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I’m watching public company earnings to identify early weaknesses in the software market. Yesterday, Microsoft announced earnings.

The transcript highlights the major trends in software of 2023. Below, I’ve listed those trends with data & excerpts from the earnings call transcript.

1. Enterprises Have Slowed their Spending, Decelerating Further in December:

Growth is down 15 percentage points or about a third in a year.

The current wave of layoffs, a difficult component of the innovation boom/bust cycle, differs from the previous years’ dynamics.

B2B companies have reduced headcount to a greater extent than at any time since 2020.

In the last three years, B2C startups’ ratio of layoffs have dwarfed B2B layoffs. In 2020, B2C companies cut 8.8x the number of B2B employees. 3.8x in 2021, & 6.9x in 2022.

Most massive software companies structure themselves with an office of the CEO, which allocates capital to different business units. Within each business unit, a general manager operates one or more products.

There are three paths I’ve seen to achieve this scale:

1. The dominant path of the last ten years: focus on a single product until the company is roughly at $100m in ARR, then build adjacent products. Snowflake, DataDog, Zendesk, CrowdStrike etc.
2. Build a financial holding company acquiring lots of small businesses & use the profits to acquire more businesses. Constellation Software.
3. Develop multiple products from Day One. This is called a suite strategy: Zoho published a history of the 2-4 product launches per year, which illustrates the idea.

“The Startup M&A Market Fell 94% Year over Year - But One Segment Thrives”, a post from last week, elicited the same question from many readers.

Just who are the most active acquirers for smaller takeouts?

To answer the question. I reviewed the roughly 560 US software acquisitions under $400m since January 1, 2020.

ServiceNow tops the list with 5 acquisitions. Alphabet ingested 4 companies. So did Medallia. Most of the other top 25 buyers, including Splunk, Apple, & VMWare, closed the period with 3 M&A events, about one annually.

I’d like to have a hero image atop each blog post.

Readers dwell for a few seconds longer on blog posts with images. Plus, images garner more interest across social media.

I wondered how the current wave of generative AI image makers like Midjourney, Dall-E, & Stable Diffusion would fare creating images for a few of my posts.

Here are the results. The format is blog post, the prompt issued to the algorithm, & some commentary.

Frank Bien at Looker kicked off each year with a theme.

A decade later, I still remember them. These themes focused the company & the board. The management team wove that theme through every board deck during the year. I imagine the internal messaging prioritized it, too.

One year, he dubbed the Year of the Hound. Looker had focused on technical data teams as its ideal customer profile for the early years.

The US startup M&A market in Q4 2022 was one of the quietest in the last 20 years. It rivals the dotcom bust & Global Financial Crisis for its paucity. In percentage terms, last quarter dropped the most since 2000, falling 94% year-over-year.

US venture-backed M&A fell from $34.6b in Q4 2021 to a paltry $2.1b in Q4 2022.

The total quantity of acquisitions demonstrated greater resilience shrinking by 56%, while the median acquisition value tumbled from $81m to $22m (-72%).

Just how big is the current web3 B2B SaaS total addressable market (TAM)?

In the last six months, 103 web3 companies generated revenue on-chain, the smallest of which recorded a few hundred dollars of sales & the largest, Ethereum, tallied $401m.

44% of these companies produced less than $0.5m. But a nascent mid-market does exist : 41 companies produced between $5-25m.

The average software company operates at about 70% gross margin, so let’s assume a web3 company is similar. To simplify, we’ll assume the typical web3 company spends all of that cost of goods sold (COGS) on software - about 30% of revenue [1].

Constellation Software is a $30b+ publicly-traded software holding company employing more than 25,000.

A former venture capitalist, Mark Leonard started Constellation in 1995 with $15m of outside investment & a goal of buying vertical software companies with a moat & good unit economics.

Vertical software companies pursue a particular market segment like car dealership management or hotel management software.

From 2003 to 2014, Constellation’s revenues compounded from $80m to more than $5b, an average of 25% annually.

Sometime in the winter of 2020, I read Dan Luu’s article on latency.

“I’ve had this nagging feeling that the computers I use today feel slower than the computers I used as a kid.”

So he measured different computers using a high-speed camera & he found a modern Macbook had about 3x the latency of an Apple 2e, a computer from 1983.

Dan wrote a subsequent post on terminal latency : the fastest application on your computer is likely the terminal or the command prompt.