We’re entering a new pricing environment for software: AI vs non-AI. It’s only happened in the last few weeks.

Recent earnings have pushed some of the most important companies to all-time highs.

This dynamic doesn’t favor everyone.

Theory created a public market AI index to track software companies who have significant product plans or current AI businesses.

AI companies trade at 2.5x the multiple of non-AI companies in the public market.

This yawning difference should compound over time as the adoption of AI is still relatively early - we’re only 18 months into it. In addition, the productivity gains & the concomitant willingness to pay for them is just getting started.

Microsoft & ServiceNow have reported 70% & 50% improvement in productivity in their organizations.

This dynamic is permeating the early stage private markets just as rapidly with the return of the 100x ARR multiple for AI companies.

The reason is the expected growth rate. AI software companies are projected to grow 63% faster in 2024 than non-AI software companies because of customer demand.

We should expect an elevated valuation environment in Q1 & Q2 as the buyer population expresses strong demand for AI.