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The Software Industry’s Great Reset and the New Moat That Matters

  • Market commentary

February 9, 2026 | 7 min read

Scott Voss

Managing Director, Senior Market Strategist

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The February 2026 selloff is the clearest sign yet that AI is rewriting Software-as-a-Service (SaaS) economics. I believe what comes next will define the winners and losers for the next decade.

The software industry is undergoing its most profound valuation reset since the 2008 financial crisis. What distinguishes the 2026 downturn is not macroeconomic weakness, nor enterprise budget cuts, nor overvaluation. The root cause is far more fundamental: AI has changed the physics of the software business model itself. 

GPs and LPs have been debating this vulnerability for years, but Anthropic’s February 2026 release of autonomous legal and business workflow capabilities made it a measurable reality. The implication was immediate and shocking: AI is not merely helping humans interact with software. It is replacing entire categories of software.

Within days, the share prices of legal-tech, market-data, business-intelligence, and horizontal SaaS tools were repriced sharply downward. Private equity investors reacted with equal force, and some quickly reduced software exposure. Other firms hired consultants to analyze AI risk across their portfolios. The long-expected re-underwriting of software valuations finally began in earnest. 

But the selloff is not a story about panic; it is a story about rational repricing. AI is undermining three assumptions that created the SaaS boom: 

  1. Seat-based pricing will grow forever 
  2. Software margins are structurally fixed at 80–85% 
  3. Recurring revenue streams are predictable 

For investors, operators, and LPs, the question is no longer “Where is the growth?” but rather “Which models survive?” 

Below, I dive into forces reshaping the industry, from why the economic model is under pressure to who may emerge on the other side. A bright line has emerged, and it’s one that I believe will define winners and losers for the next decade.

Why SaaS economics are breaking

The software industry’s recent downturn is the first true structural shift in SaaS economics since the model was invented. Two pillars of SaaS are under existential pressure: the seat-based pricing model and the fixed-cost margin structure. 

1. The collapse of seat-based pricing

For twenty years, SaaS companies charged per user, per seat. The model worked because seats grew predictably, Average Revenue Per User (ARPU) could increase modestly, and net dollar retention stayed strong. Now, AI agents enable one employee to do the work of many. Tier 1 support headcount collapses when AI assistants handle most inquiries. Sales teams need fewer SDRs. Marketing teams eliminate large amounts of manual work. If a company reduces support agents from 50 to 10 because AI handles 80% of tickets, then seat count declines 80%. Even if SaaS vendors raise prices 10–20%, that barely dents the revenue loss. The math becomes brutal:
  • 30% seat decline + 10% price increase = -23% revenue contraction1
  • 50% seat decline + 15% price increase = -42.5% revenue contraction2
AI forces SaaS companies into negative topology, with more value delivered, but fewer seats monetized.

2. Variable compute costs erode margins

Historically, SaaS margins were spectacular. Software was built once, then distributed nearly free. Now, every AI interaction has a variable cost in compute. When users shift from episodic dashboard interactions to continuous AI copilot interactions, usage skyrockets. SaaS companies face new cost breakpoints: 

  • At $0.002 per interaction, 2,500 monthly interactions erase a $5 cost buffer 
  • At $0.01 per interaction, only 500 monthly interactions wipe out margin 

Companies built for fixed-cost leverage must now build for cost of goods sold variability. This is a structural margin reset, not a temporary fluctuation. 

Rerating ARR predictability

Together, these shifts are creating major impacts on valuation multiples. High-growth SaaS companies have historically commanded up to 15–25x revenue multiples3 because Annual Recurring Revenue (ARR) was considered predictable, contractually bound, and immune to churn.

AI introduces three new risks to ARR durability:

  1. Replacement Risk — AI agents replace the entire software category
  2. Compression Risk — seat counts fall faster than pricing can adjust
  3. Margin Volatility Risk — variable inference costs destabilize unit economics

In this environment, investors no longer accept ARR at face value. The “SaaS premium multiple” is gone.

Potential winners and why: Shifting cost models

Winners: Players that own end-to-end workflows, can price on usage, and can absorb variable cost structures at scale.

Losers: Software for which AI can replicate functionality directly, with collapsing seat models, or no proprietary data.

The new moat that matters: Who’s positioned to win?

Though this transition feels turbulent, the long-term opportunity in software remains. This reset is clearing out business models built on noise and rewarding those that own the deterministic core of enterprise operations.

AI doesn’t eliminate the need for software. It amplifies the value of the right software. I see the following as core predicators of who will emerge when the dust settles.

1. Mission-critical systems of record

The clearest indicator of a software company’s AI-era survivability is whether it is: 

a system of record (SoR) or a bolt-on workflow tool 

This divide is the new bright line for valuations. 

Systems of record

  • Hold proprietary, customer-specific operational data 
  • Run deterministic, mission-critical workflows 
  • Have extremely high switching costs 
  • Are necessary for regulatory, financial, or operational continuity 
  • Cannot be replaced by probabilistic AI agents 

Bolt-on tools

  • Do not own data 
  • Perform tasks where “good enough” is acceptable 
  • Have low switching costs 
  • Solve problems AI can replicate using general-purpose models 
  • Often rely on public or third-party data 

For illustrative purposes only. Not an exhaustive list of differences.

If SAP goes down, factories stop. If Workday breaks, payroll fails. AI augments these systems; it does not replace them. 

In contrast:

  • Legal research? AI can synthesize statutory and case law. 
  • Dashboarding tools? AI generates dashboards from raw databases. 
  • Coding assistants? Frontier models integrate coding natively. 

The replicability is the risk vector. 

Potential winners and why: SoRs vs. bolt-on

Winners: Systems that own core operational data layers or are an irreplaceable backbone for companies.

Losers: Players for which AI can regenerate their insights without needing their software.

2. Vertical SaaS

Vertical SaaS has emerged as the industry’s most resilient and fastest-growing segment — and the one least disrupted by AI commoditization. 

There are several reasons I believe are behind this outperformance:

Vertical SaaS's growth factors

Industry-specific workflows

Generic CRM vendors cannot replicate many of vertical SaaS’s workflows without massive customization. Procore understands construction, from permitting delays, to subcontractors, to sequencing. In the same way, Toast understands restaurants and Samsara logistics.

Deep operational integration

Vertical platforms often run full operations, from POS and payroll (Toast) to FDA-compliant systems (Veeva). Switching costs increase exponentially when core operations depend on the platform. 

Lower AI substitution risk

AI can replicate horizontal functionality (email sequences, dashboards, case research), but it cannot easily replicate highly specific industry rules, timing, compliance, and data structures.

Non-tech buyers are stable

Restaurants, contractors, freight operators, dentists — these industries do not cut software spend dramatically in downturns.

Network effects

Loops reinforce market share. In construction, subcontractors adopt whatever tool general contractors use. In wellness, consumers book through Mindbody’s marketplace. 

For illustrative purposes only.

Potential winners and why: Vertical SaaS

Winners: Those with strong data moats, operational criticality, and embedded fintech.

Losers: Horizontal CRM or project tools without industry context or niche verticals lacking proprietary data.

3. Embedded fintech

Embedded fintech has become an important defensive layer for SaaS companies. In the U.S., embedded finance will exceed $7 trillion in transaction volume by 2026.4 For vertical SaaS companies, payment processing fees add 2-3x revenue uplift per customer compared to pure SaaS.5

Embedded fintech protects against AI disruption for a few reasons:

  1. Payments volume is not affected by seat compression. Restaurants process the same number of transactions regardless of staffing.
  2. Switching costs are massive. Shifting POS + payments + merchant accounts is painful.
  3. Data moats are deep. Payments create real-time cash-flow visibility.
  4. AI cannot replace regulated financial infrastructure. For example, AI can draft invoices, but it cannot settle payments or underwrite loans without licensed infrastructure.

Potential winners and why: Embedded fintech

Winners: Fintech revenue streams overall. They are sticky, recurring, and unaffected by AI seat reductions.

Losers: Pure-play SaaS without payments or horizontal tools with no financial hooks.

4. Research and development (R&D) investors

AI has created a structural gap between companies that invested heavily in innovation and those that optimized for short-term margins.

The leaders treat AI as a platform transformation, not a feature. They’re dedicating resources to redesigning products, updating pricing, and integrating AI throughout. Just look at Microsoft’s more than $32 million in R&D expenses in 2025.6

Though the public markets are now scrutinizing the benefits of this spending, many believe this is the best (and perhaps the only) path forward.

The laggards, particularly legacy software companies with declining R&D investment, are discovering that cost-cutting is not a strategy. AI is unforgiving to firms that underinvest.

Velocity of innovation is now a competitive moat.

Potential winners and why: R&D

Winners: Those who pursued high R&D velocity, rapid AI integration, and durable competitive positioning.

Losers: Legacy vendors with declining R&D intensity or companies caught between late cloud migration and early AI disruption.

The future: Replacing the seat with a brain

Where is this all leading us? First, I see the seat-based model giving way to a usage-based model. This could be structured in different ways:

  • Per-task (invoice processed, contract reviewed) 
  • Per-outcome (revenue generated, costs saved, compliance maintained) 
  • Per-agent (AI worker pricing) 
  • Consumption (compute, tokens, API calls) 
  • Hybrid (base subscription + usage charges) 

Further, AI agents’ 24/7 economics create enormous potential for platforms that can monetize it. If AI agents operate continuously, usage can grow 10–100x even as human seats decline.

In this new era, ARR loses primacy and new metrics matter more, including net dollar retention, committed vs. uncommitted spend, usage/margins by cohort, or the payback period under usage variability. Companies that can measure and communicate usage patterns win investor trust. 

What this means for investors

Ultimately, I believe the software sector’s valuation reset marks the beginning of a Darwinian era. AI is the predator, and many players are at risk of becoming a meal. The bright lines are clear: 

Winners are likely to have:

  • Mission-critical systems of record 
  • Platforms with proprietary data and embedded transaction capability 
  • Companies investing aggressively in AI 
  • Hybrid or usage-based pricing innovators 

Losers are likely to have:

  • Tools that AI can replicate
  • Products reliant on third-party data
  • Low-switching-cost workflows
  • Companies cutting R&D to preserve margins

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Private equity is already adjusting, reducing exposure, conducting AI vulnerability assessments, and reassessing underwriting assumptions. We also see selective buying where value and durability exist, but where long-term success depends on transformation aligned with the winning attributes above. 

I will end with a question that our CIO has been asking for 10 years as we’ve debated SaaS investments in our investment committee:  

“Is this mission critical or nice to have?” 

Though so much is changing, the fundamental question remains the same.

Footnotes

  1. Based on calculation: (1−0.30)×(1+0.10)−1=0.70×1.10−1=0.77−1=−0.23=-23%

  2. Based on calculation: (1−0.50)×(1+0.15)−1=0.50×1.15−1=0.575−1=−0.425=-42.5%

  3. Windsor Drake, SaaS Valuation Multiples: 2025, dated June 25, 2025.

  4. Bain, Embedded Finance: What It Takes to Prosper in the New Value Chain, dated September 2022.

  5. Windsor Drake, Vertical SaaS Valuation Report Q4 2025, dated December 2025.

  6. Microsoft, Annual Report 2025, dated July 30, 2025.

Disclosure

HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy.  In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information.  The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you.  There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest. 

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