Anthropic’s S-1 reveals that its technology could make some of its own customers’ businesses obsolete. Private creditors financing software companies are already facing the consequences. We don’t know which American SaaS companies will fail. But cheaper software development, increasing competition, and declining switching costs are a threat to the economics of leveraged software businesses.
The closest corollary might be American manufacturing companies outsourcing to China in the late 1990s and 2000s. In both cases, companies adopt a cheaper way to produce their products, only to risk creating competitors that undermine their original business.
The 1990s and 2000s Outsourcing Playbook
In the late 1990s to early 2000s, American companies started moving manufacturing to China en masse. Moving manufacturing to China was the default solution if you had a manufacturing company that was unprofitable because of labor costs and unions in North America.
But it came with a known price. Manufacturing in China often meant entrusting production and intellectual property to local partners. Often after a year or two, clone products would appear in the Chinese market made directly or indirectly by your Chinese manufacturing partner. These clone products would undercut the pricing of the original product. This would start a race to sell the company while it was still profitable, before Chinese competitors could establish their own distribution networks.
This product cloning problem could have been reduced if leadership chose Mexico, Vietnam or Turkey instead as an outsourcing solution. But these alternatives were rarely taken because they were slower to ramp up. We see the consequences of these choices today.
Today, AI allows customers to replace the software vendors they depend on.
The SaaSpocalypse
This leaves customer trust and distribution as the final defenses of American software companies.
Trust is slow to build but priceless. Keeping customers might come down to the question of, “do I trust you more?”
Likewise distribution sounds easy but is harder than it seems because people have more distractions than ever. This will likely mean more ad spending on Meta and Google’s platforms. As development costs decline, spending will shift toward distribution and retention.
For private equity firms holding software companies, the question is increasingly whether their portfolio companies have something competitors cannot easily replicate. Code is cheaper. Customer relationships, trust, and distribution take years to build.
I witnessed the outsourcing to China movement firsthand. I see a similar pattern emerging in software today. Through Iterate Growth, I'm helping private equity firms protect the customer relationships, trust, and distribution advantages that will determine which portfolio companies survive.