AI-native startups in India are encountering significantly lower gross margins than traditional SaaS companies due to rising operational costs, signaling a shift in business dynamics. Harshit Kumar of Kalaari Capital urges founders to rethink business models to sustain scalable growth.
- AI startups encounter lower gross margins than traditional SaaS pioneers.
- Successful AI businesses embed deeply into workflows and monetize outcomes.
- Founders must focus on defensibility and unit economics early to scale.
What happened
Harshit Kumar, AVP at Kalaari Capital, explained at an innovation event in Gurugram that AI-native startups cannot expect the same high gross margins that traditional SaaS companies once enjoyed. Rising costs related to inference and manual review processes are eroding margins, unlike the fixed, scalable technology costs that supported SaaS profitability.
Data from reports reveal traditional SaaS firms generally achieve gross margins between 70% and 85%, while AI companies operate with margins closer to 60%, with some even as low as 25%. Kumar emphasized that AI-native firms, built from the ground up with AI capabilities rather than simply adding AI features, must redefine business approaches accordingly.
Why it matters
The margin squeeze highlights that AI startups face fundamentally different economics than their SaaS predecessors. This forces founders to focus intensely on product defensibility, embedding AI deeply in workflows to generate measurable ROI for enterprise and consumer clients instead of selling software access alone.
Kumar pointed to his portfolio companies automating analyst tasks such as report generation and financial modeling as examples of AI driving operational efficiencies that create tangible value. However, AI startups must carefully manage these domain-specific approaches to withstand commoditization and intense competition as base AI technology becomes widely available.
What to watch next
Founders should monitor their unit economics closely and evolve business models to build durable competitive advantages. Success will depend on how well startups integrate AI into specialized workflows and prove the financial outcomes produced for end customers.
While platforms like Anthropic’s Claude and coding tools like Cursor accelerate building MVPs, sustainable scaling remains a challenge. The coming years will reveal which Indian AI startups can balance innovation with defensibility and cost control to thrive in a margin-constrained environment.