This is the extinction event for software companies that don't embrace AI, says Bessemer's Byron Deeter

FTC is suing Adobe, accusing it of hurting consumers by hiding fees, preventing users from easily canceling, Adobe telling CNBC in a statement. We are transparent with the terms and conditions of our subscription agreements and have a simple cancellation process. We will refute the FTC's claims in court. Joining us now is Byron Dieter, partner at Bessemer, focused on cloud and AI. Byron, great to have you. I actually want to zoom back for a moment because a few years ago we were talking about post Fang, maybe in a way post cloud, this idea of Mount SAS, this, this basket of stocks you put together Microsoft, Twilio, Salesforce, Adobe, Amazon, Shopify. And to me, the performance of that group versus the S&P speaks to something that Mike Santoli was sharing with us earlier about how the whole market's not moving together since December 2020. And over three years, the S&P has beaten everything in Mount SAS except for Microsoft. So what does that mean about the state of every piece of software out there that's not mega cap? Is there opportunity there or are the mega caps just crushing everything else? Yes and yes. So great to be back. John, Thanks for having me. And we got a few things right with that and we are waiting to see a few things play out. I would double click on your mega cap piece of that. So the Microsoft Amazon Hyperscaler part of that we nailed and you've seen them continue to play into their lead and really pull away the mid caps. The Shopify and Adobe piece of that has performed quite well in an absolute sense, but sort of hung with Fang and some of these other indices. What we haven't seen though is the quote UN quote smaller caps, which in this food group ranges from the 10 billion to the 150 billion. They've meaningfully underperformed. And so the question is, this is an inversion from the last waves in tech where in cloud and crypto in some of these markets, the smaller, more disruptive folks led and then the big companies followed. The question now is, will the smaller companies catch up and will they benefit from it? That's what we're betting on is that there is a delay and these pure plays aren't getting forward credit for their product Rd. maps as the incumbents are. But we haven't seen that in the market of the prices yet. And that's the weight we all have in mind. And the twin danger, it seems to me, Byron, is that even if the smaller caps do follow in the AI era, that the opportunity is less in the same way that historically the opportunity has been really big for the for the smaller companies out of the first movers and investors got to capture that. Is there an argument beyond NVIDIA, Microsoft, Amazon, maybe even Apple now that these smaller companies will get such an outsized AI benefit that public stock investors will benefit in a big way? So I disagree with the first part of that comment which was on market size. I believe that everything that is software addressable is now part of the AI total addressable market. Plus add in the services economy that is being very being consumed by much of the AI opportunity. This is the extinction level event for software. The software companies that don't respond and embrace AI are going to have absolute fundamental threats to their business. And so you have this huge prize up for Grab, which is essentially the the majority of software spend, plus a meaningful part of the services economy, trillions of dollars of spend that will be shifted over the coming years. We've seen the massive market reaction to the public names that are doing AI washing and have a little bit of AI in their business. What we haven't yet seen is this huge wave of private companies that are coming forward that are pureplay AI companies, and that is the next wave that's building. NVIDIA is clearly benefiting from this. They see the spend from these private companies rolling through them. The infrastructure and hardware players are seeing parts of this, but for the software and app layer that's still under the iceberg water level and that's still going to reveal itself in the coming years. And I think that's the excitement that you see building in the private markets and from the investor sentiment, waiting for this wave to reveal itself. So Byron, when do we know we're through that extinction event? Then? When do you know that the dust is settled and that the winners and losers have actually been determined? We're in the first innings of this. When you think of the plate tectonics going on now with the hyperscalers and add in meta and apples announcements recently, you've got the biggest of the bigs, the trillion dollar companies that are fighting for this repositioning of their business. And then you've got the open a eyes, the anthropics, the challengers that are playing with, you know, multi Decker corn valuations and billion dollar checkbooks that are coming after them with better products today. And you have this entire business under threat dynamic rolling through and the the chairs are going to change. And it's fascinating to see how folks like Apple who haven't made bets on LLMS yet are responding and they're partnering and they're leveraging their dual assets of of a ubiquitous platform and massive consumer data to try to get into that game and re enter. And then you've got folks like Google, Alphabet, who have their core business under attack and they've got a lot to lose and arguably very little to gain from what's going on, right?

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