Can AI help David beat Goliath?

Corporates are the Goliath of fragmented markets.

The mid-market are privately owned ‘multi-site operators’ (think same owner, five shops), large family businesses or regional players.

In the mid-market, there are also PE funds shopping about to consolidate, leverage up and compete with the Corporates.

Why is this interesting?

Well — AI is moving really fast and it’s hard to keep up. So, for better or worse, I’ve been trying to pattern match and characterize trends based on the decks I’ve seen coming through Oxford Seed Fund. It’s hard to keep up with the tech (and as a non-techie it feels inauthentic to write about the models & underlying tech). But by understanding the underlying market structure and dynamics that support entry by B2B AI, I feel better able to make sense of the noise.

One of the trends I’ve seen is that enterprise AI founders often seem to be positioning their product to mid-market players as a way to compete with corporations and survive/grow.

As I’ve considered this positioning, time and time again it comes back to ‘market structure’ — and when I have thought about market structure, I’ve looked into the sub-trend of private equity in industries with a particular market structure. Industries where AI seems to be gaining ground in 2024 are the industries PE’s have been buying up over previous years.

What about the market structure of those industries make them both attractive prospects for private equity funds and for enterprise AI solutions? Specifically, the ‘middle’ of these markets seems to be the sweet spot for where PE funds go to buy up and enterprise AI founders go shopping for customers.

Industries attractive to private equity — fragmented markets with consolidation potential — seem like fertile ground for enterprise AI, streamlining inefficiencies and driving scalability. See Dodo AI automating client communications for veterinarians and specialty clinics, Pearl AI and Overjet bringing AI to dental, and StockRx automating medical stock-management for pharmacies.

What these industries often have in common are strong local dynamics, predictable recurring revenues, and significant consolidation potential — factors that typically attract private equity. AI solutions also look like they thrive here by streamlining operations, enhancing scalability, and optimizing workflows, addressing the inefficiencies inherent in fragmented markets.

For instance, in the U.K., corporate ownership of veterinary practices has surged from 10% a decade ago to nearly 60% today, driven by private equity consolidations. In the US, the veterinary sector has experienced substantial consolidation, with private equity firms investing over $51.6 billion from 2017 to 2023, and an additional $9.3 billion in the first four months of 2024. Major players like Mars Inc. and JAB Holding now own significant portions of U.S. veterinary clinics — Mars’ veterinary health division now operates over 3,000 clinics worldwide.

The same market structure that makes these markets attractive to PE makes the mid-market players in those markets attractive to B2B AI founders. Why? Potential for consolidation means fragmentation means middle-market players punching up.

These fragmented markets present opportunities for B2B AI SaaS solutions to streamline operations, enhance scalability, and optimize workflows to help these mid-market players compete with corporates. The predictable cash flows and recurring revenues inherent in these industries further attract private equity investments, aiming to improve efficiencies and capitalize on consolidation potential. At the same time, implementing AI-driven tools in that setting can address operational inefficiencies for mid-market players with good potential for upside on cash flows and recurring revenues.

AI can help David compete with Goliath.

But — as AI B2B SaaS ventures win customers in the middle-market they also demonstrate their potential for use by PE-owned companies in that same market… to integrate systems across acquisitions, improve efficiencies, and capitalize on that same consolidation potential that brought them into the market in the first place.

B2B AI tools helping mid-market players to compete also help PE-owned companies in that mid-market streamline.

So if Corporates are the Goliath, watch out — the Davids are coming for you. And they have AI in their sling.