AI productivity tools are overhyped and overfunded. Investors should look elsewhere

The world does not require additional AI productivity tools. Extensive evaluation of such tools over the past year suggests that most are doomed to fail. AI has revolutionized productivity, and the speed of change is unprecedented. However, the longevity of AI-native businesses is highly uncertain. Productivity tools are under threat from open-source advancements, new entrants in chip manufacturing, and applications from AI models themselves.

The largest and most mature vertical within the AI ecosystem is AI coding, which represents around 20-30% of the $150-200 billion in annual recurring revenue (ARR). AI coding evolved from basic productivity tools like GitHub Copilot, culminating in autonomous systems capable of performing complex tasks independently. While some productivity tools may evolve into autonomous systems of work, the majority will likely fail.

Northzone, an investment firm, has spent the past two years analyzing the potential of truly autonomous systems of work, leading several large investments in this emerging field.