs).
Out of the 2,800 or so startups that we met over the last two years, in terms of where founders were starting in AI, horizontal was 58 percent and vertical was 6 percent (in 2023), and the verticals have now gone to 27 percent, and horizontals have actually come down to 38 percent.
In terms of subsectors, tech for sales, marketing and productivity remain foundational in horizontal AI. Investment research and BFSI are promising emerging areas for AI tech and vertical healthcare is seeing a lot of innovation too.
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Q. What’s the opportunity for Indian startups here?
SaaS is evolving into SaaS.AI. There are about 300 global unicorns in SaaS, which are primarily in workflow automation. Indian startups, wherever they’re based, can actually go after these global unicorns and therefore the opportunity is very big.
You can actually create a vertical agent or autonomous agent in any of those areas (of workflow automation), and suddenly you start eating into their share, again, because of the software-plus-salary TAM shift.
But this isn’t going to be easy. Founders will have to build AI-first products from scratch. You can’t simply put a new skin on a SaaS product and say, ‘oh I’m AI now’. You have to have the AI-first fundamental thinking in that.
For example, India-to-US healthcare is a $10 billion opportunity for Indian startups to help improve efficiency in those segments. We have also invested in three or four companies in our portfolio now: Spry Health, Rapid Claims, Confido Health, they are all doing AI RCM, which is revenue cycle management or front and back-office automation in healthcare.
Their revenues are scaling fast, and that’s a measure that we track—revenue has to scale. So, the opportunity is in diagnostics AI models, clinical trials stack, RCM and so on.
Then, build in those categories that India understands, when it comes to applications—some categories such as customer support or sales tech we understand well, so build in that.
And you would have heard this term services-as-software, and that is coming up. India is the BPO capital of the world, so contact centre automation, finance, accounting, KPO processes—AI is going to eat into all of this because of pure human automation.
And then there is the new emerging area of AI infrastructure also coming out of India now. And I’ve written about this, citing the examples of companies we’ve invested in, such as Composio, in the area of software-to-software communications, and Emergent Software, which is innovating in the area of software development lifecycle (SDLC). This is how we’re looking at the market.
Q. What are some implications for tech founders or developers in this new AI wave?
Well, the implications are, AI could make building an application easier, less labour-dependent, coding is easier, but data and deep domain expertise become critical. And on the business front, pricing models will change, and the seat-based subscription model becomes dated. Therefore, the response needs to include focusing on proprietary data and domain expertise and a move to consumption-based pricing.
Let’s take the example of the SDLC automation that Emergent is offering. They still have humans in the loop, but coding is like read and review. You don’t need the human to write the code from scratch, so the cold-start problem will go away. AI will write the code, but the human will be required to review, to make sure it’s integrated properly with the entire system and working as intended.
Humans will still be needed, but whether it’s for 30 percent or 70 percent of the tasks will vary from domain to domain, and the levels of complexity involved.
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Q. Bringing you back to what you started with, if an enterprise has, say, a 100,000 people today, what happens to them in your software + salary paradigm?
So that hundred thousand probably will come down to 50,000, maybe even 30,000 over the next three to five years. If there are a million jobs in BPO today, it can be half of that in five years, easily. Everything changes. Profit margins will change. Your competition will be much faster as well, we’ll all be talking to machines, my AI agent will be talking to your agent, it will be a very different world.
Today we’re only seeing the first order of change that we’re beginning to see in the market. At a more human level, I feel that people will have more time, and those who really want to work hard, they will unleash themselves. Your mind will not have to focus on mundane tasks anymore and you’ll be challenged to evolve to a different level altogether.
That said, there will also be many segments of people who will not be able to move as fast as needed, because of skill levels or just age, which means governments will have to definitely play a big role. In the West you can see that AI is already an arms race. There are also other difficult technical issues such as the biases that AI training is subjected to. And these will affect everything in our lives, in schools and colleges and all walks of our life. Therefore, policy making and the role of governments becomes very important.
Q. So, let’s say we actually succeed in taking AI to the masses…
With ‘AI for India’, there are two large opportunities. In healthcare there is the AI doctor. We have a big divide between rural and urban India in terms of availability of doctors and health care professionals. Similarly, there are massive opportunities in India to use AI in bridging the divides in education and skilling and recruitment of blue-collar workforce, providing more in-demand vocational training and more efficient hiring.
I think the literacy levels and healthcare can see a massive change for the better, in five years. I’m from a small town in Moga (district) in Punjab. I was able to break out. What if those who couldn’t had access to an agent of the best professor in IIT in physics or math, and they could get similar kind of education, without leaving the town.
It will unleash a totally different kind of potential because we are a very young nation, and many more can break out. Maybe they’ll be more hungry, they want to prove themselves, build new things. So, I think India can unleash a massive amount of innovation from the set of people who don’t have full access today.
What if the privilege (of good education and health) becomes more democratised and comes at a cost which everybody can afford. That will unleash, I would say, the 70 percent of India that does not have that access today to the same quality of education or healthcare (as in a city for the affluent). The social impact for India at the grassroots is going to be huge, and India will unleash a totally new wave of innovation because of that.