The expansion of digital technologies has reshaped business operations, especially within online enterprises, where artificial intelligence plays an increasingly important role. This study analyzes how the intensity of AI adoption affects entrepreneurial performance among online enterprises in Sri Lanka, while investigating the mediating role of digital competence. The study, grounded in the Resource-Based View and Dynamic Capability Theory, contends that AI alone does not guarantee superior outcomes unless organisations have the capacity to successfully implement and integrate digital technologies into their operations. A quantitative approach was employed, and primary data were collected through a structured online survey of 280 e-commerce enterprises in Sri Lanka. The analysis utilized Partial Least Squares Structural Equation Modelling via SmartPLS. The empirical findings reveal that the intensity of AI adoption significantly strengthens digital capability and enhances entrepreneurial performance. Furthermore, digital capability positively influences performance and partially mediates the relationship between AI adoption intensity and entrepreneurial outcomes. The findings reveal that both direct advantages and capabilities drive AI performance. Firms that enhance AI adoption through robust digital capabilities are more likely to achieve superior results, particularly in operational efficiency, customer satisfaction, and innovation outcomes. This study enhances the existing knowledge base by providing evidence from a developing economy and elucidating the mechanism by which AI adoption leads to performance improvements. It offers practical advice to entrepreneurs and policymakers, highlighting the need to invest in both AI technologies and the digital skills essential for their effective utilization.