AI sales rep startups have exploded. Why are VCs so wary?
When you ask venture capitalists to explain their investment in AI startups, you’ll hear that companies are testing AI solutions but are slow to integrate them into existing business processes. But there are exceptions. AI Sales Development Representatives, or AI SDRs, is one area that appears to fall into this category. They use voice technology and large language models to create personalized outreach emails. While it is not unusual for several startups to focus on the same issue, it is rare that they all experience rapid growth. Investors say that startups automating content creation for sales teams are experiencing rapid growth. When all 10 have such a stunning product-market fit, it is hard to predict how that will play out. Even though the whole category is on fire and customers are using them, it’s still too early to know whether their growth will continue over the long term or whether they will be discarded like so many other AI pilot projects once the wow factor fades, because they don’t prove to be more effective than human outreach.
Small businesses love AI sales LLMs
Arjun Pillai, founder of Docket, a startup that builds AI sales engineers, is convinced that AI SDR adoption is high because small and medium-sized businesses can easily experiment with these tools. Before Docket, Pillai was the chief data officer at sales lead generation platform ZoomInfo.
“Over the last two years, the reply rate on cold emails fell at least 50%,” Pillai said. “Now that there are a bunch of companies that claim they can improve this rate, everyone is willing to try their service.”
The best-known AI SDR startups include Regie.ai, AiSDR, Artisan, and 11x.ai, but ZoomInfo, an incumbent, also released a copilot that competes with these and other virtual sales agent startups.
While these companies are experiencing rapid revenue growth, it’s unclear if they’re actually helping businesses sell more effectively.[these startups]According to Tomasz Tunguz, founder of Theory Ventures, a chief revenue officer from a publicly traded company disclosed to him that while an AI SDR helped generate a substantial volume of leads over a nine-month period, it did not lead to actual sales.
“So it’s not to say that AI won’t work. It’s to say many of us
do not know how to use AI,” Tunguz said onstage at a SaaStr conference in September.
Will the incumbents squash them?
Chris Farmer, partner and CEO at venture firm SignalFire, said he believes that AI applied to sales and marketing is a large opportunity, but without access to differentiated data, AI SDR startups risk being overtaken by incumbents like Salesforce, HubSpot, and ZoomInfo. These companies’ main products, however, are their customers’ personal data. If they were to offer bots that allowed their customers to tap into their data, then such bots would be more effective. Another venture capitalist, who hasn’t invested yet but looked into this market, said that her firm had looked at several AI SDR startup companies and they all achieved $1 million in annual revenue within a year. She said the impressive growth of these startups was appealing, but she, too, was worried that their solutions would be offered for free by established competitors. Investors should be wary of Jasper, the copywriting startup which was valued at $1.5billion but had to cut 30% of its workforce after ChatGPT.
Investors are not surprised by the rapid adoption of AI SDRs; they are just doubting that adoption is sticky.
Updated: This story was originally published on August 22 and was updated December 26 with comments from Tomasz Tunguz.
