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Partner With UsSoftware has fundamentally transformed how businesses operate, communicate, and create value. This guide provides a comprehensive framework for investing across the entire software stack—from infrastructure to applications—with real analysis of 50+ companies and proven metrics used by professional investors.
Whether you're analyzing SaaS companies, infrastructure plays, or emerging platforms, you'll learn the business models, key metrics, valuation frameworks, and risk factors that matter most. Each section includes detailed company examples with links to full investment primers.
Executive Summary
3 min readSoftware has fundamentally transformed how businesses operate, communicate, and create value. This guide provides a comprehensive framework for investing across the entire software stack—from infrastructure to applications—with real analysis of 50+ companies and proven metrics used by professional investors.
Whether you're analyzing SaaS companies, infrastructure plays, or emerging platforms, you'll learn the business models, key metrics, valuation frameworks, and risk factors that matter most. Each section includes detailed company examples with links to full investment primers.
Understanding the Software Stack
5 min readThe software industry operates in distinct layers, each with unique business models, competitive dynamics, and investment characteristics. Understanding these layers is crucial for identifying where value accrues and which companies have sustainable advantages.
Invest Across the Stack
We break down the technology sector into three distinct layers. Click any company to read the deep-dive investment thesis.
Software Business Models
8 min readSaaS (Software as a Service)
The dominant business model in modern software. Companies provide software over the internet on a subscription basis, typically with recurring monthly or annual payments. Examples include Salesforce, Snowflake, and MongoDB. SaaS companies are valued on predictable revenue streams, net retention rates, and the efficiency of their customer acquisition (Okta, Box).
Usage-Based Models
Companies charge based on consumption rather than fixed subscriptions. This model aligns closely with customer value but introduces revenue volatility. Infrastructure companies like CrowdStrike excel with this model, scaling pricing with workload growth.
Transaction Models
Revenue comes from facilitating transactions or taking a percentage of payment flow. Payment processors, marketplaces, and fintech platforms use this model, benefiting from GDP growth and digital transformation.
SaaS Metrics That Matter
10 min readAnnual Recurring Revenue (ARR)
Best-in-class growth rate at scale
Net Revenue Retention (NRR)
Expansion from existing customers
CAC Payback Period
Months to recover acquisition cost
Rule of 40
Growth rate + FCF margin
Infrastructure Layer Investment Thesis
12 min readSemiconductors: The Foundation of Computing
Every software application ultimately runs on silicon. The semiconductor industry drives performance gains that enable new software capabilities. AI workloads have created unprecedented demand for specialized chips.
GPU Computing
NVIDIA dominates AI training and inference with 90%+ market share in data center GPUs. Their CUDA software ecosystem creates massive switching costs. AMD competes with MI300 series but lacks NVIDIA's software moat. ARM Holdings provides the instruction set architecture for efficient AI inference.
Semiconductor Manufacturing
Taiwan Semiconductor (TSMC) manufactures the most advanced chips globally, with 3nm and 2nm process technology leadership.
Semiconductor Equipment
ASML holds a monopoly on EUV lithography, essential for advanced nodes. Applied Materials and Lam Research provide deposition and etching equipment critical for chip fabrication.
Cloud & Data Infrastructure
Modern applications require scalable, distributed infrastructure. The shift to cloud computing represents a multi-trillion dollar transformation in IT spending.
Data Warehouses & Analytics
Snowflake pioneered the cloud data warehouse with separation of compute and storage. Companies like MongoDB provide operational databases optimized for real-time applications.
Developer Tools
Infrastructure that developers love creates powerful network effects. GitLab provides end-to-end DevOps platforms.
Cybersecurity Infrastructure
Security infrastructure protects the entire stack. CrowdStrike leads in endpoint protection with AI-powered threat detection and platform consolidation driving 140%+ net retention.
Platform Layer Opportunities
Platform companies sit between infrastructure and applications, enabling developers and businesses to build faster. They create powerful network effects and high switching costs through ecosystem lock-in. The most successful platforms generate compound returns by becoming the de facto standard in their category.
Enterprise Application Platforms
CRM & Sales Infrastructure
Salesforce pioneered the cloud CRM market and remains the dominant platform with 20%+ market share. Their moat comes from workflow automation embedded into sales processes across 150,000+ customers. Net retention consistently exceeds 110%, driven by expansion into adjacent products (Marketing Cloud, Service Cloud, Tableau).
Collaboration & Productivity
The shift to remote work accelerated platform adoption. Asana and other workflow platforms benefit from viral adoption within teams. Once a company standardizes on a collaboration platform, switching costs become prohibitive as workflows, integrations, and historical data create lock-in.
Document Management & E-Signature
DocuSign owns 70%+ of the e-signature market. The platform processes 1.5 billion transactions annually. Key metric to watch: Agreement velocity (how fast deals close using their platform) directly correlates with customer expansion and pricing power.
Developer & API Platforms
Developer-first platforms create the strongest network effects. When developers choose a platform, they invest time learning APIs, building integrations, and creating dependencies that are expensive to replicate.
DevOps Platforms
GitLab provides end-to-end DevOps in a single platform. Their competitive advantage: eliminating tool sprawl by consolidating CI/CD, security, and deployment. Companies using GitLab report 3x faster deployment cycles.
API Infrastructure
Payment platforms process billions in transaction volume. The stickiness comes from integration complexity— once a company builds payment flows into their product, migrating to a competitor requires months of engineering work.
Vertical SaaS Platforms
Industry-specific platforms command premium valuations by solving domain-specific problems. Healthcare, financial services, and real estate platforms trade at 15-20x revenue due to regulatory moats and mission-critical workflows.
Key Characteristics of Winning Vertical Platforms:
- •Deep industry expertise: Built by domain experts who understand workflows
- •Regulatory compliance: Handle complex compliance requirements (HIPAA, SOC 2, PCI)
- •Network effects: Value increases as more industry participants join
- •Attach rate expansion: Layer on adjacent services (payments, analytics, marketplace)
Application Layer: Where Innovation Meets Users
Application software sits at the top of the stack, directly serving end users. This layer has the highest growth potential but faces more competition and faster disruption. Success requires exceptional product execution, strong user experience, and defensible distribution advantages.
Enterprise Applications
Financial Software
Intuit dominates SMB financial software with QuickBooks and TurboTax. Their moat: customer financial data creates high switching costs. Once a business has 5+ years of accounting history in QuickBooks, migration becomes nearly impossible. Net retention exceeds 115% as customers add payroll, payments, and tax services.
Marketing & Customer Experience
Marketing automation platforms benefit from data network effects. The more customer interaction data flows through the platform, the better its AI-powered recommendations become. Look for platforms with 140%+ net retention driven by feature expansion.
Analytics & Business Intelligence
Modern BI platforms compete on ease of use and embedded AI. The best platforms enable non-technical users to build dashboards in minutes, not weeks. Pricing typically scales with data volume and user count, creating natural expansion opportunities.
Consumer Applications
Consumer software has different unit economics than enterprise. Success requires viral growth loops, freemium models that convert efficiently, and defensible network effects. The best consumer apps have CAC payback under 6 months and LTV:CAC ratios exceeding 5:1.
Consumer applications face unique challenges: platform risk (Apple/Google control distribution), ad fatigue (rising customer acquisition costs), and fickle user behavior. Winners build habit-forming products with daily active usage and strong organic growth channels.
How to Analyze a Software Company: Step-by-Step
Step 1: Read the S-1 or 10-K Filing
Start with primary sources. SEC filings contain unfiltered data about business model, risks, and financial performance. Focus on these key sections:
- 1.Business Model: How do they make money? Subscription vs. usage-based vs. transaction? What's the pricing power? Check if they disclose ARR or revenue retention metrics.
- 2.Cohort Economics: Look for customer cohort tables showing how revenue expands over time. Best companies show each cohort growing 20-30% annually through upsells and cross-sells.
- 3.Risk Factors: Read every risk. Focus on customer concentration (any single customer > 10%?), technology disruption, and competitive threats. These reveal management's real concerns.
- 4.Use of Proceeds: In S-1s, see how they plan to spend IPO capital. Companies investing in R&D and sales are growth-focused; those paying down debt may lack growth opportunities.
Step 2: Calculate Key SaaS Metrics
Use the company's financial statements to calculate standardized metrics. Here's the exact formulas:
Rule of 40
Revenue Growth % + Free Cash Flow Margin %Target: > 40% indicates efficient growth. Below 20% signals problems.
CAC Payback Period
(Sales & Marketing Spend) / (New ARR × Gross Margin)Target: < 12 months. Best-in-class achieve 6-9 months.
Net Revenue Retention
(Starting ARR + Expansion - Churn) / Starting ARRTarget: > 120% for top-tier SaaS. Below 100% indicates churn problem.
LTV:CAC Ratio
(ARPU × Gross Margin / Churn Rate) / CACTarget: > 3:1 for profitability. > 5:1 indicates pricing power.
Step 3: Build a Comparative Benchmark
Never analyze a company in isolation. Compare against public peers and best-in-class benchmarks:
| Metric | Top Quartile | Median | Bottom Quartile |
|---|---|---|---|
| Revenue Growth (YoY) | > 50% | 25-35% | < 20% |
| Gross Margin | > 80% | 70-75% | < 65% |
| Net Retention Rate | > 130% | 110-120% | < 100% |
| Rule of 40 | > 60 | 40-50 | < 30 |
| Operating Margin | > 20% | 5-15% | Negative |
Source: Analysis of 50+ public SaaS companies. Updated quarterly. See our Data Hub for live benchmarks.
Step 4: Assess Competitive Moat
Not all software is defensible. Use this framework to evaluate moat strength:
Network Effects
Does the product get better as more users join? Platforms and marketplaces score highest. Example: Salesforce AppExchange has 5,000+ third-party apps—new customers get instant access to this ecosystem.
Switching Costs
How painful is it to migrate? Financial software with years of historical data, mission-critical workflows, and deep integrations create the highest switching costs. Customer churn below 5% annually indicates strong switching costs.
Data Moats
Does the company's AI/ML get smarter with proprietary data? Cybersecurity companies like CrowdStrike analyze trillions of endpoint events—this dataset is impossible for competitors to replicate.
Regulatory Barriers
Compliance certifications (HIPAA, FedRAMP, SOC 2) take years to achieve and create barriers to entry. Healthcare and government-focused SaaS benefit from regulatory moats.