EXPLAINING THE SAASPOCALYPSE

Let me help you understand what the SaaSpocalypse is. Because if you run a business, sit on a board, or have equity in a software company, this affects you.

Before I tell you what happened, you need to understand this history.

Software was the single greatest asset class of the last 50 years. I am not exaggerating.

Put $100 into the S&P 500 in 1970 and by 2023 you had about $22,000. That is incredible. But the top VC funds focused on software returned 30%+ per year for 25 straight years. The Cambridge Associates US Venture Capital Index averaged 32.4% annually from 1995 to 2020. The S&P did 9.1% over the same period.

Nothing else came close. Here is how the major asset classes stacked up:

Tier 1: Software/Tech VC. 30%+ annual returns at the top. Nothing touched it.

Tier 2: US equities (S&P 500). 8-10% annually. The reliable compounder.

Tier 3: Private equity and REITs. 10-11% annually. Strong but requires patience.

Tier 4: Gold. 5-7% long-term. Great in chaos. Insurance policy.

Tier 5: Bonds. 4-5%. Steady. Boring. Safe.

(Source: Cambridge Associates, BullionVault, Visual Capitalist, Goldman Sachs Asset Management)

Software sat alone at the top for decades. And it attracted capital like nothing else. VC investment in software went from $4 billion in 1995 to $210 billion at the 2021 peak. Private equity went from $2 billion to $256 billion. Thoma Bravo and Vista Equity alone deployed $120 billion since 2019.

Everyone chased unicorns. Nobody learned how to make money.

Here is what the SaaSpocalypse actually is. It is not a dip. It is not a correction you wait out. It is the market telling the software industry: we do not believe your story anymore.

The median software company traded at 21x revenue in 2021. Today it trades at 5x. That is a 75% collapse. Two trillion dollars in market cap erased. The IGV software ETF is down 30%.

And for the first time in history, software trades at a discount to the S&P 500.

Let that sink in. The greatest asset class of the last 50 years is now valued below the average company in America.

Goldman Sachs compared it to the newspaper industry. Their analyst drew the parallel to industries where disruptive forces caused prolonged stock declines. Where equity value disappears before earnings even bottom out. Not a rough quarter. A structural shift.

I have personally worked at and helped build two unicorns. I know exactly what growth-at-all-costs looks like from the inside. Six keg taps in the kitchen. One for kombucha. Five for beer. Free lunch multiple times a week. Snack fridge packed with every protein bar and sparkling water you can imagine. Swag socks with the company logo. A closet full of tchotchkes nobody needed. Whole-company offsites at resorts. Presidents club excursions to places most people only see on Instagram. Beautiful offices overlooking the city skyline. Gigantic expense lines that nobody questioned because revenue was growing.

Growth, growth, growth, growth, growth. That was the only word anyone said. Ship it. Scale it. Who cares if it makes money.

So I get it. I lived it. And I need you to understand the math of what just happened to every company built that way.

A typical unicorn in 2021 had about $50M in annual recurring revenue and got a 20x revenue multiple.

$50M x 20x = $1 billion

That same company today. Growth stalled. Bloated cost structure. 77% of revenue eaten by expenses before stock compensation. No AI story. No profit.

Buyers are not paying a revenue multiple for that anymore. A distressed software company in 2026 trades at roughly 1x revenue.

$50M x 1x = $50 million

A 95% haircut. Billion to fifty million. Same product. Same customers. The market just did the math.

And for all of you who have equity in these former unicorns. Do the math on your shares. Your company was valued at 20x revenue in 2021. It is now valued at 1x to 5x. That stock option package you thought was your retirement? Recalculate it now.

I have at least four CEO friends who were within two years of selling their companies. Life-altering exits. And now they have to go back to the drawing board and make their companies ultra profitable because the growth trajectory is not there anymore. Even at strong profit levels, they are looking at 3x to 4x revenue at best. 

I am hoping unicorn math helps people understand the gravity of what happened here.

Three of the sharpest voices in software have weighed in. Let me tell you what each said and who I think is actually right.

Orlando Bravo, Thoma Bravo.

$181 billion in assets. Biggest software buyer on the planet. He said these drops are "very warranted." He said most software companies do not have enough profit and trading as a multiple of revenue is "very, very dangerous." He also admitted his own firm overpaid for Medallia in 2021.

John Zito, Apollo.

Told clients that private equity firms are misstating the value of their software holdings. His words: "All the marks are wrong." $10 billion pulled from private credit funds in Q1 alone.

David George, a16z.

Published the framework two weeks ago. Two paths. Grow revenue by 10+ percentage points through real AI products in 12 to 18 months. Or rebuild to 40%+ true operating margins. No middle lane. And he said something I love: somewhere in your org there are about five people who will deliver 100x value. Find them no matter how junior they are.

So who is right? All of them. But they are talking about different parts of the same problem.

Bravo is right on the diagnosis. These companies do not have enough profit. But he is also talking his book. He runs the biggest software PE firm on earth. He needs prices to drop so he can buy. When he says "there are jewels in the public markets that are really cheap," that is a buyer telling you the price is where he wants it.

Zito is right on the cover-up. Private equity marks on software are stale. Everyone knows it. He is saying it out loud. But he is at Apollo, which competes with Thoma Bravo. Calling out the Medallia deal by name is not just honesty. It is positioning.

George is right on the prescription. He gave people an actual playbook. Two paths. Find your five people. Execute in 12 months. That is useful. But he is a VC who needs his portfolio to pick a lane.

Here is where all three miss. None of them are saying what I am about to say. Profitability is not going to come from cutting. It is going to come from AI.

75% of software companies with $10M+ revenue are stuck in the middle right now. Roughly 7,500 companies. Most will not make it.

Not because the math is hard. Because the switch from growth to profitability is a completely different sport. Almost nobody trained for it.

Growth companies are sprinters. Just go fast. Exciting. Everyone cheers.

Profitable companies are marathoners. Endurance. It hurts. Boring to watch. Nobody writes about you on TechCrunch.

You cannot just show up and run a marathon. Anyone can run a hundred meters. A marathon will break you if you have not trained. That is what is happening to 7,500 software companies right now. They trained for the sprint. The race changed to 26.2 miles. They are cramping at mile 3.

I already told you about the kombucha taps and the presidents club trips and the closet full of tchotchkes. I lived that. And here is the part nobody talks about. What it actually feels like when that world ends overnight.

None of that made the company money. Not one dollar. But it felt like winning.

Now the music stopped. Every dollar gets scrutinized by the CEO and CFO. You have to work 40 real hours a week. Not 40 hours of meetings and team building. 40 hours of actual work. Your best friend at the company gets fired. The lunches are gone. The office is gone. The offsites are gone.

That is not a budget cut. That is a completely different company.

Most people do not want to do it. So they leave. They go chase the next unicorn still burning cash and throwing parties. Because that is what they trained for. And the company that needs to make the switch just lost the people it needed most.

Running a growth company is like running a nightclub. Loud music. Bottle service. Velvet ropes. Everyone wants to be there Saturday night. But you are hemorrhaging cash and the minute a cooler club opens down the street your crowd disappears.

Running a profitable company is like a neighborhood restaurant that has been open 30 years. Not flashy. Nobody writes about it. But the food is good. The regulars keep coming back. And the owner actually takes money home.

The software industry hired nightclub people. DJs and promoters and bottle service managers. Now it needs restaurant people. Cooks and dishwashers and owners who know how to run a tight kitchen. Those are not the same people. You cannot retrain a DJ to run a kitchen in 12 months.

Growth is sunshine. Everybody looks good in sunshine. Flip flops and a tank top and life is great.

Profitability is winter. Winter reveals who actually built a real house and who was just camping.

The software industry just went from July to January overnight. A lot of people are standing outside in flip flops wondering what happened.

Have I mentioned my family calls me the polar bear? I love the winter.

Profitability is not going to come from cutting 10% of your headcount. That is a band-aid on a broken leg. You need to rebuild how the company operates. And that means AI.

This is the whole point of why I write this newsletter. Let me show you the math.

The typical SaaS company spends:

R&D: 25% of revenue

Sales & Marketing: 30% of revenue

G&A: 12% of revenue

Stock-based comp: 10% of revenue

Total: 77% of revenue gone before profit

75% gross margins minus 77% in costs equals minus 2%. Or worse.

Getting to 40%+ margins means cutting 35 to 40 points of cost. Not a trim. A rebuild. New benchmarks:

R&D: 25% down to 10%. AI agents write code, test code, review code, triage bugs. Look at Anthropic: 18 major releases in 10 business days using Claude Code to build Claude.

Sales & Marketing: 30% down to 15%. AI handles lead scoring, outbound, content, analytics. Your sales team closes. Machines do the rest.

G&A: 12% down to 5%. Finance, legal review, HR, reporting. AI does 80% of this today.

Stock comp: 10% down to 3%. Smaller team. Less dilution.

New total: 33% in costs. 42% true operating margins.

That is the target. Trimming 5% here and 10% there will never get you there. Entire functions rebuilt with AI at the center. Not AI as a feature. AI as the workforce.

Most people cannot do this. Not wired for it. Not fun. It means telling people their job is done by a machine. Rebuilding processes that took years. Admitting that change must happen.

That is the reality of where we live.

This connects everything.

You no longer have to be a computer science major to build software. Can someone who has never written code build working software today? Yes. Is it production-ready? No. But that is not the point.

The barrier to pushing software out the door dropped through the floor. And not just for beginners. For experienced engineers too.

People with great ideas no longer have to wait around for engineers to free up roadmap time. The barrier between "I have an idea" and "I have working software" got very small. And that changes everything.

Anthropic used Claude Code to build Claude. I tracked their releases. 18 major releases in 10 business days. That would be a quarter or two quarters for most companies. Some would take a year. Anthropic did it in two weeks. In production. Was it perfect? No. There were stability issues. But never in the history of software have releases gone out that fast.

The tools are in a horse race. Claude Code, Cursor, GitHub Copilot, Replit, Windsurf, Lovable, v0. I am not betting on one horse. I am naming the field. The result is the same regardless of which wins. The cost and time to build software just collapsed. That is why 7,500 companies in the middle are in trouble.

If you are reading this thinking "I do not run a software company so this does not apply to me," let me be clear.

Software is always the tip of the iceberg. Things happen in software first and then spread to every other industry.

At some stage in the near future your business will be judged on profitability or growth. Not revenue. Not headcount. Profitability or growth. If you are stuck in the middle of the barbell, you will have a problem when it comes to the value of your business.

If you are looking at an exit, thinking about going public, or sitting on a board and care about enterprise value, you need to get to the ends of the barbell.

The software industry spent 20 years at the best party ever. Open bar. No cover charge. VCs buying rounds. Everyone having the time of their lives.

Now it is Sunday morning. Lights on. Music stopped. Somebody has to pay the tab.

Most people are going to look for the next party. That is human nature.

A few of us are going to buy the building at a discount while everyone else nurses a headache.

But here is the thing. I still believe software is the best asset class on the planet. That has not changed. What changed is how you have to think about it.

It is the barbell now. Marc Andreessen said it: you are either Gucci or Walmart. The middle is dead.

You are either on the growth end, shipping AI-native products so fast your competitors cannot keep up. Or you are on the profitability end, running 40%+ margins with a team that knows how to operate.

Everyone in the middle is screwed.

The people on the ends of the barbell are going to win big.

Sounds like you better start your weightlifting program sooner rather than later.

I really hope this helped explain where software is right now. I do not think it is going to change anytime soon. The golden years are over. That is terrible for some people. But great for others.

Kathy

THE AI BOSS