Founders are no longer pitching traditional software businesses. The focus has shifted entirely to AI-native companies building 'systems of intelligence' or 'systems of action'. This reflects a market belief that existing software workflows without a deep AI moat are too easily replicated and devalued.

Instead of selling software to traditional industries, a more defensible approach is to build vertically integrated companies. This involves acquiring or starting a business in a non-sexy industry (e.g., a law firm, hospital) and rebuilding its entire operational stack with AI at its core, something a pure software vendor cannot do.

Private equity firm Apollo is outperforming peers by having intentionally avoided software investments over the past decade. While others chased soaring SaaS valuations, Apollo's skepticism about the sector's durability, now threatened by AI, has positioned it to benefit as investors flee software-heavy funds.

The current AI-driven downturn in SaaS valuations will primarily eliminate low-end, commoditized tools. Large enterprise platforms are protected because implementing AI effectively is complex and requires the deep, trusted C-suite relationships and integration capabilities that incumbents possess.

Times Square Capital focuses its software investments on infrastructure (tied to consumption), cybersecurity, and vertical SaaS. They are wary of seat-based models (e.g., traditional CRM, HRIS) which may face headwinds if AI-driven productivity gains lead to slower enterprise headcount growth.

Bill McDermott argues the threat of AI replacing SaaS is not uniform. Niche applications serving a single department with low strategic value are vulnerable. In contrast, platforms that are systems of record or integrate workflows across multiple departments have a significant competitive moat.

A partner at Google's AI-focused fund, Gradient Ventures, has adopted a "short SaaS" investment thesis. The rationale is that AI makes building software so easy that most traditional SaaS companies no longer have a defensible moat. This puts the entire business model in jeopardy, making it an unattractive area for new venture investment.

Investor Joe Lonsdale offers a heuristic for the 'SaaSpocalypse': low-end SaaS, particularly PE-backed companies that prioritized sales over deep tech, is in trouble. However, complex software that required over $100 million in engineering to build has a significant moat and is defensible against AI-driven disruption for the foreseeable future.

The fear of AI disruption has led some private equity acquirers to create a new filtering mechanism. They will not even present a deal to their investment committee if the target SaaS company lacks at least one of five specific defensibilities, such as proprietary data loops or deep operational embedding.