AI Startups: Faster, Cheaper, but Stickier?

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AI is changing how Silicon Valley builds startups.

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Notably, AI tools are boosting productivity, allowing teams to accomplish more with fewer people. Compared to previous startup cohorts, we're seeing higher ARR per employee and a growing wave of “tiny team” success stories.

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For comparison, before the AI boom, Afore Capital's portfolio data from 200 startups showed they typically burned $1 million to generate $1 million in revenue. It now costs one-fifth as much and could drop to one-tenth soon.

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Sam Altman has predicted that there could someday be a one-person startup worth $1 billion.

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However, the big challenge remains—while AI apps are growing fast, they're also experiencing high churn.

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• When AI emerged, companies had discretionary funds to experiment with and test its potential use cases. That’s no longer the case.
• AI customers tend to follow the latest technological advancements—i.e., switching from ChatGPT to Claude and from one vertical AI player to the next.

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Today, the focus is on high growth, but retention will matter most tomorrow.