We are pleased to share our latest Arctos Insights Flash Piece: “World (Soft)War II.”
This note explores our emerging views on the so-called “SaaSpocalypse” roiling private markets.
We are not technology-focused investors, but we are technology practitioners. That’s the angle we take here.
We believe we are experiencing the early innings of a fundamental paradigm shift in how software is delivered. This is not the first time this has happened in recent memory; the last shift, from on-prem to cloud, was just as disruptive. Like with the cloud, the new technology (AI) monetizes less well. This creates an innovator’s dilemma. We call this battle between incumbents and new entrants World Softwar II.
We stick as close as possible to what we know today, without speculation about the rate of advancement and utilization of the technology. Our argument is simple: when you fairly examine the two combatants, both sides have material advantages and fragilities, and the speed of the disruption to incumbent firms is highly dependent on (fundamentally unpredictable) capital markets openness. AI is coming, but how fast matters.
We explore (with AI) which types of software firm are best positioned to weather the battle, and how investors can protect portfolios through this period, which we believe must start with offensive bets on adjacencies super-linear in progress in AI over picking winners in the AI war. In an appendix, we offer an LLM prompt investors can use, with any commercial LLM of their choice, trained on this paper and public SaaS company data, to grade private or public software firm AI disruption risk.
You can find the full paper here or access via The Breakout (login required).
For questions or inquiries, please contact [email protected]