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Published

August 2025

Reading time

10 minutes

A Five-Part Series: The Playbook for Winning in Market Consolidation

Part I & II

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Published

August 2025

Reading time

10 minutes

A Five-Part Series: The Playbook for Winning in Market Consolidation

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Editor’s Note to the Reader:

To be clear from the outset: We at Activant believe AI represents one of the most significant platform shifts of our lifetime, creating a generational opportunity to build market-defining companies. Our conviction in the future of AI has never been stronger.

But that conviction demands intellectual honesty. The era of easy money and fragmented innovation could already be coming to an end. A new, more challenging chapter of consolidation looks to have begun, and the old SaaS playbook for building a startup could be obsolete.

This five-part series is a direct response to what we see in the market. We will dissect the market's shifts and the strategies of the tech incumbents to deliver a playbook for survival and victory. We are publishing this not as a warning to stay away, but as a roadmap for how to win.

Day 1: Is the AI Gold Rush Over? We examine the data that signals an end to the initial boom, exploring the dynamics of a now hyper-competitive market and the imminent consolidation to follow.

Day 2: Does the House Always Win? Inside the Tech Giants' AI “Gravity Wells”. Next, we turn to the tech incumbents. This piece explains how widespread "app fatigue" among enterprise customers is creating a strategic opening for giants like Microsoft and Google to build powerful "gravity wells," posing a challenge to the broader startup ecosystem.

Day 4: The AI Survival Guide: A Playbook for Building a Defensible Moat. Here, we provide the solution to the challenges outlined in the first three parts. This is our guide to building a durable company in the current AI landscape. We detail the three pillars of a defensible moat-Relationship Capital, Model Stack Strategy, and Distribution Ownership.

Day 5: A New Mandate for the AI Market. In our conclusion, we consider the significant wildcard of regulatory intervention. We then deliver our final mandate for succeeding in this landscape, where the traditional venture capital playbook no longer works.

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Part I: Is the AI Gold Rush Already Over?

Market cycles are driven by major technology shifts, and we are currently amid the most dramatic one yet. AI is not merely an incremental improvement but a fundamental platform transformation, akin to the dawn of Operating Systems in the 1980s or SaaS in the 2010s.

Over the past several years, the AI ecosystem has been a whirlwind of creation–a modern-day gold rush fueled by accessible foundation models and a flood of venture capital. It was and is a veritable Cambrian explosion of new "apps", but for some built on a thrillingly simple playbook: find a niche, wrap it in a GPT-4 or now 5 API, and ship it.

That era of unrestrained, fragmented innovation could be coming to an end. Signals of a consolidation are underway, creating an incredible opportunity for those who understand the new rules of defensibility.

The dynamics of the market are shifting. The speculative “party” of the initial AI gold rush is concluding, and now the real work begins: building durable, defensible companies designed to last.

An Ecosystem Consumed by Capital

The scale of this recent boom is difficult to overstate. In the first half of 2025 alone, AI startups raised a staggering $121.9 billion in venture funding–more than doubling 2024’s $55.3 billion and 2023’s $51.8 billion.1

This influx of capital has fundamentally reshaped the venture landscape. In the second quarter of 2025, AI- and machine-learning-related deals surged to 49.2% of the total VC deal value, but only 29.5% of the deal count. That’s a increase from just 33.3% and 24.6% respectively in the same period of 2024.1

This is not merely a popular category; AI is consuming the entire venture ecosystem, drawing capital away from other sectors, as seen above.2,3

While the total number of global venture deals has fallen from its 2021 peak, Pitchbook shows the proportion of AI/ML deals grew. In Q2 2021, "other" deals outnumbered AI/ML deals by more than four to one (11,048 to 2,533). By Q2 2025–in a much tighter market–that ratio had compressed to just over two to one, with AI/ML deals at 2,146 versus 5,126 across all other sectors. The takeaway is clear: as the proportion of AI/ML deals grows against a backdrop of fewer overall deals, capital and founder attention are inevitably consolidating into the AI sector.

The Catalyst: Democratization Meets Hype

This capital tsunami and democratization of technology fueled a proliferation of new companies. In 2024 alone, over 1,800 new AI startups were funded, most built on the same handful of foundation models. The accessibility of the technology was a key catalyst. Open-source models like Meta's Llama, Google's Gemma, and Microsoft's Phi-2 dramatically lowered the barrier to entry, enabling startups and researchers to leverage cutting-edge AI capabilities at a fraction of the upfront cost.4 This wave of accessibility has enabled the launch of countless new ventures.

The composition of accelerator batches provides a clear signal of this phenomenon: in Y Combinator's Spring 2025 cohort, a remarkable 46% of the startups (67 out of 144) were AI agent companies.5

Concluding Thought for Day 1: A Darwinian Shakeout

However, this explosion of creativity could carry the seeds of its own demise. The low barrier to entry and the intense hype cycle led to an oversaturated market, with thousands of startups built on the same commoditized technological foundation.
 

While it seemed money was flowing to everyone, the reality is: 2025, an astounding 52% of all VC funding to date was captured by just the top 10 funding rounds. Revealing a consolidation of capital, up from 25% in 2023 and only 8% in 2022.
 

As the market becomes crowded and the initial excitement wanes, a period of Darwinian selection is inevitable. The very forces that enabled the boom–accessible models and abundant capital–have created a hyper-competitive environment that is now paving the way for a potential platform-led consolidation.
 

Next: With the market dynamics established, we’ll analyze the key players driving this potential consolidation. Tomorrow, we examine how tech giants are building "gravity wells" to reshaping the landscape from the top down.

Part II: Does the House Always Win? Inside the Tech Giants' AI “Gravity Wells”

The consolidation of the AI market isn’t a random event; it is a calculated response by the technology giants to a clear demand signal from their most important customers. Microsoft, Google, Amazon, and Salesforce are no longer content to simply sell shovels in the AI gold rush. They want to claim the mines, building "gravity wells" designed to attract and retain enterprise spend.

For investors, understanding these platform “gravity wells” is critical, they can either accelerate a startup’s scale or quietly cap its upside.

The Driver: Enterprise “App Fatigue”

This shift is being driven by pervasive "app fatigue" among Chief Information Officers (CIOs), who are overwhelmed by vendor complexity and under pressure to deliver measurable returns on their technology investments. A PwC survey found that 82% of tech leaders say their companies are struggling to realize value from these investments.6

As a result, enterprise leaders could be rationally choosing to consolidate. A Microsoft survey revealed that 86% of business leaders and employees point to a single, centralized platform as the ideal solution for collaboration and efficiency.7

This sentiment is echoed in a Deloitte survey where 88% of leaders identified cloud as the foundation of their digital strategy, indicating a desire to build upon existing, trusted platforms.8 CIOs are rationally choosing to consolidate their spending with the major cloud providers, viewing their integrated AI offerings as a lower-risk path to achieving the productivity gains their organizations demand.

This is why the giants are pulling disparate AI functions - like translation, data analytics, and image generation, as metaphorically shown in the graphic above - into their core platforms.

The Strategic Advantage: Agentic AI on a Dominant Platform

The mechanism for this platform-led consolidation is the rise of "agentic AI" - systems capable of acting autonomously on behalf of users and business units. This is the new strategic battleground. Gartner projects that by 2028, AI agents will execute 15% of daily work decisions, up from virtually 0% in 2024.9 The tech giants are building the infrastructure to own this agentic layer, leveraging their existing dominance in cloud computing as a significant distribution advantage. In the second quarter of 2025, Amazon Web Services, Microsoft, and Google collectively controlled 67% of the global cloud market (excluding China).10 Their individual market shares in Q4 2024 stood at 33% for AWS, 20% for Microsoft Azure, and 11% for Google Cloud.11

This existing infrastructure, combined with a vast customer base, enables the giants to deploy new AI capabilities to millions of users with a simple software update. They are weaving AI into the very fabric of enterprise work, transforming it from an application one opens into an ambient layer across the entire software ecosystem.

The Platform's Blind Spot: Winning on the Giants' Turf

While the gravity of the major tech giants is undeniable, it creates its own blind spot. These giants are optimized for building massive, horizontal solutions—a "one-size-fits-all" approach that often becomes "one-size-fits-none" for customers with deep, industry-specific needs. They are structurally too slow and too generalized to serve every niche effectively.

This is where the opportunity for startups emerges. The incumbents' platforms are not just fortified walls; they are also home to the largest marketplaces in software history, such as the Salesforce AppExchange and Microsoft Azure Marketplace.

For a specialized startup, these marketplaces represent a powerful distribution advantage. They offer:

  • Direct Access: A channel to a massive, aggregated pool of enterprise customers who are already qualified and have budget authority.
  • Reduced Friction: A trusted environment where discovery, procurement, and integration are streamlined, dramatically lowering a startup's customer acquisition cost (CAC).

Think of it like a race car drafting behind a large truck to conserve energy and gain speed. A savvy startup can "draft" behind an incumbent's massive go-to-market engine, using the marketplace to reach customers that would be impossible to acquire independently. The goal for some is not to compete with the tech giant’s platforms head-on, but to become an indispensable, value-adding component within its ecosystem.

Concluding Thought for Day 2: The Platform Paradox

For certain startups, one of the primary threats is no longer just another startup, it’s the "good enough" feature bundled for free into a core platform. However, this same dynamic creates a new opportunity. The platform's marketplaces have become valuable distribution channels in software.

The critical question for founders has evolved beyond "can you build a better product?" to "Can you build a moat so deep that even a platform update can’t erode it?" In this era, success requires a playbook for winning on the giants' turf, either by becoming a specialized, indispensable solution within their ecosystem or by building a stand-alone platform so deeply embedded in a customer's workflow that it creates its own gravitational pull.

For founders, the challenge is to decide: Are you building to integrate deeply within a giant’s ecosystem, or to compete from the outside with a differentiated, standalone platform?

Tomorrow: The Tech Giants “gravity wells” are reshaping the startup landscape in unexpected ways. We’ll break down the so-called “wrapper challenge” why it could determine which AI products surviveand uncover the mechanics of the controversial “acqui-hire,” a strategy quietly redefining founder and investor outcomes.

The information contained herein is provided for informational purposes only and should not be construed as investment advice. The opinions, views, forecasts, performance, estimates, etc. expressed herein are subject to change without notice. Certain statements contained herein reflect the subjective views and opinions of Activant. Past performance is not indicative of future results. No representation is made that any investment will or is likely to achieve its objectives. All investments involve risk and may result in loss. This newsletter does not constitute an offer to sell or a solicitation of an offer to buy any security. Activant does not provide tax or legal advice and you are encouraged to seek the advice of a tax or legal professional regarding your individual circumstances.

This content may not under any circumstances be relied upon when making a decision to invest in any fund or investment, including those managed by Activant. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Activant. While taken from sources believed to be reliable, Activant has not independently verified such information and makes no representations about the current or enduring accuracy of the information or its appropriateness for a given situation.

Activant does not solicit or make its services available to the public. The content provided herein may include information regarding past and/or present portfolio companies or investments managed by Activant, its affiliates and/or personnel. References to specific companies are for illustrative purposes only and do not necessarily reflect Activant investments. It should not be assumed that investments made in the future will have similar characteristics. Please see “full list of investments” at https://activantcapital.com/companies/ for a full list of investments. Any portfolio companies discussed herein should not be assumed to have been profitable. Certain information herein constitutes “forward-looking statements.” All forward-looking statements represent only the intent and belief of Activant as of the date such statements were made. None of Activant or any of its affiliates (i) assumes any responsibility for the accuracy and completeness of any forward-looking statements or (ii) undertakes any obligation to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in their expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements.

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