AI and Hyperniche Software

The AI revolution is not about replacing jobs

We strongly believe that AI in its current form (Large Language Models) will not replace developers, but will instead empower them to build more software, faster. The AI revolution is not about replacing jobs, but about expanding what we can build. There are no guarantees that AI will improve the quality of software - for now it creates a lot of what the development community refers to as "slop", but overtime we expect the quality of the software to improve to the point where it is indistinguishable from human written code. Even if the code quality is human-like, we believe that the same development jobs will still be there, albeit with an increased expectation of developer productivity.

Here comes hyperniche software

The AI revolution is enabling the creation of hyperniche software that is tailored to the needs of a specific business. This software is not only more efficient, but also more effective at solving the problems that often apply to a single business or client. This is a huge shift from the current state of software development, where most software is built to be sold to as many customers as possible. We already have hyperniche software in the form of custom websites - those are widely accepted as the option with the highest return on investment. Most businesses accept that a custom website is more effective than a generic template, but they often hesitate to invest in custom software for other parts of their business due to the perceived risks and costs (which pre-AI were both very high). AI is flipping the risk profile and allowing small software publishers to build hyperniche software that would be unprofitable to build without AI. Hyperniche software developers can also build a base product, and heavily customize it for each client - this is a huge shift as small publishers can now outcompete large software providers with their ability to deliver a more tailored product. A hyper customized product also provides much stronger lock-in, as the effort to customize a new product is much higher than the effort to customize an existing one.

The impact on Software Private Equity

The rise of hyperniche software will put a huge deal of pressure on the large PE funds that focus on the higher end of the market. Large software M&A often focuses on legacy (or established) companies that are likely to carry a high level of technical debt - and PE is awful at addressing technical debt. The large legacy systems will struggle to compete with smaller and more nimble modern stacks that can be customized to the needs of the client. This dynamic will likely benefit smaller PE funds that focus on the lower middle market (such as Outroll), as they will be able to acquire and grow smaller software companies with closer relationships with clients, more modern stacks, and nimbler development teams that can adopt AI faster.

The hyperniche software company

The hyperniche software company is a new breed of software company that is built to deliver highly customized software to a small number of clients. These companies are built to be highly profitable, as they can charge a premium for their services and have a high level of lock-in with their clients. The key here is to unite the best of both worlds - the efficiency of a product company with the customization of a service company. This is a huge shift from the current state of software companies, where most companies are either product or service companies, but not both.

An exciting future

The future of software is bright, and we are excited to see what the next few years will bring. Large software valuations are likely to drop, but the number of software companies will increase, and the availability of highly customized software will increase. We are excited to see how this shift will impact the software industry, and we are looking forward to being a part of it.

Image: The Leader of the Luddites, 1812.