“SaaS Faces Decline as a Business Category”
The software-as-a-service (SaaS) industry, once hailed as a goldmine, is facing significant challenges as we move into 2026. This decline can be attributed to the advent of artificial intelligence (AI), which is increasingly overshadowing traditional software solutions.
SaaS Market Trends and Decline
In 2011, Marc Andreessen wrote an influential piece titled “Why Software Is Eating the World,” emphasizing the integral role of software in global business. Ten years later, however, the narrative is shifting dramatically. The SaaS index, which tracks subscription-based software companies, experienced a decline of 6.5% in 2025. This decline contrasts sharply with a 17.6% rise in the S&P 500 during the same period.
- 2025 SaaS Index Decline: -6.5%
- S&P 500 Growth: +17.6%
Companies like Intuit, Atlassian, and HubSpot, previously market leaders, have also shown consistent weaknesses and began 2026 with double-digit losses.
Impact of AI on Software
AI advancements are reshaping software development dynamics. Solutions that allow users to program using natural language, known as “vibe coding,” are proliferating. For example, tools like Claude Code from Anthropic can perform complex tasks in minutes, shortening project timelines significantly.
Formerly profitable contracts for traditional software platforms are now being canceled in favor of simpler, AI-driven alternatives. Reports indicate that some former clients of major SaaS providers are now opting for DIY solutions built on vibe coding platforms.
Shifting Investment Landscape
The disruption in the software realm has led to an evolving investment landscape. Major venture capitalists, such as Dean Shahar from DTCP, express concerns regarding the future of SaaS businesses. Shahar noted, “The SaaS world is dying as a business category.” Investors are becoming wary as AI commoditizes many software offerings.
- Current Median Revenue Multiple for Software Firms: Below 5
As traditional software offerings are being replaced rapidly, venture capital funds are advising potential SaaS entrepreneurs to reconsider their strategies and focus on unique data sets or technologies.
The Future of Software and AI Integration
Despite the challenges, some experts believe that fundamental software solutions will not disappear. Lior Handelsman, managing partner at Grove Ventures, suggests that existing software could see a resurgence as companies grapple with the influx of AI-generated code, which may necessitate comprehensive oversight.
As organizations adapt to this tumultuous landscape, some SaaS companies are also evolving. For instance, companies like Nice and monday.com are integrating AI capabilities into their products while working on strategic acquisitions to fortify their market positions.
Outlook for High-Tech Industries in Israel
Looking specifically at the Israeli software sector, a generation of startups emerged in the past decade focusing on SaaS models. However, as the market shifts, questions arise about the sustainability of these companies and their ability to compete against AI-driven solutions.
While experts agree that traditional software may struggle to maintain growth rates seen during its peak, there is cautious optimism that innovative solutions can thrive amid these changes. The ongoing upheaval presents both challenges and opportunities in redefining how businesses approach technology and product development.
Conclusion
The SaaS industry is under significant pressure as new AI technologies reshape market expectations and capabilities. To succeed, businesses must adapt to these rapid changes, reevaluate their offerings, and consider the evolving landscape of technology integration. The future may not be devoid of software, but its role and function are undoubtedly transforming.
