The market is broadly concerned that businesses may switch to more cost-effective AI tools to replace existing software subscriptions. This anxiety has not only severely impacted the share prices of listed software companies but has also significantly depressed the valuations of private startups. Unless these startups undertake a new round of equity financing, it's difficult for outsiders to know their private valuations. However, disclosures from public mutual funds provide a window into the actual positioning of major institutional investors in the public markets. Supporting charts indicate the current valuation outlook for most companies is far from optimistic.

Caplight, an organization tracking fund disclosures and secondary market data, reports that T. Rowe Price and Franklin Templeton participated in the 2021 funding round for the collaborative software company Airtable, which was valued at $11 billion prior to that round. Since then, major funds have marked down the carrying value of their holdings in the company by at least 60%.

In a similar vein, the automated modeling platform DataRobot was valued at $6 billion during a funding round in mid-2021. T. Rowe Price has now written down the value of its stake in this enterprise software firm almost entirely. Since late 2021, public funds including Fidelity and T. Rowe Price have, on average, marked down their holdings in the HR software company Gusto by nearly 30%. (Acknowledgement for these valuation decline clues goes to an industry blogger on platform X).

These markdowns are closely correlated with the widespread sell-off in the public software sector. The share prices of public companies serve as a key reference benchmark for private equity valuations, and this downward trend is difficult to reverse in the short term.

Ron Heinz, a partner at Utah-based investment firm Oquirrh Ventures, which focuses on mature software companies, stated: "Over the medium to long term, software company valuations overall will continue to decline, with only two exceptions: companies with extremely high growth rates, or those possessing unique, hard-to-replicate core technology."

To mitigate the risk of AI technology disrupting its portfolio companies, this firm now only invests in startups with defensible intellectual property moats, such as those possessing exclusive cybersecurity technology.

Of course, not all enterprise software valuations are falling. In 2021, Franklin Templeton led the G-round financing for data management company Databricks, valuing the company at $27 billion. Since then, public funds like T. Rowe Price have, on average, tripled the valuation of their holdings in the stock. As previously reported, Databricks recently planned a new funding round targeting a valuation as high as $175 billion.

The rapid pace of AI technological iteration means traditional enterprise software vendors must continuously outrun AI competitors. Otherwise, a single new feature from a rival could render their own products obsolete, dramatically increasing competitive pressure in the industry.

Brandon Gleklen, a software investor at venture capital firm Battery Ventures, noted that a decade ago, if a startup was first to market with a product that fit, it could typically enjoy stable growth for ten years. In the current environment, however, "the window for product-market fit has become incredibly short."

He explained that many companies experience a short-term surge in new orders with high customer satisfaction and enthusiastic market feedback. Yet, just one or two quarters later, a general-purpose large language model can replicate all their core functionality. "A smooth, upward order growth curve on a chart can come to an abrupt halt in an instant."

In his view, the solution for founders is to deeply master various AI code development tools to refine their products and create differentiated value. "AI is absolutely not just a toy for internal company hackathons."