It’s not easy to run an enterprise software company these days. For the nth example of this, read the latest story by my colleague Laura Bratton, who describes how an Atlanta real estate manager replaced Salesforce software with a custom app developed using Replit and Claude Code—saving $100,000 a year. Yipes. Fears that companies will replace their software subscriptions with cheaper AI tools have hammered not just publicly traded stocks but the valuations of private companies. While we don’t often get a look at these private valuations unless the startups sell more shares, mutual fund disclosures give a glimpse into how big public investors are feeling. As the attached chart shows, for most it’s pretty bleak.
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It’s not easy to run an enterprise software company these days. For the nth example of this, read the latest story by my colleague Laura Bratton, who describes how an Atlanta real estate manager replaced Salesforce software with a custom app developed using Replit and Claude Code—saving $100,000 a year. Yipes.
Fears that companies will replace their software subscriptions with cheaper AI tools have hammered not just publicly traded stocks but the valuations of private companies. While we don’t often get a look at these private valuations unless the startups sell more shares, mutual fund disclosures give a glimpse into how big public investors are feeling. As the attached chart shows, for most it’s pretty bleak.
Since T. Rowe Price and Franklin Templeton invested in Airtable’s 2021 funding round, which valued the maker of collaboration software at $11 billion before the investment, fund companies have marked down the per-share price by at least 60%, according to Caplight, which tracks fund disclosures and secondary market data.
Similarly, since DataRobot raised money at a $6 billion valuation in mid-2021, T. Rowe has marked down nearly the entire value of its stake in the enterprise software company. And mutual funds including Fidelity and T. Rowe have marked down the value of their stakes in human resources software company Gusto by nearly 30%, on average, since late 2021.
Of course, these markdowns correlate with the sell-off among publicly traded software stocks, which usually provide a benchmark for private shares.That may not reverse anytime soon.
“Over time, we see software values continue to trend down except for companies with a very high growth rate” or technology that is hard to replicate, said Ron Heinz, who invests in mature software companies for Utah-based Oquirrh Ventures.
To protect against the risk that AI will undercut its companies, the firm has focused on startups where the partners believe there is an intellectual property moat, such as those with proprietary cybersecurity technology.
Not all enterprise software valuations have lost value. Since Franklin Templeton led Databricks’ Series G in 2021, valuing the database management software company at $27 billion, mutual funds including T. Rowe on average have tripled the value they ascribe to the stock. Databricks has recently discussed raising more money at a higher valuation of up to $175 billion, we recently reported.
The fast pace of AI development has heaped pressure on enterprise companies to stay one step ahead of the AI companies whose next feature could make them irrelevant.
Brandon Gleklen, who invests in software startups for Battery Ventures, said that a decade ago the startups that were able to find a market for their product before competitors could generally rely on a decade of growing the business. These days, “product market fit is much more ephemeral,” he said.
“We’ll see companies that have great spikes in new bookings—they’ll have very happy, excited customers,” he said. But then a quarter or two later, the foundation models catch up to their products. “All of a sudden the nice linear bookings momentum that looks great on a chart fades.”
One solution, he said, is for founders to try to immerse themselves in the AI coding tools so they can make sure their products deliver more value. “AI is not just a thing for an employee hackathon.”
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