Software & IT Services Industry Report 2H 2026

• The collective software sector, especially SaaS providers, got an unexpected shock in the first half of the year as a relatively unknown research company released an AI-based “what if” report that sent software investors scrambling.
  
• AI continues to evolve and get better. The things we’re seeing are truly amazing. But we believe no AI platform can out-create clever, inquisitive humans who apply critical thinking to problems and develop software solutions that didn’t exist before and apply them in never-before seen ways.
  
• One bright spot may lie in software integrated into physical components such as wearable health devices, IoT machinery monitoring, and inventory and distribution management tools creating an unbreakable bond between the software and a proprietary device.

The thing about “the next big thing” is that sometimes it displaces the previous “next big thing.” Or maybe not. Sometimes in can enhance that other thing. This can make it tough for business owners, buyers, sellers, and investors to navigate big changes. Jump in, you might get burned (hello dotcom bubble). Hold back, you could miss it (hello Amazon). In the vast, diverse world of software, tech, and IT, sifting through the noise and finding a path to profit both challenges investors and creates unexpected opportunities for innovators. ¹ ²

The first half of 2026 saw another shakeup. While Software as a Service (SaaS) was enjoying its turn as the apple of investors’ eyes with its steady, repeatable subscription-model revenue, one small spark threatened to blow things up. A Substack post from a little-known firm, Citrini Research, presented an apocalyptic vision of a world ravaged by AI. And there it was, high-flying software firms – big ones such as Adobe, Oracle, Workday, Salesforce – tumbled. Hit hardest, SaaS firms. What if, people wondered, we don’t need to keep paying a software company each month to use their products? What if we could just use AI to code our own programs? From January to July one SaaS provider, the customer relations management giant Salesforce, saw its stock price tumble by a third. ³ ⁴ ⁵

“What that (Citrini) report showed was that the market was searching about for a reason to panic about AI, and panic it did,” explained the Financial Times’ U.S. Finance Editor Robert Armstrong on the podcast UnHedged. “And a lot of stocks got punched in the face, but the stocks that got punched in the face hardest then and kind of throughout the whole AI excitement are companies that make software … As such, this event has been called the SaaSpocalypse.” ⁴

The SaaSpocalypse: The beginning of the end. Or was it? Shakeups don’t always destroy; they can prevent opportunities to excel and for innovators to stand out, rise up, and overcome.

“The market is right that a repricing is underway, but it’s missing the mark about what should be repriced,” reported global accounting and consulting firm PwC after software stocks tanked following the Citrini report. “Software is still an important asset class. AI just highlights the difference between durable platforms and replaceable tools. Platforms based on essential workflows, unique data, and deep industry expertise will, we believe, see their position strengthen.” ⁶

Change can be all in how we look at it. Did Uber gut the taxi industry, or did it democratize transportation and usher in a future of self-driving cars? Did the internet kill newspapers, or did it move information and opinion from the domain of the few to the many?

Make no mistake, AI is finding its way, from party trick at first to the useful applications of today. AI use globally is exploding, and its mathematical computing capacity exceeds the calculation capacity of someone at the Ph.D. level. AI business use surged in 2025 with an estimated 70% of surveyed organizations worldwide reporting the use of AI in at least one business function. But AI is far from taking over the world just yet. In a Stanford University study, AI applications presented with an analog clock couldn’t consistently tell time. For some things, people and specifically engineered software do better. ⁷

And there are things that true, old-school software helps people do that AI does not. The Harvard Business Review introduced the term “thinkslop,” the danger of trusting AI to “think” for us. AI is built on existing information. It organizes data sets. But the data sets are nearing exhaustion, they’ve all been ingested, and AI doesn’t create new information. It gathers and sifts it. It doesn’t generate new ideas, it regurgitates ideas already expressed. Software, on the other hand, enables creativity and innovation. A word processing program doesn’t create an outline, it opens a blank page that allows the user to efficiently record unique thoughts. Drafting software won’t design a new building, but it allows a creative architect to model a new structure.

Those who say AI will replace software miss an element: Software isn’t simply code. Behind the code are people who researched and understood a customer need, then creatively worked on ways to fill that need, delivered an experience, and strategically solved a problem and satisfied the user. AI can build a simple game, but it takes creative humans using sophisticated software to create a groundbreaking, innovative gaming experience. As one startup founder wrote, saying AI will kill software companies is akin to saying home kitchen appliances will put restaurants out of business. ⁸ ⁹ ¹⁰ ¹¹

While SaaS company valuations may be down, it may have nothing to do with AI, the big companies have simply saturated their markets. Only so many companies need an enterprise CRM or professional-grade graphic design software. The highly fractured SaaS sector may, in fact, be ready for consolidation – rollups – and some innovation. What have you done for me lately. We remain optimistic there is space for software development and deployment. Those who think creatively, understand and solve problems, or operate in regulated areas where auditability, oversight, and security matter – areas such as finance, healthcare, law, and biotechnology – remain relevant. Will some AI hybrid models exist? Will AI challenge some existing software? Probably. But some, after the panic of the SaaSpocalypse, were already pitching a calmer message noting AI’s impact on software producers will be “uneven.” In other words, it’s not the end of the software world. It appears that reports of the software sector’s death were greatly exaggerated. ¹² ¹³ ¹⁴ ¹⁵

An interesting and thriving software application is in the area of hardware that depends on proprietary software. Finish biometric monitoring company Oura incorporates its wearable ring with proprietary software to monitor a user’s vital signs and transmit them wirelessly to an app to measure functions and make health recommendations. The company is expected to generate $2 billion in 2026 revenue. Inventory management software pairs with physical scanners, point of sale data, and real-time location tracking to help shippers, warehouses, distributors, manufacturers, and retailers efficiently manage and reorder goods. Robotics applications paired with AI-enhanced traditional software are attracting investors. IoT (internet of things) applications match software with physical sensors to monitor and manage anything from home security and interior climate control to industrial manufacturing, ensuring processes are operating efficiently while conducting predictive maintenance measurements. ¹⁶ ¹⁷ ¹⁸ ¹⁹

Of course, not every idea for pairing software with devices is a hit. Those who are old enough may remember the Digital Convergence Corporation, makers of the ill-fated CueCat. In the early days of the internet, the company created a kind of barcode reader (shaped like a cat, of course) that people were supposed to plug into their computer using a cord. Then, as they read a physical newspaper or catalog from a partner’s publication, they could use the “cat” to scan a barcode that would send their web browser to an online location for more information. Thing was, people weren’t crazy about reading a newspaper next to their computer. If they wanted to sit next to their computer, they could probably just go to the newspaper’s website and read online. After a couple of years, the CueCat and the $185 million in invested capital were gone. Poor execution of an idea that might have had some merit. Cell phones today still scan QR codes for digital menus in restaurants (a leftover from the COVID days) or to store airline boarding passes. ²⁰

Integrating software applications into physical devices can allow developers to create user experiences that can’t be duplicated in the cloud, building sticky relationships through proprietary software solutions that solve problems in the physical world. But more than ever, it’s up to software innovators to create solutions users need and want.

• Pairing AI ambitions and software development, San Diego-based semiconductor and computer stalwart Qualcomm in June announced a $4 billion all-stock deal to acquire software developer Modular. The startup company develops programming that runs AI models across chips without having to write code ‌for each processor. The move is seen as challenging CUDA, a software platform that has boosted rival Nvidia’s AI dominance by embedding CUDA’s programming and tying chip buyers to them. Reports said Qualcomm is hoping to snare a bigger share of the rapidly evolving data center market. A news report quoted Qualcomm CEO Cristiano Amon as saying, “We believe ‌the future belongs to developer-friendly, horizontal platforms that can ​run across diverse compute environments and give customers ​real choice in how and where they ​deploy AI.” ²¹
  
• In June, one of the world’s largest private equity firms Thoma Bravo – a big, Chicago-based investor in enterprise software firms – announced an agreement to acquire the Toronto software platform Kneat, which operates a SaaS platform that digitizes data for integrity and traceability and is central to validation and compliance in the life sciences sector. The deal was valued at nearly $460 million, a 20% premium to the stock price at closing the day prior to the announcement. A capital management fund controlling 9% of Kneat stock vowed to vote against the deal, saying the timing was bad, “in the middle of a massive sell off in SaaS companies.” The deal, for $6.50 a share represented premium but was still below Kneat’s $7 share price in 2025. A Thoma Bravo official had earlier been quoted as saying the 2026 SaaS shakeup represented “a really exceptional buying opportunity.” ¹² ²² ²³
  
• Customer Relationship Management (CRM) SaaS giant Salesforce closed out 1H26 in June announcing the acquisition of Fin (formerly Intercom) for $3.6 billion. Fin uses its AI enabled platform to manage customer questions and situations across multiple channels, including live chat, WhatsApp, SMS, phone calls, and Slack. The deal is expected to close in early 2027, and Fin company leadership is expected to remain on board. ²⁴

One thing is certain, nothing is static in the tech space. There are those of us who remember the magic of the early, four-function pocket calculators of the 1970s. Then office computers, home computers,the personal digital assistants (PDAs) of the ‘90s, and the early “bag phones” before today’s smartphones. Today, with smartphones, we walk around with access to virtually every piece of human knowledge ever accumulated through a device tucked in our pocket. ²⁴

Investors were apparently ready to be spooked by AI capabilities earlier this year. Maybe that’s a good thing, a needed spark. But as others have said, AI doesn’t challenge the human creative spirit and the ability to find creative solutions and build things that don’t already exist in the collective cloud. We believe software developers will continue to bring new solutions to market, perhaps aided by or incorporating an element of AI. For the dreamers who won’t take “it can’t be done” for an answer and the investors who have faith and vision, the future looks bright. ⁴

Right now, these are the most active buyers we are seeing in the software & IT industry.

Year over year data

Recent lower to middle market transactions by SDR Ventures in the software & IT services sector, including:

Software and IT Service Industries are the driving forces that not only support modern society but help it to progress into the future. Let us guide you and your company through the Software & IT Services’ complex and competitive landscape.

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