"The Traditional SaaS Business Model is Dead"

Key Takeaways

I think my contrarian take that I've been thinking about for a long time is that the traditional SAS business model is dead. The the business model that has taken up the lion share of venture capital dollars over the past two decades is sort of coming to an end and I think the next decade is going to be littered with a bunch of carcasses of these types of companies. Um and and the reason for this is is sort of multiffold. First, um we're entering an era where software is easier than ever to build. So historically R&D was a big portion of of the costs for a software business and today R&D is less and less of a relevant part of opex for a software business. Secondly uh one of the underlying things that made uh SAS businesses interesting was the fact that cogs were were very low. It was largely just cloud hosting bills where you would pay AWS or GCP uh and then as a business scaled those cogs would would ultimately be negligible um and these businesses would be very profitable. Um, today we're entering an era where the the actual costs of training and inference for these AI enabled software companies is actually very high. And so these businesses are not operating at the same gross margins that historic SAS businesses were able to. And so the traditional venture model of funding these AI enabled agents or AI enabled SAS companies is no longer as tenable as it was 5 or 10 years ago. And so investors are looking for new places to deploy capital. And one of the places that I consider very interesting is this area of SMB consolidation or AI roll-ups as some people call it, which is this idea of founders going out and buying these old school SMBs, old school services businesses.