Market Musings: The "SaaS-pocalypse" Is Real - Why AI is Rewriting the Software Business Model
The phrase “SaaS-pocalypse” has been making the rounds lately, and while it might sound like an exaggeration, we believe it holds a lot of truth. Simply put, the traditional Software-as-a-Service (SaaS) model is facing an existential shift. The era of simply paying a monthly subscription for software that requires heavy human involvement is ending. A lot of SaaS companies will need to drastically change their business models, or risk being left behind.
To understand why this is happening, we have to look at how we currently interact with software. Traditional SaaS - whether it’s a CRM, an ERP, or a project management tool - requires you to prompt it. You have to log in, manually input data into a dashboard, pull reports, and actively manage the system. You pay a subscription fee, but you’re still doing a lot of the work yourself.
With the rapid advancement of artificial intelligence, we are moving toward a concept of "promptless AI." Eventually, you won’t have to ask the software to do anything; it will proactively manage tasks, anticipate needs, and execute workflows autonomously.
We are already seeing this concept of promptless AI being contemplated across financial institutions. Block’s announcement in early March of a 40% workforce reduction was largely attributed to AI, particularly in the application of AI and how that can be done more evenly across the organization. Management has said they want a customer - whether it’s a Square seller or a Cash App consumer - to be presented with automated solutions, such as introducing a lending product the customer would otherwise have to search for. Customers won’t be asking for more products or features; they will be asking for peace of mind. By proactively protecting a Square seller's cash flow, the company avoids overloading them with information and removes the burden of figuring out the right questions to ask.
When the software does the work for you, the business model fundamentally changes. If a tool is actively driving business efficiency and cutting costs without your constant oversight, charging a flat monthly fee no longer makes sense. Instead, .we believe the revenue model will transition to performance-based pricing. AI companies will start earning a percentage of the actual savings or revenue they generate for the client. The value proposition shifts from "access to software" to "tangible business outcomes."
This shift brings us to a conclusion that services-based revenue will become more attractive than traditional SaaS.
We anticipate a massive return to services-based business models, but with a modern twist. The real value won't just be in building the underlying agentic AI technology; it will be in the companies that wrap themselves around these agents to help businesses actually apply them. Additionally, the AI may even bill itself as the service or the agency itself. For instance, instead of an AI that helps ad agencies, the AI IS the ad agency.The application of the technology, rather than the technology itself, will become the primary driver of value.
So, what is the moat in this new era? We believe the strongest and most attractive defensibility will come from deep industry specialization, and more specifically, industries that are boring and preferably have not been touched by AI or even tech in a major way before. Generic AI tools will become commoditized, but AI solutions that are purpose-built for the unique workflows, regulations, and nuances of a specific industry will be incredibly sticky (e.g., our portfolio company Nexxa AI).
The evolving landscape of revenue models in the AI era will require nimble strategy adjustments. Founders and investors alike need to embrace new monetization frameworks and recognize that the straight-up, traditional SaaS model is no longer the default path to success.
The "SaaS-pocalypse" isn't the end of software; it's just the end of paying for software that doesn't do the work for you.