AI startups have a value chain problem

Nov 20, 2025

Silicon Valley is awash with AI startups. A few like OpenAI and Anthropic are building AI models and using them to power chatbots, coding agents, video generation tools, etc. Many startups are applying those AI models to offer tools that address industry-specific use cases like customer service, drafting legal briefs, etc. Others are using the AI models to run their own chatbots and coding agents. However, a large number of AI startups do not have sufficient ownership of their value chain. This increases their exposure to disintermediation, copycats, price wars and feature races.

Let us understand this using an example. Say, Company X builds an AI model, and makes it available to the public via a chatbot. The chatbot answers all your internet curiosities. It can even do things for you, like manipulate Microsoft Excel files. The chatbot quickly gains hundreds of millions of users. You spot an opportunity — you think people would like to be able to manipulate their Excel files without ever leaving Excel. If you were to build an Excel add-in, you could make a lot of money. So you build the add-in using the AI model’s API. People love it! You raise money to scale your startup.

To understand what is likely to happen next, let us ask a few questions.

What is the operating environment of Company X? It costs $100M or more to train an advanced AI model (Techcrunch report). Company X would likely keep racking up bills to train new models to stay ahead of the competition. They better make a lot of money from their models. Their investors are watching. The time is ticking.

What does product success look like for Company X? Mass adoption. Consumers should use their AI models to chat, generate images and videos, shop, etc. Businesses should use their APIs to build applications and workflows.

How would Company X price its products? Their prices would probably be very close to or below their unit costs. Company X is probably thinking their unit costs will come down over time (Moore’s law and/or software optimizations). They might even give away products for free — Company X would want to remove any friction that could slow their adoption curve.

How many users does Excel have? Close to a billion.

What is Company X thinking about launching its own Excel add-in? An AI-powered add-in for Excel has massive market potential. With hundreds of millions of users of its own, Company X has a warm start to enter and penetrate the market for productivity applications.

What is Microsoft thinking about launching its own Excel add-in? Most users would want this functionality. This might even expand the market for Excel users. Why should a third-party use their platform for free (Microsoft's terms)? Even if Microsoft gets a commission from each sale, it would be more accretive to book the full revenue themselves. They would want to launch a native Excel feature, potentially using the same API your startup is using. Microsoft would not mind pricing at or below their unit costs to drive adoption, though they probably have more pricing power and could also monetize it through bundling (The Verge report).

How competitive is your startup’s Excel add-in? Not very competitive. If Microsoft launches an Excel native feature without any big fumbles, their distribution gives them a big user base instantly. This probably kills your startup. If Company X launches an Excel add-in, they also get a sizable user base — because they have a warm start. Your startup hits on tough times but if you have a great product, you stand a chance. The problem, however, is that your product is easily copiable because someone else’s AI model is a big part of your core offering. If Company X copies your product, you likely cannot compete on price — because their price is your cost.

Your initial market position does not predestine your startup to doom. You can still create value with a great product but if the market is lucrative enough, a deadly footrace with Company X and Microsoft would ensue. It would be detrimental to be a price taker in a market where you cannot compete on price. To improve your odds of success, you would want to own more of your startup’s value chain that gives you a sustained competitive edge.