Who:
- Menlo Ventures: A leading venture capital firm known for its annual State of Enterprise AI report.
What Happened:
- Enterprises spent $176.8B on AI in 2026, a 5.4x increase from 2025.
- Only 22% of AI spend came from software budgets, with 13% going to incumbents converting SaaS licenses.
- AI-native vendors captured just $12.6B, competing for the smallest budget pool.
Why It Matters:
- AI spend is reshaping budget allocation, with 55% coming from net-new budgets and 23% from labor.
- Incumbents dominate AI spend in key categories like IT and HR, making it harder for startups to compete.
- AI has slowed SaaS growth by 2 points, reducing market expansion from 13% to 11%.
ARM Impact:
- **Tab Hopper (Stage 1 (Tab Hopper))**: Incumbents leveraging existing SaaS licenses to AI products dominate.
- **AI Sprinkler (Stage 3 (AI Sprinkler))**: AI-native vendors must unlock budgets beyond software to succeed.
- **ARM (Stage 4 (Autonomous Revenue Master))**: Products priced at 2x or more are being paid for out of the 78% non-software budgets.
What to Watch:
- Monitor how incumbents continue to convert SaaS licenses to AI products.
- Watch for AI-native vendors unlocking net-new budgets and labor savings.
- Track SaaS growth rates to see if AI continues to slow market expansion.