A market bifurcation is underway where investors prioritize AI startups with extreme growth rates over traditional SaaS companies. This creates a "changing of the guard," forcing established SaaS players to adopt AI aggressively or risk being devalued as legacy assets, while AI-native firms command premium valuations.

SaaS companies are not equally vulnerable to AI. Some (like Zendesk) tie seats to work AI can replace. Others (like Workday) use seats as a proxy for company size and are safer. Markets are currently failing to differentiate, creating a valuation gap worth understanding.

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.

SaaS stocks are plummeting not because of poor current earnings, but because AI's rapid advancement makes their long-term cash flows unpredictable. Investors, who once valued SaaS like a predictable government bond, now place it in a "too hard bucket," crushing its terminal value multiple.

While many SaaS vendors like Adobe and HubSpot are introducing token-based pricing for AI features, actual business adoption remains negligible at around half a percent of spend on those platforms. This signals that the predicted shift away from seat-based models is far from imminent.

Public markets are incorrectly rewarding SaaS companies for "revenue reacceleration" that comes from reselling LLM tokens. This is flawed because token resale has drastically lower margins than traditional SaaS and creates data silos. The more sustainable model is providing value via new consumption-based APIs for agents.

Value in the AI stack will concentrate at the infrastructure layer (e.g., chips) and the horizontal application layer. The "middle layer" of vertical SaaS companies, whose value is primarily encoded business logic, is at risk of being commoditized by powerful, general AI agents.

AI doesn't kill all software; it bifurcates the market. Companies with strong moats like distribution, proprietary data, and enterprise lock-in will thrive by integrating AI. However, companies whose only advantage was their software code will be wiped out as AI makes the code itself a commodity. The moat is no longer the software.

Snowflake's CEO warns that traditional software firms with walled-garden data models are vulnerable. If they don't develop their own compelling agentic interfaces, they risk being reduced to mere data sources for dominant AI platforms, losing their customer relationship and pricing power.