The Future of Software Looks Like Services
Application software won’t look like venture risk for much longer.
When building app software was hard, there was a moat in software. The products weren’t easily replicable and that was enough.
As building app software becomes easy (or even automated) the execution, biz logic, systems, etc. become the moat but that’s very hard to prospectively underwrite (without proof) even if it’s relatively easy to identify at scale. So pure application software businesses are increasingly uncertain to start or invest early in early.
Eventually/soon we’ll get to a world where you just ask GPT-10 to “build me an app to do X, has these features, and looks like this screenshot” At that point, there will be no moat and infinite competitors for application software.
Software companies (and their margins and outcomes) will generally compress to look services companies: easy to start, usually not very big, little or no need for outside capital at inception, etc.
Because there is increasingly no moat in software, building a big high-quality business requires finding something else defensible and novel to pursue. You need to put more complex wrappers, strong network effects, or better business models/structures around software to have margin rich defensible businesses.
Software with tech risk (cyber, infra, etc) will look like app layer companies did in their heyday as the “basics” get easier and companies can focus more on the hard stuff. Everything will move one step down the ladder of risk and defensibility.
Who wins in this world once there are infinite, small point solutions and software vendors for every industry and org?
Integration platforms and vendor management becomes more important (everyone needs a Plaid or Mulesoft)
Software++ models with network effects will win their categories
Infrastructure that catalyzes/monetizes the rising N of small software businesses
Incumbents have brand and distribution. New startups, by definition, don’t. And when barriers to entry drop to zero and the number of competitors trying to squeeze through the same door goes up 100x, most categories just don’t produce the big winners.
So early stage, levered bets (of founders’ time or investors’ capital) on most pure application software just don’t won’t make sense anymore. At least not for venture. Maybe they already don’t.
Why You Think I’m Wrong and Why I’m Not
You: But Microsoft and Adobe are great!
Me: I’m making a prospective/forward looking statement. Nevertheless, there will still be great biz software companies that get started. They’re just becoming worse and worse early bets to make because they have no moat other than scale and execution.
You: Moat comes later! Why are you thinking about that at early stage?
Me: the moat might only be reified later but it can be anticipated early on. If you’re not thinking about that early, you’re not thinking about business model quality and earning power. And if there’s no barriers to entry, the business will never get far enough (on a risk-adjusted basis) to matter and activate a moat.
You: Big companies want to buy from big companies so the big software vendors will still be bundled platforms.
Me: Yes. And they’ll probably be the same big, bundled platforms that exist today. I’m not saying that SW goes to zero but rather that the new entrants will stay there (at zero). If something does break out, it will need to look like Rippling much earlier than most contemporary application software does.
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