AI has given public markets the software scaries... and it’s spreading to private markets too

Since ChatGPT burst onto the scene, it has been blamed (or credited) for reshaping just about everything it touches, from knocking down college kids' favorite homework shortcut to upending the job market. Now, the AI spectre has spooked the very industry that created it: software.

At a time when most of “big tech” is flying, a lot of “medium tech” is getting crushed. As Sherwood’s Luke Kawa noted last week, a range of formerly high-flying software companies, including Salesforce, Adobe, and Atlassian, now trade at valuation multiples clustered below 5x their respective sales — while the iShares Expanded Tech Software ETF (IGV) is down more than 7.5% year to date.

Behind that selloff is growing anxiety around a new class of AI-native, agentic tools — most visibly Anthropic’s Claude Code, though other major models like OpenAI’s ChatGPT and Alphabet’s Gemini offer similar capabilities — which promise to make software cheaper and quicker to build.

De-moated

As these tools improve, investors are increasingly questioning whether traditional SaaS models still have defensible moats after years of “eating the world.”

That concern isn’t theoretical. According to data from Similarweb, a growing cohort of “vibe-coding” startups have seen their monthly traffic surge over the past year, as more users experiment with building software from simple prompts, without needing much programming skill. Lovable, perhaps the most well-known of the specific vibe-coding platforms, went from a revenue run-rate of $1 million to $100 million in just 8 months; its CEO describes his work as “building the last piece of software.” Another, Emergent, just tripled its valuation this week after reporting rapid growth.

The problem is that these AI-native startups are weighing not only on public stocks, where the damage is at least visible through a brutal repricing, but also on private markets, where valuations are more opaque, and liquidity for early employees and investors is typically delayed until a big exit — usually an acquisition or an IPO.

Well-known venture capitalist and podcaster Harry Stebbings recently wrote on X that “we have a big problem. The venture model doesn’t work with the current public market revenue multiples.”

For decades, software has been venture capital’s favorite place to park money. According to Pitchbook data, the sector has consistently pulled in roughly a quarter of all US VC dollars throughout the 2010s. In recent years, that dominance has only grown, with software startups absorbing ~$172 billion in 2025 alone, more than half (53%) of all venture capital invested.

And while software's dominance hasn't changed, where the money inside the sector is going has quietly flipped.

Just a few years ago, B2B SaaS (think software for HR teams, accounting teams, finance teams) was the hottest thing in venture capital. Last year, however, startups tagged as “AI and machine-learning” attracted a larger share of VC funding than “SaaS” software companies for the first time, per Pitchbook. As venture dollars migrate toward AI startups, it’s getting harder for traditional, non-AI-native software firms to raise fresh funding, just as the prices they can expect at exit are coming down.

Chamath Palihapitiya, a high-profile venture investor, put it bluntly on X this week (emphasis ours):

...the Great SaaS Meltdown has started and there's no going back.

What exactly is happening?

In short, hi growth, low/no profitability SaaS is no longer a winning strategy because the big question mark is the durability of that growth in the short term and, because of AI, the lack of profits in the long term. Every SaaS company has sold the dream (to investors and employees) that they will growth quickly now, and harvest lots of cash later. With AI, this assumption may be completely out the window.

The hype now is all about agentic AI — chatbots and assistants that can execute tasks — and dozens of modestly successful software startups were left sailing in the wrong direction as the winds changed. Some are working hard to pivot, but for others it might be too late.

Over the past decade, dozens of SaaS firms raised capital at double-digit revenue multiples, fueled by the belief that software was the ultimate “sticky” asset. In the 2010s, they were valued at well above 10x revenue on average, per Pitchbook. From 2020 to 2025, those multiples averaged ~22x, drawing in as much as ~$466 billion in venture capital. 

With more public software stocks now trading closer to 4–5x sales, however, that math may no longer hold, potentially capping what many of those legacy software firms can realistically hope to sell for down the line. 

Whether the software scaries are overdone is yet to be seen. As one colleague recently noted: is a dentist in Idaho really going to vibe-code their own software for keeping track of their patients' appointments?