AI is the New WeWork

WeWork demanded that it was a software company. It was not.

First, a disclaimer: I have a lot of respect for WeWork and what Adam Neumann accomplished. I was one of his first tenants (his first floor ever!), and he was generally an all-around good guy to me. I also think Adam truly had higher aspirations to build revenue-generating place-based software until he was stuffed with billions to expand WeWork's physical footprint.

With that said, when it comes to venture capital investments, now, we're witnessing a similar WeWorkian phenomenon in the AI craze. There are customer relationship management software companies that will say that they are artificial intelligence companies. They are CRM companies enhanced by AI. Retail analytics companies that will insist they are AI companies. They are retail analytics companies enhanced by AI. Name most software segments, and you'll have companies masquerading as artificial intelligence concerns. The true AI companies are those building the infrastructure, the utilities, and the software that has the potential to replace human labor almost entirely. Everyone else? They are software companies that had better deliver a user experience and features that serve human users well.

Here's why.

Eating its Own Tail: The Value Paradox

As a software company delivers a product where user seats go down, the inherent needle-moving outcomes that the software drives have to deliver ever-increasing value. Take marketing software, for instance. Let's say this software creates full campaigns without the help of humans. It does everything: creative designs, videos, copy, writing, and placing ads. A marketing company would have needed 10 people to run that off but now needs only one person. That's only one user seat. Now artificial intelligence companies must drive outcomes that create business results. Very visible results because they can't charge for user seats (and charging for time usage won't save a product that doesn't drive outcomes).

WeWork should have focused on real estate. Instead, it lost its focus – comfortable chairs, beer taps unlocked at 3 pm, booths not laced with formaldehyde – and began to sell its digital vision. When the dust settled, it was not in a blue ocean of the world's most desirable office space enhanced by tech, but in one of the reddest oceans in the world, software.

Make no mistake, venture capital will fund several non-AI infrastructure winners that will dominate the "powered by AI" space. Once those winners are entrenched, we're going to see a bloodbath of companies that strayed from their core focus and got caught without a human-centered value prop, just like WeWork. Those who don't dominate will retreat to competing on their core segments and user seat count.

And just like the office concern, I believe we are going to see a coming back to earth for numerous investments with not-enough-customers-to-serve, and valuations that serve as lead balloons.