Software is at a transformative moment, and now is a great time to build

Credit: @ashkanstweets

We loved this quote from F1 driver Ayrton Senna. It speaks to our conviction in founders who see opportunity in downturns. In these times, the pretenders disappear, and only founders with true conviction and grit set out to launch new companies. “Fortune favors the bold,” after all.

Software innovation is at a defining moment. AI, the continued adoption of vertical SaaS, embedded finance, and new software architectures will transform how we work. Individually, these present significant opportunities. In aggregate, they will be revolutionary and could create trillions in enterprise value. We also believe unique macroeconomic factors will favor early-stage companies.

1. AI has reached a tipping point. In the past, AI identified patterns in large data sets. Consider Amazon leveraging AI to determine what book to recommend based on your previous purchases. Better models, more data, and more computing power have brought AI to the point of being capable of creating. This recent phenomenon is a new category called “Generative AI.” Whether used for sales and marketing, or coding and architecture, apps utilizing generative AI will make creative and knowledgeable workers more efficient and capable of tasks beyond their abilities. There is plenty of hype, which is justified, but we are still in the first innings. Generative AI faces potential obstacles, such as technology challenges, business model definition, copyright, trust and safety, and costs. Ultimately, though, it will create tremendous opportunities for founders. You can appreciate AI’s developments by testing it out yourself.
2. Vertical SaaS will bring SMBs into the digital age. SMB adoption of vertically-focused B2B software and marketplaces is proliferating. From payroll and accounting to workflow management, these platforms provide businesses with an end-to-end solution that runs their entire operation. As more businesses depend on these platforms, the possibility for software companies to develop and sell specialized tools and services continues to grow. We are particularly excited about embedded financial service solutions. They can take what would have previously been a niche SaaS opportunity and turn it into a significant market opportunity.
3. Fintech-enabled platforms revolutionize financial access. Embedded financial services have created a new distribution channel for individuals and businesses to conveniently access financial products and services within the apps they use daily. By integrating financial products such as payments, lending, and insurance into SaaS applications, software companies can provide their customers with a more convenient way to access financial services at their point of need. This eliminates the need for customers to work directly with a bank or go into a branch to apply for a business loan. The market for embedded financial services is expected to reach $7 trillion by 2026, presenting a massive opportunity for software companies seeking to expand the services offered to their customers and add revenue streams previously limited to banks.
4. New approaches to software architecture. Software architecture is constantly changing. A recent trend that excites us is enterprise applications built directly on data warehouses such as Snowflake. This new approach to software architecture allows companies to easily integrate and analyze large amounts of data from multiple sources, providing them with valuable insights and enabling them to make better decisions without the complexity and challenges of traditional approaches.

In addition to these software trends, other macro factors could make the next couple of years a great time to start an early-stage software business.

Talent is finally obtainable. It is important to note that this has been a challenging year for the tech sector, as evidenced by the 200,000+ layoffs across the industry. Still, it has also created a large pool of talented individuals looking to join companies or start their own. The talent war driven by big tech and other well-funded companies is leveling off, making talent less concentrated.

There is still a lot of venture capital available for early-stage companies. With roughly $290 billion in dry powder ready to be invested over the next few years, we expect investment activity will continue despite what we’ve seen in previous slowdowns. Recessions are a great time to build but a challenging time to grow. Venture funds know this and tend to invest in earlier stages.

To be sure, it is essential to acknowledge that the market is still facing headwinds. Starting a software business will be a formidable undertaking. Although there are record amounts of investable capital, the bar has been raised for founders to prove their companies are worthy of investment. Investors are returning to the fundamentals and looking for tangible product market fit and growth signals.

We anticipate two major challenges for early-stage companies in the year ahead. First, increasingly discerning customers will reduce spending on software. Second, risk-averse technology buyers will question the viability of early-stage companies. The uncertainty and difficulty of fundraising in downturns will be front of mind as they weigh whether to stick with their existing providers, or take a risk on a company that could go out of business.

Nonetheless, we remain optimistic about the year ahead and the potential for innovative early-stage software companies to emerge. We are excited to see what the future holds for these companies and the impact they will have on the world of work. If you’re building companies in these spaces, please reach out — we’d love to hear from you!

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