In technology, leverage compounds where scarcity exists. For the last two decades, software was scarce. It was expensive to build, hard to distribute, and even harder to maintain. This scarcity created enormous opportunity—for founders, investors, and especially for private equity.
But we are now entering an era where software is no longer scarce. The emergence of generative AI—through tools like Cursor, Claude, GPT-4o, and others—has dramatically compressed the cost of software creation. What once required teams of engineers can now be prototyped and deployed by an individual over a weekend.
This transformation has profound implications, but perhaps nowhere more acutely than in private equity. PE, by design, is a machine for exploiting structural inefficiencies. If those inefficiencies change, the machine must adapt.
We are approaching a new equilibrium—one where software is abundant, and scarcity shifts elsewhere. This piece is about where that scarcity is moving, and what it means for PE investors in the years ahead.
Software as the New Content
The best historical analogy isn’t SaaS—it’s media.
Just as the internet turned video content from something only studios could afford to produce into something anyone could upload from their phone, AI is turning software from a capital-intensive asset into a generative output. A YouTube for code is forming—only this time, the creators are agents.
In media, this led to a collapse of the cable bundle. The value of individual channels dropped. Distribution unbundled. Attention fragmented. The traditional model of scarcity—owning the pipe and controlling the programming—gave way to a model of abundance, where success came from aggregation, recommendation, and data.
That same transformation is now beginning in software.
What used to be defensible—having a product at all—is no longer enough. In a world of infinite software, the bottleneck is no longer supply. It is distribution, data, and integration.
What Made Software Attractive to PE
To understand what’s changing, we need to first recall why software has historically been so attractive to private equity.
Software companies offered:
- High gross margins (often 90%+),
- Recurring revenue,
- Predictable cash flows,
- Operational leverage from automation,
- Embedded switching costs via workflows and integrations.
In short, software offered the perfect profile: scalable growth, low capital requirements, and visible economics.
The result was intense competition among PE firms to acquire software assets—especially B2B SaaS. Strategies like buy-and-build, vertical consolidation, and margin optimization became standard.
But these strategies assumed that software remained fundamentally hard to build. That assumption is no longer safe.
Infinite Software: The Coming Flood
Generative AI is collapsing the cost to build software in both time and dollars. We are seeing:
- Agents generating full applications from natural language,
- Individual developers producing what previously took teams,
- Niche tools being built and iterated at unprecedented speed.
As a result:
- The number of software products will increase exponentially.
- Differentiation based on feature sets will erode.
- Competition will intensify in every vertical.
This mirrors the rise of user-generated content. When anyone can create, the supply curve steepens. And when supply outpaces demand, the value of undifferentiated units approaches zero.
This is the new reality for software.
Implications for Private Equity
The private equity playbook must evolve. Here’s where the shifts are most acute:
1. Product Is No Longer the Moat
Owning a software product is no longer defensible on its own. The barrier to creation is now marginal.
Instead, moats shift to:
- Distribution: Control of the customer relationship, network, or embedded channel.
- Data: Access to proprietary, structured, or user-generated data that improves with usage.
- Workflow Depth: Integration into critical, non-trivial processes that are hard to rip out.
- Brand and Trust: Especially in vertical markets where risk aversion is high.
This means PE diligence must refocus from technical depth to contextual advantage. Who owns the user journey? Who collects irreplaceable data? Who operates at the point of decision? Is the product a feature, or the system of record?
2. Buy-and-Build Needs to Be Rethought
Buy-and-build relies on M&A to expand product lines and customer reach. But in a world where you can build instead of buy, this calculus changes.
AI-native development allows acquirers to:
- Rapidly clone feature sets of target companies,
- Spin up adjacent modules internally,
- Integrate functionality faster than post-merger replatforming would allow.
This raises a new question for every acquisition: is this asset unique, or just early? For example, why acquire a small company for its AI-powered contract analysis feature when an in-house agent, trained on your firm’s proprietary legal data, could perform the same task with greater context and accuracy? If an asset’s core value can be replicated by an agent, PE firms may be better off building than bidding.
3. Operational Value Creation Gets Rewritten
Private equity thrives on post-acquisition optimization. The mandate for operational improvement is supercharged. An AI-native PE firm won't just advise; it will deploy.
- Portfolio-wide Automation: Imagine deploying a universal agent for customer support or financial reporting across all portfolio companies, creating immediate, scaled efficiency.
- Internal Development Revolution: Expensive outsourced development can be replaced by small, in-house teams armed with AI copilots, building and iterating at a fraction of the cost.
- Real-time Intelligence: Gone are the days of waiting for quarterly reports. Prompt-based monitoring allows for real-time KPI tracking and operational oversight.
This isn’t a theoretical advantage. It is a direct assault on SG&A, leading to faster reporting cycles and tighter control across the portfolio.
4. Multiples Will Compress for Undifferentiated SaaS
In an abundant market, valuation premiums vanish for generic supply.
We’re already seeing early signs:
- Feature-based SaaS companies are struggling to justify growth-stage multiples,
- Buyers are increasingly focused on retention, embeddedness, and customer acquisition cost,
- LPs are pushing for value over narrative.
The “SaaS premium” is becoming more selective. Companies without strong network effects, differentiated data, or unique distribution will see multiple compression—possibly significantly.
Where Scarcity Lives Now
If software is no longer scarce, where is the next arbitrage?
1. Data Moats
Firms should target companies with:
- Unique access to customer behavior,
- Domain-specific structured inputs,
- Feedback loops that improve accuracy or recommendations.
These are hard to replicate and essential to AI performance. Consider a vertical SaaS for dentistry: while a competitor can clone its scheduling features overnight, they cannot replicate years of patient dental records. That historical data is the fuel for predictive models that a new entrant simply cannot build. This is the new compounding asset.
2. Workflow Integration
SaaS companies that are deeply embedded in vertical workflows (e.g., practice management for dentists, field service dispatching, EHR integrations) retain switching costs that are meaningful.
Think of compliance software so deeply tied into a bank's core transaction systems that removing it would require a multi-year, multi-million dollar overhaul. That is a moat. Ownership of process > ownership of features.
3. Distribution Access
Companies with privileged channels—whether through embedded sales, regulatory advantages, or strategic partnerships—are insulated from supply-side competition.
A healthcare software provider that has spent a decade securing exclusive integrations with the top three Electronic Health Record (EHR) systems holds a distribution channel that is nearly impossible for a new competitor to replicate. In a commoditized market, distribution becomes the kingmaker.
A New Role for Private Equity
Private equity thrives when it identifies and exploits underpriced assets or under-optimized operations. The new wave of opportunities will not come from acquiring traditional SaaS businesses at lower multiples.
It will come from a new, more hands-on playbook:
- Aggressive Replatforming: Buying legacy software not for its code, but for its customer base, and aggressively replatforming it with AI-native tooling.
- Internal Venture Building: Building new vertical modules and even entire companies internally, leveraging portfolio data and shared AI infrastructure.
- Infrastructure Plays: Acquiring the data and process automation layers in legacy sectors, effectively owning the "rails" on which future AI services will run.
- Portfolio as a Platform: Creating shared distribution and data platforms that give all portfolio companies an unfair advantage.
This is not a small shift. It is a new mandate: from optimizing assets to building them.
The PE Firm of the Future
The most valuable private equity firms of the next decade will not be those who pay the highest multiples or hire the best consultants. They will be the firms that:
- Operate like product companies,
- Think like AI-native technologists,
- Build internal agent infrastructure,
- And own scarcity in a world where software is infinite.
What made software attractive—scarcity—no longer holds. But the opportunity remains. It has simply moved. And as always in private equity, those who find it first will outperform.