Menlo Ventures' third annual report on the state of generative AI in the enterprise documents unprecedented growth: enterprise AI spending rose from $1.7B in 2023 to $37B in 2025 ($11.5B in 2024, a 3.2x increase in one year), capturing 6% of the global SaaS market. This is the fastest-growing software category in history.
The application layer dominates with $19B (51% of spending), ahead of infrastructure (33%) and model APIs (16%). The market is maturing: at least 10 products exceed $1 billion in ARR and 50 products exceed $100M.
Adoption patterns are shifting markedly. Enterprises now buy 76% of their AI use cases rather than building them in-house (up from 53% in 2024). The production conversion rate reaches 47%, compared with 25% for traditional SaaS, a sign of clear perceived ROI. Product-led growth accounts for 27% of AI application spending (four times the rate of traditional software), and "Shadow AI" — employees paying for AI tools with personal cards — is estimated to account for nearly 40% of application spending.
On the competitive front, AI-native startups capture 63% of the application market versus 37% for incumbents. This dominance is particularly pronounced by department: 71% in Product & Engineering (Cursor versus GitHub Copilot), 78% in Sales (Clay, Actively versus Salesforce), 91% in Finance & Operations (Rillet, Campfire versus Intuit). Incumbents, however, retain 56% of the infrastructure layer (Databricks, Snowflake, MongoDB).
Departmental AI totals $7.3B (4.1x year over year), dominated by coding: $4B, or 55% of the total, with 50% of developers using AI coding tools daily and measured velocity gains of 15% or more. Next come IT ($700M), marketing ($660M), customer success ($630M), design ($490M), and HR ($370M). Vertical AI reaches $3.5B (2.9x), driven by healthcare ($1.5B, 43%, tripling since 2024), ahead of legal, financial services, education, and retail.
The report settles the boom-versus-bubble debate in favor of a boom: strong real revenue growth, broad adoption (500+ decision-makers surveyed), measurable productivity gains, and sustainable business models. It also highlights the rise of model-agnostic tools (Cursor, OpenRouter) that accelerate adoption of frontier models, and international competition, notably from Chinese providers.