As a professional venture capitalist, it’s my obligation to write about software valuations and the big SaaS sell-off in the public markets. This is my “end of SaaS” post. There are many like it, but this one is mine.
Software after SaaS: sin eaters, hybrids, and NFX.
Software is definitely not dead. Nor is SaaS. But pure software will be a much different (worse) business than it is today.
The TAMs will shrink or at least stop growing. Pricing power will decline. Margins will compress. Multiples will stay depressed.
Margins in SaaS depended on three assumptions:
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Zero marginal cost of reproduction (same code, infinite users)
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Non-ephemeral value (software doesn’t depreciate like media, so you keep selling across time)
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High switching costs (mission-critical or highly differentiated products drive retention and willingness to pay)
AI degrades all three. Marginal costs go up with inference. Value depreciates faster as new tools improve rapidly. And switching costs collapse as software becomes less differentiated/easier to replicate, and easier to switch between (does the agent care what software it’s using?).
The economics of software businesses are getting permanently dented.
The net result: a business that used to earn 25% income margins might earn 10-11% going forward. In the future/near-present, you can think of pure application software having similar dynamics to traditional services business today: very numerous, easy to start, usually not very big, little or no need for outside capital at inception.
It’s definitely still a business but it’s a fundamentally different kind of business. The assumptions of perpetual revenue growth and stable high profits that undergird SaaS multiples go away for many/most of the household names that can’t successfully find defensible positions.
With all that said, the TAMs won’t go to zero and public equities won’t get permawiped, because no serious person/leader/company that actually wants to win is going to homebrew everything, switch vendors constantly, or buy from tiny upstarts.
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Leaders want a throat to choke and purchasing decision they can defend (“no one gets fired for buying IBM”)
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You want to crowdsource best practices from other customers/you don’t want to discover every commodity from first principles
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No one wants to be responsible for maintaining undifferentiated cost centers, even if they can build an 80% solution with relative ease.
Everything is a capital allocation decision evaluated in times of relative IRR, even if only implicitly. Businesses want to focus only on the things that they do best and allocate their resources to the places where they can produce the most differentiated returns. Even if codegen changes that math it does so largely by making pure software companies more competitive to run, not by introducing tons of internally vibe coded competition.
This is why Anthropic and OpenAI don’t rebuild Slack internally. It’s a pain in the ass and doesn’t drive their business. And it’s why white shoe professional services like consulting and law won’t go away. You’re rarely paying purely for the outputs – especially not when they seem rote.
So: software isn’t going away. But SaaS as a business model, defined by 80-90% gross margins, is not the default anymore.
Ultimately the solution to this new problem for software lies in #3 (switching costs) not in ephemerality or replicability.
Switching costs are the real driver of pricing power and consequently margins and long term earnings. If you can dictate pricing substantially above your costs without customers leaving, you have pricing power. It shows up in the P&L as margins. Whether those switching costs derive from brand, network effects, product value, monopoly, or usage patterns doesn’t matter.
”Software is a business tool, not a business model.” – Sam Lessin
The future of software after SaaS:
Build for network effects. Create switching costs through networks and multiplayer dynamics such that your value gets better with scale and the cost to compete goes up for any new entrant. There are specific places where network effects might erode in the face of agents but overall this is part of the physics of business and will generally persist.
Become a sin-eater. If you can absorb and make smooth the most jagged, ugly part of a business, you allow them to wash their hands of something they desperately want off their plate, which is very often risk. The code isn’t the product; the code is the interface for high-stakes, operationally intensive coordination. Think: flows that are too high volume/intricate to do manually but too high stakes to do generically. This is why security, infra, fintech, etc all still have a future. Nihar calls this “embracing liability.”
Roll hybrid models. Decommodify code by bundling it:
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Software + services: use services to differentiate software. This is why “forward deployed” businesses are so in vogue right now in the enterprise.
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Hardware + software: physical switching costs. Generate lock-in or create proprietary data through sensors, devices, and physical infrastructure.
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Services + software: use software to differentiate services. This presents as vertical integration, whether as a de novo business or an acquisition platform.
There are other advantages that can create durable businesses: brand, trust, regulatory capture, cost of capital, distribution. But those have to be earned over time and you generally can’t plan for them at inception (or some people can but YOU probably can’t).
Software will be more important over the next decade than it’s been over the last: cheaper to produce, more powerful to use, responsible for orchestrating and accelerating more GDP. The challenge/opportunity/profit is in decommodifying the code and building good software businesses: align with rather than against the foundation models such that their improving capabilities are a boon not a headwind to you. The latter option (rooting against the models/betting on their limits) only makes sense within some narrow domains, software engineering not being one of them.
As the models improve software capabilities even more than they already have, the SaaS TAMs will be smaller but the software TAMs overall will be MUCH bigger. There will be more software companies and the most successful of them will be hugely profitable and valuable – not just in financial terms but in terms of impact.
Connecting the foundation models to high value complex real-world use cases is the biggest opportunity for wealth creation in recent memory. It will happen through new (often hybrid) business models and products rather than re-running the cloud playbook.
The software companies that succeed in this brave new world won’t be pure application software and they certainly won’t be traditional SaaS. The physics are moving too much, too hard, and too fast against the business models and the products having an economic future.
Read more
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The end of pricing power (2025)
Libbing Out with Eric Newcomer
I sat down with my friend Eric Newcomer on his podcast to talk about AI rollups/growth buyouts, our creator fund, and Trump/the tech right.
Some choice quotes from that conversation:
On the criticality of democratic institutions for capitalism
A lot of people don’t take seriously the extent to which our system of entrepreneurial capitalism rests on strong institutions. What Trump is doing to our democracy, he is also doing to our market system…
It should be extremely concerning to anyone who calls himself a capitalist to watch him start nationalizing companies, which is what he has done in the steel industry and in the chips industry. The systems of democracy, capitalism, property rights, institutions and independent judiciary, these are all actually one thing. In countries that have one, they generally tend to have all of them. In countries where one fails, the rest fail shortly thereafter…
Even in the most strictly amoral terms, if you don’t care about any of the ideas about the liberal world order, we’re going to wind up looking like Turkey or Argentina or Russia where there is no meaningfully free market system, there is no central bank independence, there are no strong institutions…
He’s doing third world style corruption in the US and is substantially undermining the excellence of American institutions and the excellence of American capitalism and we are all going to wind up paying for that.
More on kingmaking and consensus
The problem with kingmaking is it’s not putting the crown on the head of the crown prince upon the death of his father. It’s putting a crown on a baby out of the womb and believing that the crown itself confers legitimacy instead of the legitimacy conferring the crown.
OpenAI was so profoundly non-consensus from its start, it wasn’t even a for-profit company. Anthropic people thought was an insane thing to even attempt. Cognition started as a video conferencing app. Clay wandered in the desert for 10 years. Ramp, everyone was like what the hell are they doing? Don’t they know about Brex? It’s worth five times Brex now.
Winners always look inevitable in retrospect. I just don’t believe in that as the reality on the ground.
VC-Backed Startups are Low Status
A couple times a year, Mike Dempsey writes something really excellent. I really think he’s one of the best thinkers/writers in venture.
When the institutions are optimized to fund the legible thing and the individuals are optimized to build the legible thing, the identity of the founder itself fades. Being a founder used to carry with it the implication that you had seen something others hadn’t, that you were willing to be wrong in public about an unlikely future you believed in, and take a risk of banging your head against a wall with high career risk for a long time. Now it is almost eye-roll inducing in many non-tech circles as people struggle to distinguish Another Founder with Another Launch Video building Another (insert zeitgeist here) Startup.
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Investment banking had 2008. An easy to see crisis that gave people moral vocabulary to dismiss it and started the march downwards of social status throughout the 2010s. You could say “I don’t want to be part of that” (even if it was painting a broad brush stroke on the entire finance industry) and point at something concrete.
The venture-backed startup path doesn’t have its 2008, but instead has has something more diffuse and possibly harder to reverse: cultural exhaustion.
Read the whole piece. I quite liked it.