In the dynamic world of venture capital, few possess the seasoned insight of Rory O’Driscoll, founder of Scale Venture Partners. With three decades immersed in the startup ecosystem, O’Driscoll has witnessed and capitalized on transformative technological shifts, most notably the rise of SaaS. Scale Venture Partners became synonymous with identifying and nurturing SaaS giants like Bill.com, Box, DocuSign, and WalkMe. Now, O’Driscoll and his firm are strategically pivoting, placing significant bets on what they believe is an even more profound revolution: the third wave of artificial intelligence companies.
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Rory O’Driscoll, the founder of Scale Venture Partners, brings decades of experience to the forefront of AI investment, recognizing the transformative potential of this technological wave.
In a recent discussion, O’Driscoll emphasized the seismic impact of AI, noting that an impressive 80% of Scale Venture Partners’ current deals are deeply intertwined with AI, whether in application layers or foundational infrastructure. This strategic focus underscores AI’s dominance in both Scale Venture Partners’ $600 million seventh fund raised in 2020 and their even larger $900 million eighth fund secured in 2022. This significant allocation of capital highlights Scale Venture Partners’ conviction in the AI-driven future.
From SaaS Success to AI Focus: Scale Venture Partners’ Strategic Shift
Scale Venture Partners’ deep understanding of market transitions is evident in O’Driscoll’s prescient observations regarding the SaaS market. Back in 2019, he astutely pointed out the increasing competition and maturation within cloud computing investments. His analysis, articulated in his commentary on the SaaS landscape, foreshadowed the venture capital slowdown that materialized after the unprecedented growth spurred by the COVID-19 pandemic in 2020 and 2021. This foresight demonstrates Scale Venture Partners’ ability to anticipate market corrections and adapt investment strategies accordingly.
“Just as the SaaS S-curve levels out, and Silicon Valley looks alone, sad and scared, along comes the AI curve,” O’Driscoll remarked. He anticipates a similarly transformative, albeit potentially lengthy, adoption cycle for AI. Drawing parallels with the evolution of SaaS, O’Driscoll predicts, “It’s clearly going to take 10 or 20 years to finance the adoption of AI across the board in enterprise. That is the big picture with some of it happening quickly and some will take time — just like SaaS.” This long-term perspective is central to Scale Venture Partners’ investment philosophy as they navigate the AI landscape.
Identifying Winning AI Applications: Scale Venture Partners’ Investment Thesis
Scale Venture Partners is strategically focusing its AI investments on applications and applied AI, recognizing the immediate and tangible opportunities in this sector. While other members of the Scale team delve into AI infrastructure, O’Driscoll’s primary interest lies in identifying the AI applications that will achieve rapid enterprise adoption.
“I think the real money is going to be made by figuring out which apps are going to get done first,” he stated. A key element of Scale Venture Partners’ evaluation process involves understanding how enterprises define success and, crucially, “how willing they are to live with the intrinsically probabilistic nature of AI — in other words, how catastrophic is failure.” This pragmatic approach acknowledges the inherent uncertainties of AI and the necessity for applications to deliver robust value even with occasional imperfections.
O’Driscoll highlights the fundamental shift AI introduces in user interaction. The SaaS era was characterized by users inputting data and receiving structured reports. However, AI is ushering in an era of more human-like interactions. “It’s speaking, it’s listening, it’s seeing, it’s writing; they’re very human tasks,” O’Driscoll explained. “There’s a whole range of human tasks that AI can now do at some level of merit, and I think a lot of the success will be about judging when it’s good enough and when it’s not.” This emphasis on practical applicability and user-centric design guides Scale Venture Partners’ investment decisions in the burgeoning field of AI applications.
Tracing the AI Waves: Scale Venture Partners’ Historical Perspective
O’Driscoll provides a historical context to the current AI boom by outlining three distinct waves of AI investment he has observed throughout his career. The first wave, in the mid-to-late 1990s, centered on neural networks, natural language processing, and voice recognition. However, this early enthusiasm was followed by a period of relative dormancy in AI investment as the focus shifted to the cloud.
“Then you had 20 years, where it was just, take ‘x’ and move it to the cloud. And it was great, and it was wonderful, and it was simple, and with probably two or three funds there was little or no AI investing,” O’Driscoll recounted. This “cloud era” saw the rise of SaaS giants like Salesforce, contrasting with the pre-SaaS dominance of on-premise enterprise software providers like SAP and Oracle. O’Driscoll notes the significance of Salesforce’s rise: “It’s a nontrivial fact that the dominant cloud company is a sales tool. While the dominant on-prem company was an accounting tool. And I think the reason for that goes to the essential nature of what the [Salesforce] platform did — it made it cheaper to adopt.”
Scale Venture Partners re-engaged with AI investing around 2015-2016, marking what O’Driscoll identifies as the second wave. This phase saw investments in robotics, computer vision, natural language processing, and predictive analytics. Scale Venture Partners backed companies like Forter (fraud prevention), Socure (identity verification), Locus Robotics, and Observe.AI (call center speech recognition). Many of these companies have achieved substantial scale, reaching $100 million or more in revenue and are now integrating generative AI capabilities.
The Post-ChatGPT Era: Scale Venture Partners and the Third Wave
The launch of OpenAI’s ChatGPT in late 2022 ushered in the third, and arguably most transformative, wave of AI. Scale Venture Partners has been quick to identify and invest in companies born in this new era. Their portfolio includes Regie (sales and marketing content automation), Tavus (personalized video communication), Bland AI (AI-powered customer service calls), and Klarity (AI for contract review). On the infrastructure side, Scale Venture Partners has invested in Galileo (model management) and QA Wolf (software quality assurance).
O’Driscoll acknowledges the potential for short-term market fluctuations, noting that after Salesforce’s 2004 IPO, venture funding for non-SaaS software companies temporarily dried up. “There is probably going to be a period in the next two or three years where we all get a little disappointed at the traction, and there’s a little bit of a correction,” he predicted. However, his long-term conviction in AI remains unwavering. “But, zoom out 10 years, no one’s going to be building software without AI at the core.” This forward-looking perspective reinforces Scale Venture Partners’ commitment to leading the charge in AI investment and shaping the future of enterprise technology.
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Illustration: Dom Guzman
This generative AI illustration represents the third wave of artificial intelligence investment, a key area of focus for Scale Venture Partners, highlighting their commitment to innovation.
