貝恩：2023技術(shù)報告 Technology Report 2023 Reset and Reinvent The Thriving Landscape of Tech Innovation

TechnologyReport2023

ResetandReinvent:TheThrivingLandscapeofTechInnovation

BAiN&CMPANY

Acknowledgments

DavidCrawford,leaderofBain&Company’sGlobalTechnologypractice,andateamledbyDanaAulanier,practicedirectoroftheTechnologyServicespractice,preparedthisreport.

BainPartnersJohnBeaumont,BryceCrawford,DavidCrawford,MatthewCrupi,RishiDave,

DavidDeming,FrankFord,JonathanFrick,ArunGanti,PeterGuarraia,PeterHanbury,KarenHarris,SimonHeap,JoshHinkel,JensFriisHjortegaard,AnneHoecker,ChristopherJohnson,JordanLee,BrianKmet,DavidLipman,JustinMurphy,RohanNarayen,BrendanO’Rourke,ChristopherPerry,BillRadzevych,GeneRapoport,MichaelSchallehn,ChristopherSchorling,JenSmith,Balaji

Thirumalai,JFVanKerckhove,ColleenvonEckartsberg,andJueWang;ExpertPartnersSyedAli,SanjinBicanic,BalaParameshwaran,TedShelton,andVeluSinha;AssociatePartnersJamesBaird,JayBhatnagar,ArjunDutt,PeterHenle,andNiharNaik;SeniorManagerNehaVerma;VicePresident,DataScienceEricSheng;andChiefExecutiveofEnterpriseBlueprintsNeilMulhollandwrote

itschapters.

TheauthorswishtothankBainPartnersAdamBorchert,BhaviMehta,andPaulRenno;Associate

PartnerTanveeRao;SeniorManagersJamesCarlsonandRuchiSingh;AdvisoryPartnerMikeMcKay;ManagersYashDamania,AdityaPoonia,andCollinSkousen;ConsultantsJamesAdams,Gavin

Cosgrave,CaroGonzalez,ChrisMa,DeekshaManjunath,andDubemMbeledogu;AssociateConsultantsRamyaAjjarapu,KushAmin,JoshuaChiang,HelenaEpstein,MistyLiao,MyronMageswaran,AlexNielsen,andKitWiggin;PracticeDirectorsDanaAulanier,LaurenBrom,andAlexSmyth;PracticeSeniorManagersElisabethDuffyandTarunGupta;AssociateDirectorsofPrimaryResearchMikeKatesandDawnKix;LeadsofPrimaryResearchJPLissandChristopherMarguette;BainCapabilityNetworkSeniorManagersSaurabhGuptaandNishatParveen;andJohnCampbell,JeffBauterEngel,AdamJones,andDavidSimsfortheireditorialsupport.

Thisworkisbasedonsecondarymarketresearch,analysisoffinancialinformationavailableorprovidedtoBain&Companyandarangeof

interviewswithindustryparticipants.Bain&CompanyhasnotindependentlyverifiedanysuchinformationprovidedoravailabletoBain

andmakesnorepresentationorwarranty,expressorimplied,thatsuchinformationisaccurateorcomplete.Projectedmarketandfinancialinformation,analysesandconclusionscontainedhereinarebasedontheinformationdescribedaboveandonBain&Company’sjudgment,andshouldnotbeconstruedasdefinitiveforecastsorguaranteesoffutureperformanceorresults.Theinformationandanalysishereindoesnotconstituteadviceofanykind,isnotintendedtobeusedforinvestmentpurposes,andneitherBain&Companynoranyofitssubsidiariesortheirrespectiveofficers,directors,shareholders,employeesoragentsacceptanyresponsibilityorliabilitywithrespecttotheuseof

orrelianceonanyinformationoranalysiscontainedinthisdocument.ThisworkiscopyrightBain&Companyandmaynotbepublished,transmitted,broadcast,copied,reproducedorreprintedinwholeorinpartwithouttheexplicitwrittenpermissionofBain&Company.

NetPromoter?,NPS?,NPSPrism?,andtheNPS-relatedemoticonsareregisteredtrademarks,andNetPromoterScoresm,NPSxsm,andNetPromoterSystemsmareservicemarksofBain&Company,Inc.,NICESystems,Inc.,andFredReichheld.

Copyright?2023Bain&Company,Inc.Allrightsreserved.

BAIN&COMPANY○

1

Contents

ResetandReinvent:TheThrivingLandscapeofTechInnovation

2

ValueEvolution

5

CreatingValueinTechThroughouttheLifeCycle

6

PreparingforExit:ABuyer’sMarketIsComingforTechAssets

10

AIInvestors:ActFast,ActWisely

15

TechnologyEntersItsPost-GlobalizationEra

20

StrategicBattlegrounds

26

You’reOutofTimetoWaitandSeeonAI

27

HowAIIsRecodingtheSoftwareBusinessModel

32

GenerativeAIandCybersecurity:

StrengtheningBothDefensesandThreats

37

TakingtheHyperboleOutoftheMetaverse

41

TheUntappedValueattheIntelligentEdge

47

AftertheChipShortage,FearsofaCapacityGlutAreOverblown

52

OperationalTransformations

58

DigitalInnovation:GettingtheArchitectureFoundationsRight

59

TheTalentImplicationsofGenerativeAI

63

HowEnterpriseSalesCanSuperchargeProduct-LedGrowth

68

HowYourRevenueCanGrowFasterThanYourSalesforce

73

DecarbonizingTechnologySupplyChains

76

2

ResetandReinvent:TheThriving

LandscapeofTechInnovation

ByDavidCrawford

Technologythrivesoninnovation,andtoday,thesectorisinaperiodofrenewalandreinvention.Techishealthy,vibrant,andmovingforwardassertively,drivenbystrongglobaldemandandbroadinterestin

newtechnologies.

Whatlookedlikeaslowdownwasactuallyareset.AftertheCovid-19spendingbubble,demandslowed,valuationsfell,andprofitabilitymatteredagain.Thesectorresponded,cuttingcostsandlayingoffthousands,thenbouncedbackquicklywithmarketcapsnearpeaklevelsagain(Figure1).

Thisreboundridesonoptimism.Technologyisincreasinglycentraltoeverythingwedo—personally,professionally,andasasociety.Evenduringperiodsofeconomicuncertainty,companiescontinuetoinvestintechnology(Figure2).LargelanguagemodelsandgenerativeAI

representthemostsignificantdisruptionsincetheInternet.Theneedforresilienceinsupplychainsiscreatingcapacityinnewplaces.Thesearetheinvestmentsthatwillpropelandreshapethetechsectorintheyearsahead.

DavidCrawford

LeaderofBain’sGlobalTechnologyPractice

3

Figure1:Thetechnologysectorbouncesback

S&P1500aggregatemarketcap,weeklypercentagechange

300%

250

200

150

100

0

Tech

Next-best–performingsector

Worst-performingsector

January1,2019January7,2020January5,2021January4,2022January3,2023

Note:BasedonWednesdayclosingprices

Sources:S&P1500compositesectordata;Bain&Company

Figure2:MostCIOsstillaren’tdecreasingtheirbudgets

PercentageofCIOswhosaythattheirbudgetsareflatorincreased

July2021

August2022

August2023

80

76

87%

Source:BainITDecisionMakersSurvey(July2021n=150;August2022n=200;August2023n=151)

ValueEvolution

CreatingValueinTechThroughouttheLifeCycle

6

PreparingforExit:ABuyer’sMarketIsComingforTechAssets

10

AIInvestors:ActFast,ActWisely

15

TechnologyEntersItsPost-GlobalizationEra

20

6

ValueEvolution

CreatingValueinTech

ThroughouttheLifeCycle

Drivingreturnsdependsonhowfardowntheroadyouare.

ByDavidCrawford,MatthewCrupi,andJFVanKerckhove

AtaGlance

Inthetechsector,investorsareattractedtoyoung,disruptivecompaniesbasedontheirgrowthpotential.

Ascompaniesandtheirmarketsmature,investorsexpectamixofgrowthandreturns.

Maturecompanieswithaproventrackrecordinstablemarketscanexpectslowergrowthwhiletheirinvestorsarecloselyfocusedonprofitabilityandreturnoninvestedcapital.

Understandingwhereyourcompanyisinitslifecycleandsignalingexpectationstotherightgroupofinvestorsisessentialforattractingthecapitalthatcompaniesneedtooperate.

Overthepastfiveyears,astechnologycompanieshavenavigatedthroughvolatilesupply-and-demandshocks(Covid-19,supplychainconstraints,recession,inflation)anduncertaintyonfinancing(highercostofcapital,closedequitymarkets),manyhavefocusedongrowthatanycost.Theirattentionisshapedbythecommonbeliefthat,intech,growthmattersmostincreatingvalueforshareholders.

7

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Thetruthismorenuanced:Shareholdersrewardtechcompaniesdifferentlybasedonacompany’scontextandpointinthelifecycle.Formorematurecompanies,theirreturnoninvestedcapital(ROIC)canmattermuchmore.Asmarketsmature,theyalsoattractmoreconservativeinvestors,whothenpressurecompaniestoturntowardmorepredictable,profitableopportunities.Thisthenlimitsfurthergrowthandinvestmentinthebusinessandattractsanewbreedofvalueinvestorwhocaresaboutstablerevenuestreams,reinforcingthiscycle.

Asmarketsmature,theyalsoattractmoreconservativeinvestors,whothenpressurecompaniestoturntowardmorepredictable,profitableopportunities.

Whendeterminingacompany’svalue,investorsoftenturntototalshareholderreturn(TSR),afinancialmetricthatindicatesthetotalamountaninvestorreapsforaninvestment.TSRhasafewfundamentalfactorsthatmeasurestrategyandoperations(forexample,revenuegrowth,profitability,andcapitalefficiency);investorsentiment(multiples);andcapitalstructure(debt-to-equityratio,buybacks,anddividends).Theweightofthesefactorsdiffersascompaniesandtheirmarketspassthroughlifestageswithdifferentgrowthrates(seeFigure1).

?Early-growthmarketsmaybesmall,buttheyaregrowingfast,disruptingexistingindustriesorcreatingnewones.Speedandinnovationareessentialforrelatedbusinessesastheyestablishtheirmarketposition.RevenuegrowthandfutureprospectsdriveTSR,creatingvalueforventureinvestorswhoinvesttoscalenewchampions.

?Late-growthmarketsstillbenefitfromrobustgrowthastheyexpandandstabilize.TSRisbasedongrowth,withcreditforinitialprofitabilityasinvestorslookforgrowingcompanieswithproveneconomicviabilityandscalableprofitability.

?Maturemarketsarerelativelystable,withsingle-digitgrowthexpectations.Anincumbent’ssharepositionmayvarybyonlyafewbasispointsayear.InvestorsfocusonprofitabilityandROIC.Growthislessimportant,valuedonlyifit’sefficientlyfunded.

?Asset-richlegacymarketsmaybefightingthegravitationalpullofshiftingcustomerneeds.Investorsexpecthighlypredictablereturnswithlowtonotoleranceforrisk.

Onceacompanyiswithinagivenstageofmarketmaturity,itisimportanttomaximizethesourcesofTSRspecifictothatphase.Althoughthesephasesseemlogical,toomanycompaniesinlate-growthandmaturemarketsdownplaytheimportanceofprofitabilityandROIC.Growthstillmatters,butprofitabilityandcapitalefficiencymaycreatemorevalue.

8

Figure1:Thecatalystsfortotalshareholderreturnsdifferaccordingtoacompany’sstageinthelifecycle

Marketmaturity

Earlygrowth

Lategrowth

Mature

Asset-richlegacy

Historictotalshareholderreturn(TSR)catalysts

ProfitabilitygrowthMultiplegrowthRevenuegrowthDividedpayoutSharecount

Contributors

toTSR

Detractors

fromTSR

TSRbasedonfuture

TSRbasedon

TSRbasedon

TSRbasedon

growthprospects

growthandwith

creditforinitial

profitability

profitabilitygrowthandcapitalreturns

capitalreturnstoshareholders

Strategy

Strategy

Strategy

Strategy

Sellsharesand

Balanceprofitability

Driveoperational

Manageassetsto

builddebttofund

andreinvestment

excellenceandROIC

deliverpredictable

rapidgrowth

incoremarkets,

returningexcesscashtoshareholders

returns

Examples

Examples

Examples

Examples

PaloAltoNetworks

AmazonWeb

Cisco

DigitalEquipment

2010–2022

Services

2012–2022

Corporation(DEC)

Palantir

2011–2015

Broadcom

1991–1998

2018–2022

Microsoft

2012–2022

CrowdStrike

2008–2015

Oracle

2017–2022

NetApp

2009–2022

Snowflake

2010–2019

2019–2022

Note:DECstartdateisyearoffirstreportedannualloss,andenddateisyearofCompaqacquisition

Sources:S&PCapitalIQ;Bainanalysis

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9

Companiesinlate-growthandmaturestagesshouldbeimprovingtheefficiencyofgeneratingrevenueby:

?rethinkingwhichmarketsaremostattractive;

?reducingportfoliocomplexityandadoptingdesign-to-valueprinciplestomatchcustomerneeds;

?revisitingwaysofworkingtoimproveproductivity(includingAIandautomation);

?deployingnewbusinessmodelsbasedonasset-lightsolutions;

?pursuingM&Awhereoperationalsynergiesareclear;and

?reinvigoratingaleancoretoensurenewgrowth.

Movingbackupstreamtohigher-growthphasescanbeextremelydifficult.Fewtechcompanies,apartfromApple,haveproducedsuccessfulsecondactsinunrelatedadjacencies,butAdobe,

Microsoft,Nvidia,andothershaverenewedthemselveswithanupstreamshiftbyreignitingandmodernizingthecore.Late-growthcompaniessuchasAmazonhavealsosuccessfullyunleashedEngine2catalysts,generatingasecondwaveofgrowth.

Interestratehikeshaveincreasedthecostoffunding,soshareholdersarewatchingreturnson

capitalmorecarefullyandrewardingcompaniesthatunderstandwhentoreinvestinthebusiness,whentousecapitalmoreefficiently,andwhentoreturncapital.

Asbusinessesgrow,theirinvestorsandvaluationstendtoreflectthematurityoftheircorebusiness.Sometimes,smaller,lessmaturebusinessestrappedwithinthebiggercompanyarenotproperlyvaluedbythemarket—afactthat’softenpointedouttoboardsbyactivistinvestorsratherthan

management.Portfoliorestructuringcanunlockvalueandhelpmatchthesebusinesseswiththerightinvestments.

Companiesshouldbeproactiveinshapingtheirinvestorbase,targetingthetypeofinvestorstheywantandtailoringcommunicationstothem.Amazondidthisbysignalingitsintenttodeprioritizeprofitinfavorofcontinuallyreinvestinginthebusiness.Byclearlycommunicatingthesepriorities,Amazonwasabletosetexpectationsandattractgrowth-orientedinvestorswhosupportedthisreinvestmentratherthanconservativeinvestorswhowouldnothaverewardedthisstrategy.

Tomaximizevalue,strategiesforgrowth,capitalallocation,andinvestorrelationsshouldchangeovertimeasmarketsmature.Shapingtheinvestorbaseandcommunicatingclearlytosetexpectationsareessentialtoensureinvestorsupport,whethergrowingthecorebusiness,searchingforanewengineofgrowth,unlockinghiddenassets,orimprovingcapitalefficiency.Understandingtherolesamongmarketmaturity,investorexpectations,andsourcesofTSRisessentialtodelivershareholdervalueateverystepofthejourney.

10

ValueEvolution

PreparingforExit:ABuyer’sMarketIsComingforTechAssets

Abacklogofportfolioinvestmentsislikelytocometomarketwhendealactivity

picksbackup.

ByBrianKmet,DavidLipman,ChristopherPerry,JenSmith,andColleenvonEckartsberg

AtaGlance

Reducedexits,extendedholdtimes,andsteadydrypowderreservespointtowardanincomingwaveoftechassetexitsthatwillcreateacrowded,competitivebuyer’smarket.

Firmsthathavepreparedtostandoutwillfarebetterthanaverage,whileothersmaystruggletosellmatureassetsintheirportfolio.

Thevolumeoftechnologydealshasslowedsincemid-2022foranumberofreasons,includinglimiteddebtavailabilityamidrisinginterestratesanddeclinesinassetvaluesthathaveleftbuyersunabletomeetsellers’askingprices.Successfuldealshavereliedongreaterequitycontributions(with

expectationstorefinancelater),partialequitysalestofundgrowth,andagreaterproportionofadd-onsratherthanstandaloneorplatformassets.Overall,thepaceoftechdealssincethethirdquarterof2022continuestobeslow,inlinewiththebroaderdealmarket.

Exitsarealsodown—onaverage,about$20billionperquarterinthefirsthalfof2023comparedwith$107billionperquarterinthefirsthalfof2021and$75billionperquarterinthefirsthalfof

2022.Agrowingbacklogofdeals,includingmorethan$700billionoftechassetspurchasedbetween

11

209

2018and2021(seeFigure1),hasledtolongerholdtimesoftechportfoliocompanies.In2023,nearlyhalfoftechportfoliocompanieshavebeenheldformorethanfouryears,and15%havewaitedmorethansixyears.Forthefirsttimesince2012,morethan40%oftechportfoliocompaniesarebeingheldformorethanfouryears(seeFigure2).Thisbacklogoflong-heldportfolioassetsisgrowingmorequicklythanthemountainouslevelofdrypowderthatisholdingsteady,whichwillcreateabuyer’smarketwhenactivitypicksup(formore,readBain’s“StuckinPlace:PrivateEquityMidyearReport2023”).

Thebacklogoflong-heldportfolioassetsisgrowingmorequicklythanthemountainouslevelofdrypowderthatisholdingsteady,whichwillcreateabuyer’smarketwhenactivitypicksup.

Figure1:Techdealshaveslowedoverthepastyear,andabacklogofdealspointstoacomingbuyer’smarket

Followingbuyoutfrenzyin2020–2021,

exitshaveslowed

Globaltechsectorbuyoutexitvalue,inbillionsofUSdollars(2018–2023YTD)

130

52

5758

36

7

23

25

2524

79

112

82

25

1314

26

101

46

85

20

9

Q1Q1Q1Q1Q1Q1

201820192020202120222023

Notes:YTDafteryearstandsforyear-to-date;FafteryearstandsforforecastSource:Dealogic(asofJuly5,2023)

Abacklogofdealswillcometomarketwhendemandrecovers,includingmorethan$700billionofassetsthattradedbetween2018and2021

Globaltechsectorbuyoutdealvalue,inbillionsofUSdollars(2018–2023F)

315

Likelytotrade

withinthe

nextthreeyears

149

158

143

113

201820192020202120222023F

Annualized

12

Figure2:Nearly45%ofcurrenttechportfoliocompanieshavebeenheldforlongerthanfouryears

Numberoftechbuyout-backedcompaniesbytimeinportfolio(global)

4K

3

2

1

0

Percentage

heldfor

longerthan

fouryears

2012

43%

2013

40%

2014

38%

2015

37%

2016

35%

2017

32%

2018

29%

2019

29%

2020

30%

2021

29%

2022

33%

2023

44%

Timein

portfolio

Longerthansixyears

Fourto

sixyears

Zeroto

threeyears

Note:Dataaggregatedbyyearofinvestmentandtimeinportfolio

Source:PitchBook(asofMarch31,2023)

Howtoaddvalue

Withmultiplestrendingdownwardandacompetitivemarketonthehorizon,investorsshouldfocusonaddingvaluetoexistingassetsbygrowingearnings,redefiningoperationalprocessesthatmay

havebeenignoredforawhile,raisingefficiencywithnewtools,andseekingnewareasofgrowth.Withinsoftware,weseeseveralinterdependenttrends.

?Focusonmarginimprovement:Asmarketvaluationshavedeclined,investorshaveshiftedfocusfromgrowthatanycosttorewardingprofitability.Toexpandmargins,companiesneedtobuildscale,increaseautomation,andboostproductivity—allwhilemanagingthecostsofgrowth.

Operationalmetricsandbenchmarksbecomemoreimportantascompanieseliminatelow-valuework,automateless-complextasks,andexploreoffshoreopportunities.

?Addressweaknessesinthego-to-marketmodel:Aslowingeconomyhasrenewedthefocusonsalesandmarketingcapabilities.Bysynchronizingsales,marketing,ops,andproductfunctions,companiescandesignfocused,repeatablesalesplays.Additionally,theemergenceofproduct-ledgrowthletssoftwarecompaniesengagecustomerswithaself-servicemodel(formore,readtheBainBrief“WhatItReallyTakestoDevelopProduct-LedGrowth”).

13

?EvaluateAI-drivendisruptionandefficiencyimprovements:TherecentboominconsumerAIusageandbusiness-to-businessapplicationshasledtoavarietyofnewusecases,specificallyintwokeyareas:R&Dandenablementtools.PortfoliocompaniesareevaluatingthepotentialofgenerativeAI,andtheyarefocusingtheirR&Deffortsonareasofgrowthwhilepullingbackondistractions(formore,seetherelatedchapterinthisreport,“AIInvestors:ActFast,ActWisely”).

?Considernewgrowthvectors:Companiesaredevelopingthenextphaseoftheirgrowthstrategies,whichshouldincludeadjacencies,newregions,andbuyandbuildthroughM&A.

Whentoaddvalue

Portfolioactivismpaysoffatanypointintheinvestmentprocess,fromearly-stageduediligencetopreparingforexit.Wehaveseenbetter-than-averagereturns,uptothreetimesmultipleoninvestedcapital(MOIC),withpost-acquisitionactivism(seeFigure3).

Thebiggestreturnscomefromengagingearly,asclosetodayoneaspossible,aswellasengaginglater,withplanstomovefromgoodtogreatbeforeanexit.

Figure3:Post-acquisitionportfolioactionscandeliveruptoathreetimesmultipleoninvestedcapital

Averagemultipleoninvestedcapitalforinvestmentsbytypeofeffort

3.0

2.5

2.0

IndustryaverageDiligence(pre-acquisition)Post-acquisition

Dealcount—19984

Sources:Baincoinvestmentdatabase;BainRevenueSystem

14

?Engageearlytostrengthencapabilities.Settingstrategyalongwithsubstantialsupportincapability-levelexecutioncanimproveearningsandboosttheexitprice.

Oneexampleofaddingvaluesoonafteracquisitioncomesfromasoftware-as-a-servicecompanyofferingcriticaldataandcommunicationsITsoftwareforbusinessclientsthatwantedtodevelopaplanforefficientgrowth.Thecompanystartedbyidentifyingprospectsanddevelopingachannelstrategythatshiftedfocustoitshighest-priorityaccounts.Amongotheractions,thecompany

diagnosedsalescoverage,acceleratedthesalespipeline,andassesseddiscountingandprice

increasepracticesinordertomaximizerevenue.Adetaileddiagnosticacrossmarketingchannelshelpeditdifferentiateitsmessageandtargettherightaudience.Online,itranstructuredA/B

testsandimprovedthewayitmeasuredleadtrackingandrevenueprojections,usingbenchmarksfromOPEXEnginetocompareperformanceacrossindustries.Throughtheseactions,thecompanyidentifiedopportunitiestoraiseearningsbyabout$40million,mostlythroughpriceincreasesandnewmarketleads.

?Engagelaterwithtargetedactions.Forcompaniesalreadyperformingwell,strategicinvestmentsthatraisetheirgamefromgoodtogreatcandeliverthegreatestpunch—onaverage,a50%increaseinMOICwithinayearoftargetedengagement,mostlyfromtheworkleadingtoasuccessfulexitatanattractiveprice.

Forexample,oneeducationaltechnologycompany,aleadingproviderofonlinetestandassessmentsolutions,hadalreadyachievedsignificantorganicgrowthbasedonthestrengthofitsproduct.Aninconsistentgo-to-marketapproachthatincludedinvestingtoomuchinaccountsunlikelytodeliverthenecessaryreturns,however,preventedthecompanyfromachievingitsfullpotential.

Thecompanyimproveditsgo-to-marketstrategytocapitalizeonitsstrongproductadvantageandtogainmarketsharebeforeitssale.Itassessedthecompetitivelandscapeandredefined

M&Aobjectivestoarticulateapathwaytofurthergrowth.Pushingafasterexecutionhelpedthecompanygetmoreoutofitsmarkettractionandtrajectory,whichboostedequityvalueduringthesalesprocess.

Theseactionstookanalreadyremarkable7timesMOICatthestartoftheengagementandraiseditto14timesatexit.Anewsegmentationofcustomersofferedclarityonserviceandbuyingbehaviorfor13,000potentialcustomers.Thecompanycrystallizeditsstrategy,revisitedideasforadjacencyandacquisitions,andimprovedcompetitivedynamicstocreatetherightdialogueforexit.Withintwoyears,theprivateequityownerscompletedapartialsaleofthebusiness,keepingasizablechunkthemselvesgiventheirnewfoundconfidenceinthebusiness.

Investorsandportfoliomanagersthatdon’taddsignificantvaluetotheirsoftwareassetswillstruggletosellamongagrowingslateofmatureassets.Techinvestorsthathavedonetheworknecessarytoimproveearningsaremorelikelytosucceedintheupcomingcompetitivebuyer’smarketwithassetsthatstandout.

15

ValueEvolution

AIInvestors:

ActFast,ActWisely

Lowerbarrierstoexperimentationopenthedoortomoredisruption,butincumbents

haveadvantages,too.

BySanjinBicanic,DavidLipman,ChristopherPerry,GeneRapoport,andJueWang

AtaGlance

Investors’enthusiasmforartificialintelligenceishigh,withAIandmachinelearninginvestmentsleadingventuregrowthinthefirsthalfof2023.

Acrossindustries,AIshouldincreasetheproductivityofknowledgeworkers,andsoftwarecompaniesalreadybenefitfromAIcodingassistants.

Investorsshouldbeassessingrisksandopportunitiesacrosstheirportfolios,understandingwheretechnologywillcreatenewadvantagesandwhereitmightleadtoshareloss.

Investmentsintechnologyflockedtoearly-stagegenerativeAIcompaniesinthefirsthalfof2023,ledbyMicrosoft’s$10billioninvestmentinOpenAI(seeFigure1).

Withthepotentialforsweepingchangestothetechsector,investorsarerightlyafraidofthewaysthatgenerativeAItechnologiescanaffectcurrentandfuturetechassets.Theexcitementraisesanumberofpossiblyoverwhelmingchoicesforinvestors:HowwillAIaffectourportfoliocompanies?Whichbusinessmodelswillchange,andwhatnewopportunitieswillpresentthemselves?Howdoweadjustdiligencecriteriaforfutureinvestments?AretherewaysweshoulddeploygenerativeAItoimproveourowninternaloperations?

16

201

199

17%

13%

118

111

14%

28%

Figure1:Artificialintelligenceandmachinelearningsolutionsledventureandgrowthfundinginthefirsthalfof2023

Quarterlycapitalinvestmentsinventureandgrowthstagedeals,inbillionsofUSdollars

$300B

200

100

0

230

14%

H12021H22021H12022H22022H12023

Allotherdealvalue

AI/MLdealvalue

Note:DataasofJuly12,2023;AIstandsforartificialintelligence;MLstandsformachinelearning

Source:Pitchbook

“Softwareiseatingtheworld,butAIisgoingtoeatsoftware.”—JensenHuang,CEOofNvidia

Broadimpactsinsoftware

Asthenatureofhuman-to-computerinteractionsevolves,customerexpectationsaregrowing.

GenerativeAI–poweredchatinterfacesforapplicationsanddatasimplifytheuserinterface,increasethelocalizationandpersonalizationofcontent,andopennewroutestomarket.

Ne