Why most AI startups are struggling despite record software spending

This article summarizes an episode of SaaStr AI’s video series featuring Jason Lemkin, CEO and founder of SaaStr.

Jason Lemkin, CEO and Founder of SaaStr/ Photo credit: SaaStr

Global software spending is expected to reach a record high in 2026, but for most companies, that growth is misleading. Jason Lemkin, CEO and founder of SaaStr, sees the market splitting into two. A few AI leaders are growing quickly, while everyone else competes for what’s left in a hidden budget crisis.

The great divide in startup growth

Headlines are filled with stories of AI startups seeing huge growth, getting big in months, not years. This makes the market look like it is booming. In reality, a small number of companies are growing fast, while most are struggling to grow at all.

Getting big has never been faster
Lemkin says, “It’s literally never been easier to scale to US$100 million quickly, but only for a select few. Glean has already gone from zero to US$100 [million in ARR]… this year. Replit and ElevenLabs went to US$200 million already this year.”

The downside of hyperspeed
The same forces that help a few companies grow fast also make competition tougher. New ideas can be copied almost overnight.

Lemkin notes, “There’s so much competition. Folks are getting cloned so quickly… A company I invested in here that is totally awesome AI, very disruptive, I think, launched about 60 days ago, has four clones already.”

Most startups with investors are failing
This fast-changing market is splitting into two. Most startups are struggling, while investors pour money into the few growing quickly.

Lemkin reports, “If you’re an investor, most startups are not doing great today. They’re not. But the ones that are really breaking out at this crazy level, the investors are just frothing at the gums to put more money in.”

Venture capital’s game of concentration

The market’s instability is worsened by a shift in venture capital. Investors are backing fewer top companies, leaving most startups with less funding and more risk.

The way investors give out money has changed

• About half of all venture funding now goes into just four large deals, leaving less for other companies.
• The total number of investments is far lower than in 2021.
• Investors prefer established AI companies, where bigger checks feel less risky and are easier to exit.

Investors are chasing established AI leaders
This has led to a shift where investors who once backed early-stage startups are pulling away.

Lemkin argues, “So many investors that I’ve known over the years, so many actually classic SaaS and B2B investors that used to do seed… they’re doing [deals with] Anthropic at US$80 billion… Why are they doing this? … That’s actually where the easy money is.”

The software budget mirage

What it takes to break through