As economic cycles go, I was hoping that by now, nearly 2 1/2 years into the software downturn, we’d be seeing more green shoots and signs of recovery. While there are some small pockets of growth, especially around AI investment, the software market is still in a recession. I’ve been reflecting on this over the past few months, talking to entrepreneurs, getting feedback, and trying to find reasons and insights. On valuations, they are still down dramatically from 2020 and 2021, and rightfully so. The valuations got so far ahead of themselves and were so distorted based on the accelerated demand for products from COVID and the zero interest rate environment. After valuations peaked towards the end of 2021, they started to fall dramatically and have since fluctuated in a more sustainable, long-term average range.
From a software perspective, for sales, churn, and renewal rates, this downturn has highlighted just how often software companies sell to other software companies. Much like in the dot-com heyday, high flyers with fast growth sold their products, ads, and solutions to other tech companies. As long as money was flowing on the investment side, those dollars helped the whole ecosystem, and everything looked good. Once the new investment stopped, most of the ecosystem fell apart. Today, we’re in a similar situation outside of the AI investments.
In other words, software companies are the early adopters for other software companies. When software companies stop receiving large amounts of venture capital at favorable valuations, they become much more cost-conscious. They let go of employees, cut back on their own spending, and stop buying software from other software companies. This presents challenges for the software industry.
Of course, plenty of software companies sell to non-software companies. By and large, the economy is doing fine but not growing fast adjusted for inflation, so the sales from software companies to non-software companies have been slow and steady. Sales from software companies to other software companies have been nonexistent, resulting in an overall malaise in the software business. When does it all end? I don’t know. We’re still bouncing along the bottom. At some point, things will pick up, and we’ll get back to a more aggressive growth orientation as a software industry. Hopefully, that’s in 2025, but you never know. The lack of investment by software companies and software companies selling to other software companies has been eye-opening to me and is one of the important reasons why the software industry has struggled for nearly 2 1/2 years.
Entrepreneur
via https://www.aiupnow.com
David Cummings, Khareem Sudlow
