(2024-01-16) Assetlight Software Businesses The New Paradigm For Startups

Will Manidis and John Kennedy: Asset-light Software Businesses: The New Paradigm for Startups. When we started our companies in the late 2010s, we heard the same advice about how to raise money from venture capitalists in the pursuit of fast growth: Founders would need to raise significant sums of venture capital to incur fixed costs like software developers and sales reps that would pay back over time. This paradigm is now saturated.

Software is becoming commoditized as a category

Robert Smith, who founded and grew the private equity firm Vista Equity Partners over the last two decades to manage over $100 billion worth of assets, did so on the idea that “all software companies taste like chicken. They’re selling different products, but 80 percent of what they do is pretty much the same.” ((2018-07-09) Billionaire's Secret Buyout Formula, see also (2024-01-23) Brown Dark Software)

Because “all software companies taste like chicken,” whether you’re selling to hospitals, school districts, or local retailers, you’re tackling the same problems that SaaS companies before you have mastered

Each of those buckets of fixed costs can be selectively ignored, automated, delegated, or consumed as a service

This future was emerging before our current generative AI moment; it will only accelerate if companies can use large language models to automate junior-level work.

Three theories of an AI-driven SaaS future

Generative AI (GPT) : content :: internet : distribution

The Internet offers programmatic, global-scale content distribution at no marginal cost.

Generative AI offers programmatic, global-scale content creation at a diminishing marginal cost.

Generative AI represents a classic technological revolution.

In Technological Revolutions and Financial Capital, researcher Carlota Perez argued that new technological paradigms—the microprocessor, the internet, the steam mill—follow similar patterns of deployment

if we were to roughly apply that frame to the internet adoption life cycle of the past 30 years, it might look like this

Installation period: the extended 90s (internet birth to dot-com crash)

Financial slump: dot-com crash -> Great Recession

Deployment period: the extended 2010s (Great Recession to 2022)

The cycle has recently started anew. We are in the installation period of the technological revolution brought on by generative AI. The launch of ChatGPT was a big bang

The financial slump to come is inevitable. Markets are lightweights. We’re all drunk on speculative hype

Generative AI is a sustaining innovation for products and a disruptive innovation for costs

a dramatic increase in the capacity of software represents a disruptive innovation to the cost of white-collar work. Most white-collar work consists of generating text: writing code, support emails, summaries, blog posts.

building a business with infinite junior employees presents infinite junior-level mistakes

What if future software organizations look like marketing orgs? Senior strategists, creatives, and leaders would manage automated systems in lieu of junior developers to deliver work at scale. Just like how Hubspot and Mailchimp automate the process of sending marketing emails (An email template is nothing like a "software feature template". But cf cyborg.)

Technology moves operational leverage up the business chain. Before the introduction of spreadsheet software, clerks and bookkeepers outnumbered analysts, auditors, and managers by a third in the U.S. Twenty years later, there are two-and-a-half times more analysts and managers than clerks.

Generative AI enables every clerk to become an analyst, every writer to become an editor, and every developer to become an architect.

If generative AI can reach its potential, it represents a new frontier for software, where organizational structures, cost structures, and growth strategies can and should be re-imagined. These new opportunities empower creative business development: dealmaking, marketing, elephant hunting.

New ventures need new venture capital

Venture capital as we know it today is a narrow product for a narrow set of companies in a narrow set of market conditions.

this new paradigm of software will sprout new generations of alternative software businesses that need financing options better aligned to their future than high-growth venture capital. The future median software founder will aspire to be Hank Hill, not Mark Zuckerberg. (indie)

Traditional “prestige” venture capital firms, by most measures, have already dug their own grave.

Vertical market software providers are solely focused on capturing, retaining, and upselling a specific vertical market, such as school districts, hospitals, or local retailers. An extremely generalized way to look at vertical market software is as industry-specific templates and integrations on top of commodity data warehousing and workflow offerings.

as software costs become increasingly variable, cloud providers like AWS and Microsoft Azure can encroach on vertical market software providers more easily than ever before. Why pay separately for a niche supply chain software tool when Azure offers a "good enough" solution, configurable by a business manager

As hyperscalers and vertical software battle it out on the enterprise side, the lower and middle market will need services to take advantage of the opportunities to come.

Maybe future organizational structures have significantly more senior members than they do now.

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