The systems of record vs peripheral software distinction is such a crisp way to think about software vulnerability. I've been struggling to articulate why some SaaS names feel more exposed than others and the data half-life framing explains alot of it. The point about seat-based pricing being structurally vulernable to AI automation is something more investors need to grapple with.
This is good analysis, and I say that as a venture investor who has spent 10+ years investing in b2b software. Some of these are points I needed boning up on.
With that being said, I'll offer one soft counterpoint. Much of what you've shared is good criteria for making an early stage investment, i.e. thinking through whether a $10m ARR company has the goods to grow to $100m and beyond.
When it comes to public SaaS businesses though, particularly those with $1B+ in ARR, I suspect that an outsized portion of these companies have satisfied most/all of these criteria by virtue of not having hit a wall at some earlier point in their lifecycle. (many SaaS companies stop growing for various reasons at $50m ARR, or $200m, or $400m, etc). The companies that made it all the way to public scale have likely developed system or record or quasi-system of record capabilities, multi-product strategies, deep workflows, tons of proprietary data, and significant lock-in in enterprise accounts that are unlikely to ever rip them out.
I'd venture that in the public software universe, particularly those that are still growing at scale, you are probably looking at a basket of the least-disruptable technology companies in the world, at least on average. If they didn't have these key attributes you point out, they'd have been knocked out a long time ago (it's not like AI is the first time there has been substitution pressure on these businesses... the last 10 years have seen insane VC investment into dozens of companies in every single category currently occupied by a current public company).
I guess you can say I'm arguing for a sort of Lindy Effect in software, which is counterintuitive in a field where newer often feels better. But people have been predicting the death of Microsoft since the early 1980s...
Great perspective. I like the Lindy effect reference. But then again, some of these massive multi-billion SaaS businesses haven’t actually been around for that long.
Think Veeva is better positioned by far... more regulatory protections and complexity, long lived data (i think pharma has to keep data for 25 years) and easier for Veeva to incorporate Ai as opposed to being attacked by AI...
It's interesting how the talk about durable business models kinda makes me think of my Pilates classes; without a strong core, nothing lasts. But do you think we're seeing to much good stuff get thrown out with the bad in this market?
Great article Rene, I think you capture all the nuance needed to make a good informed decision here. I think a good exercise is doing a bingo sheet with all these software names and classifying them by the criteria you said... its then clear which ones may deserve attention, and even then, like you say, you must be aware of the price you pay. The Software premium is gone, but now what is a fair valuation given all the uncertainty you point out.
The systems of record vs peripheral software distinction is such a crisp way to think about software vulnerability. I've been struggling to articulate why some SaaS names feel more exposed than others and the data half-life framing explains alot of it. The point about seat-based pricing being structurally vulernable to AI automation is something more investors need to grapple with.
This is good analysis, and I say that as a venture investor who has spent 10+ years investing in b2b software. Some of these are points I needed boning up on.
With that being said, I'll offer one soft counterpoint. Much of what you've shared is good criteria for making an early stage investment, i.e. thinking through whether a $10m ARR company has the goods to grow to $100m and beyond.
When it comes to public SaaS businesses though, particularly those with $1B+ in ARR, I suspect that an outsized portion of these companies have satisfied most/all of these criteria by virtue of not having hit a wall at some earlier point in their lifecycle. (many SaaS companies stop growing for various reasons at $50m ARR, or $200m, or $400m, etc). The companies that made it all the way to public scale have likely developed system or record or quasi-system of record capabilities, multi-product strategies, deep workflows, tons of proprietary data, and significant lock-in in enterprise accounts that are unlikely to ever rip them out.
I'd venture that in the public software universe, particularly those that are still growing at scale, you are probably looking at a basket of the least-disruptable technology companies in the world, at least on average. If they didn't have these key attributes you point out, they'd have been knocked out a long time ago (it's not like AI is the first time there has been substitution pressure on these businesses... the last 10 years have seen insane VC investment into dozens of companies in every single category currently occupied by a current public company).
I guess you can say I'm arguing for a sort of Lindy Effect in software, which is counterintuitive in a field where newer often feels better. But people have been predicting the death of Microsoft since the early 1980s...
I wrote about some of this yesterday: https://thedownround.substack.com/p/its-probably-a-good-time-to-buy-horizontal
Great perspective. I like the Lindy effect reference. But then again, some of these massive multi-billion SaaS businesses haven’t actually been around for that long.
Think Veeva is better positioned by far... more regulatory protections and complexity, long lived data (i think pharma has to keep data for 25 years) and easier for Veeva to incorporate Ai as opposed to being attacked by AI...
interesting way to look at Adobe vs Veeva! great article thanks!
Thank you! Where do you see Adobe based on the framework?
It's interesting how the talk about durable business models kinda makes me think of my Pilates classes; without a strong core, nothing lasts. But do you think we're seeing to much good stuff get thrown out with the bad in this market?
Best comment I’ve read yesterday!
Yes, I think there are indiscriminate selling dynamics right now.
Great article Rene, I think you capture all the nuance needed to make a good informed decision here. I think a good exercise is doing a bingo sheet with all these software names and classifying them by the criteria you said... its then clear which ones may deserve attention, and even then, like you say, you must be aware of the price you pay. The Software premium is gone, but now what is a fair valuation given all the uncertainty you point out.
Very well said Paul. It‘d indeed be fun to rate a basket of software stocks with regard to the dimensions discussed - each separately of course.