Software exceptionalism is over
AI killed the software moat
The era of software exceptionalism is done.
Tech companies were once unique and exceptional because software served as a powerful tool for mechanizing labor and automating business logic. Very few people knew how to build it, giving those who could a massive advantage. In other words, the people buying software couldn't feasibly build their own. That era is over.
A new paradigm: all companies are becoming software companies
The concept of a software company is changing dramatically. Now more than ever, all companies are becoming software companies simply by virtue of using software. The key driver here is that the building blocks of software have improved dramatically; not only in automating work and business processes, but also in making it easier for more people to build their own solutions.
I'm not advocating that vibe coding platforms like Cursor or Lovable are going to replace traditional software development. What I'm actually pointing to is the emergence of higher-level abstractions that are much more powerful for building production-grade software. We still have not seen a production-grade code co-pilot that can consistently produce high-quality software for enterprise environments, which account for 99% of international commerce. What I am starting to see, however, is the rise of more modular platforms that leverage AI for ontology mapping and business process discovery. These tools are enabling a new class of builders to participate in software creation in a more meaningful way.
The impact on Software Engineering jobs
This shift means that, contrary to popular belief, demand for software engineers is set to grow. Companies like Klarna and Workday have tried to signal to the markets—mostly to support their stock price in a misguided attempt to appease the markets—that they no longer need as many people. But historically, every major leap in labor mechanization over the past century has created more jobs, not fewer. The market isn't zero-sum. Capitalism expands capacity for output, and that expansion creates new roles.
Companies will be able to generate significantly more economic output than before, and that will result in more employment. Of course, this will require some workforce re-skilling, but it's already happening. For the first time, at bem we're seeing even traditional and family-run service companies hiring CTOs, software engineers, and data scientists to build their own tools.
Services companies building software
My thesis is simple: service companies that once relied heavily on external software vendors are going to become software companies themselves—faster than today's software companies can adapt to this shift or remain relevant players in the market.
The decline of vertical SaaS
As a result, SaaS (especially vertical SaaS) is going to thin out. The most likely outcome is that vertical SaaS will largely disappear within the next five years. The original promise of SaaS was delivering software that customers couldn’t feasibly build themselves. But with improved primitives, that’s no longer the case. Customers now place less value on prebuilt software.
So the trend of building custom, in-house software is growing. And with the introduction of newer LLM and VLM technologies, companies are adopting a software-first mindset by default, not just as a fallback.
Another problem: vertical SaaS promised tailored workflows from small, nimble startups—but that promise has repeatedly failed to deliver. Unless vertical SaaS is extremely modular, it’s often no better than generic horizontal solutions.
The only vertical SaaS companies that will survive are those that use AI not out of FOMO or investor pressure, but by truly embedding it into their workflows. These platforms will succeed by becoming more modular and better adapted to the specific needs of companies—even within the same vertical. This includes leveraging AI to significantly reduce customer acquisition costs, implementation costs, and time, ultimately enabling the delivery of highly tailored software solutions with zero downtime or implementation lag.
The coming consolidation wave
We’re going to see a wave of consolidation. Many companies that raised hundreds of millions in VC funding will have to face the fact that much of that capital will evaporate in the coming years.
Some SaaS companies are already adapting. They’ve taken one of two paths: either raising funds to pursue private equity-style roll-ups, acquiring service businesses to become full-stack market players; or transforming their platforms into modular systems that allow customers to build on top of them. It's all about the packaging.
What this means for tech VC
For tech VCs, this new reality requires a serious strategic shift. The days of passive capital flowing into high-valuation software startups that promise eventual dominance are ending. The investment thesis has to evolve. VCs must begin evaluating companies based on operational integration, domain expertise, and their ability to embed deeply in real industries, not just their ability to scale user counts or feature velocity.
The next generation of successful investments will likely come from firms backing startups that actively participate in services, offer modular, domain-specific platforms, or execute intelligent roll-up strategies that give them end-to-end capabilities. It also means understanding the new dynamics of value creation, less about proprietary code and more about embedded execution, workflow precision, and outcome-driven design. It's all about the packaging.
The new GTM: packaging, friction, and distribution
In this new landscape, the companies that win won't just have great products, they'll have the best packaging. Go-to-market strategy is no longer about brute force sales ops or BDR/SDR armies. Crusty old outbound motions are evaporating. Truth is, they haven’t really worked since the end of the pandemic.
What works now is frictionless adoption, modularity, and clarity of value. If your software requires a multi-week implementation plan and a hand-holding team, you're losing. Speed, flexibility, and clear ROI are non-negotiable. The winners will be those who design distribution into their product, who can scale without needing armies of account reps or long sales cycles. It’s not just about building software; it’s about packaging it in a way that feels instantly useful, instantly customizable, and instantly scalable.
A changed market and a new playbook
In short, the era of the standalone software company, especially the software startup, is over. It’s now entirely feasible for service companies to develop production-grade tools in-house. The market has changed fundamentally.
Software exceptionalism is finished. Startups will need to rethink how they operate, get more involved in real service layers, and build modular, integrative solutions. For tech VCs, this means adapting as well. They must either accept lower valuation multiples and fewer liquid exits, or start investing in companies with tangible operational capacity, whether through functionality or equity-based roll-ups, that actually deliver value in today’s market.
Parting thoughts
None of this is theoretical anymore. It’s already happening. The infrastructure is here. The primitives are getting more mature. The market signals are clear. The companies that win in this new era won’t be the ones chasing the next shiny framework or marketing buzzword, they’ll be the ones closest to real workflows, solving real problems, with software that feels native to the business, not bolted on.
Software is no longer the moat. Execution is. Modularity is. Market understanding is. The distinction between a software company and a service company is dissolving. What matters now is who can build better, faster, and closer to the metal of their customers’ needs. It's all about the packaging.
Adapt, or become irrelevant.