AI Spend Hits $177 B, Yet Only 22% Comes From Software Budgets

Menlo Ventures’ fourth annual State of Enterprise AI report estimates total AI deployment spend at $176.8 billion for 2026, a 5.4-fold increase from 2025 Menlo report. The allocation split shows 55% net-new budget, 22% from existing software budgets, and the remaining ≈23% from labor and other lines.

Software Budgets Favor Incumbents

Of the 22% sourced from software budgets, incumbents converting seat licenses into AI products claimed 13 points, while AI-native vendors secured the remaining 9 points—equating to $12.6 billion.

AI Dampens SaaS Growth

Menlo estimates AI reduced overall SaaS application growth from roughly 13% to 11% on a market exceeding $600 billion, shaving about $12 billion of potential growth. According to the report, the categories priced per human seat — CRM, sales, marketing and collaboration — are the ones that slowed. Menlo found little evidence that enterprises are replacing their systems of record (CRM, HRIS, ERP) with AI; those systems are staying, and what is shifting is how much new budget goes to them and how much goes to tools built around them.

Incumbents Capture Departmental Spend

Tracking AI spend by function, incumbents dominate where they already own the workflow and data. ServiceNow controls 91% of AI spend in IT, and Workday holds 68% in HR. The report shows incumbents gained ground in nearly half the categories Menlo tracks.

Disproportionate Enterprise Spending

The survey of roughly 400 U.S. enterprise decision-makers—who collectively control over $4 billion in AI spend—reveals a wide variance between average and median spend. The average enterprise spent 4.7 × its prior-year AI budget, while the median spent 2.2 ×, indicating that a small cohort of power users drives the headline totals.

Labs Command the Majority of Deployment Dollars

Anthropic, OpenAI and Google together captured $122.7 billion, or 69% of deployment spend, up from 50% a year earlier. AI-native companies overall hold 77% of application spend (up from 63%) and 90% of infrastructure spend. Excluding the labs, startups still hold 61% of app spend.

A disclosure for reading the report: Menlo is an investor in many of the companies it covers, including Anthropic, OpenRouter, Lovable, Factory, Fireworks, Modal, and OpenEvidence. The budget-source, overspend, and departmental figures come from Menlo’s survey of 400 enterprise decision-makers. The agent-versus-human token figures come from OpenRouter, whose users skew toward developers and startups.