The end of software?

If you follow the public markets at all then you probably read a bunch of hair-on-fire takes this past week about how the software market is in trouble.

And to be fair, public enterprise software companies did get hammered last week. Salesforce fell 15%, MongoDB fell 24%, UIPath fell 36%, just to name a few.

What’s happening? The simple explanation is that these companies all revised their revenue projections down. So of course valuations fell as a result!

That being said, this is a sector-wide issue, as highlighted by Chetan Puttagunta:

And if you compare performance to the past few years, you’ll notice that growth has indeed meaningfully shifted. As Tomasz Tunguz details here, the 25th, 50th, & 75th percentiles for public software company growth rates have all halved in the last 18-24 months.

So where did all the growth go? I think there are a few potential explanations. One is that a lot of growth was pulled forward during the pandemic. I’m not very convinced of this one for a variety of reasons, but you can certainly find examples where this is the case (e.g. Zoom).

Another is that we’re reaching the “top of the S curve” of software, as explained by Jared Sleeper in this piece. I think there’s something to this idea, but S curves exist for technologies, not business models. And so while it feels right as an explanation in general, I think it falls apart if you look at it too closely.

More convincing is the argument that the index is just full of huge companies that went public years ago and are, understandably, growing more slowly as they reach saturation (e.g. how fast do we expect Salesforce to grow at 150K customers and $35B in revenue?). It’s not that there are zero software companies growing fast. It’s just that the fast growing ones are all private. In other words, if companies went public earlier, public software companies would, on average, be growing faster, and my guess is we’d be having a very different conversation now.

My personal favorite explanation is simply that easy wins are getting harder to come by. Back in 2008, you could meaningfully improve a product by rebuilding it in the cloud. Not to say that was all you needed to do, but if you were aiming for that “10x” improvement over the incumbent, you could get a lot of that improvement for free if you pulled off the cloud transition. This predictability led to the playbook-ification of venture, or “entrepreneurship on autopilot,” as my partner Gil likes to say. And this dynamic has defined the startup world for the past decade.

Today, without the wave of the cloud to ride, everything feels a bit more incremental. You need a meaningful edge in either technology or distribution to break through. And I think that fact is starting to catch up with a lot of companies, both public and private. How many companies are facing growth challenges simply because their product is better, but not that much better? How often are buyers deciding to stick with their current vendor because the switching cost is just too high and the benefit isn’t there?

For what it’s worth, that’s why, these days, I’m so focused on talking to founders with ideas that truly break the mold. I want to spend time with founders who have ideas that are so out there they take me a few meetings to understand. I want to go deep on sectors that investors have all long since ignored. The cloud transition tricked us all into believing that if you built something that looked more or less the same as what came before, but was just a bit better, that’d be enough to win. No longer.

All of which is to say, software isn’t over. And maybe there are some private companies waiting in the wings that will show public market investors what growth looks like once again. But it's my bet that the next great public company, even if it’s software, won’t look anything like what came before.