The Opportuna Assembler #4

Welcome back to The Opportuna Assembler, where we break down the biggest issues facing the software industry.

In collaboration with Mark Campbell at 3dot Insights, we help industry watchers to “assemble” pieces of the software industry puzzle.

In this edition we cover:

1. Enterprise Software Capital Flows Across The Stack – Relying on M&A as the IPO window remains closed and secondaries are nascent

2. GenAI as A Modern-Day Klondike Gold Rush – which enriched the provisioners rather than the prospectors

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Enterprise Software: Capital Flows Across The Stack

As we reach the halfway point of 2025, the enterprise software sector finds itself in a holding pattern. Fundamentals are stabilizing, but exits remain constrained. While public markets offer some signals of improvement, private markets are navigating a changed environment; one defined by scarcity of IPOs, the persistence of M&A, and a still-nascent secondary market. This brief takes the pulse of the sector across the maturity spectrum.

Public Markets: Signals, But No Surge

Let’s take two examples. The performance of IGV versus SOX suggests guarded optimism. Fundamentals across the enterprise software space are inching higher: as long as profits don't deteriorate, IT budgets are unlikely to tighten further. We note continued weakness in the mid-market, and without a material improvement in fundamentals, valuations remain compressed. The median forward revenue multiple of companies in the BVP Cloud Index hovers at 5–6x.

Private Markets: M&A Over IPOs

On the private side, IPO exits remain elusive. As of Q1 2025, trailing 12-month VC exit value totalled $91 billion via acquisitions, compared to $55 billion from IPOs and just $60 billion via secondaries. According to SVB's State of Enterprise Software, M&A activity is back to mid-2020 levels, with 40% of exits occurring at the Seed stage.

Nearly half of US enterprise software startups are expected to raise capital in the next year. Meanwhile, S&P 500 tech firms are sitting on $604 billion in cash. This imbalance suggests M&A will remain the primary exit path.

Secondaries: Not Quite There Yet

The direct secondary market remains smaller and probably too concentrated at the moment to meet the ecosystem's needs. Half of all US venture secondary dollars go to just five companies. Less than 2% of unicorn equity changed hands on the secondary market in the trailing twelve months through March.

IPO Pipeline: Encouraging, but Inconclusive

Fintechs have dominated the IPO pipeline so far this year. Most offerings are oversubscribed, delivering first-day "pops" - a helpful signal, though not an entirely sufficient one. The real test will come from 6- and 12-month post-IPO performance. So far, results have been encouraging, reflecting a that bar to IPO is now higher and cautious vetting by underwriters.

Underlying Metrics: Rule of 40 Slippage

Worryingly, the core health of late-stage enterprise software startups continues to erode. SVB reports that the median Rule of 40 score—the sum of growth and margins—for startups with $50M+ in revenue fell to 9% in 2024, down from 21% in 2021. The share of startups meeting or exceeding the Rule of 40 threshold has dropped to 13%, from 31% in 2021.

Pricing models are shifting as well. There's greater emphasis on core subscription offerings, with usage-based pricing layered on top.

Roll-Ups and AI: A New Playbook?

One potential bright spot: VC-led roll-ups, modelled on private equity, aim to use AI to modernize legacy enterprise software businesses. These strategies are still early, but they signal an evolution in the way growth equity may seek returns in a tighter environment.

The software stack remains under pressure not from lack of interest, but from mismatched expectations. Public market multiples have reset and remain sticky. Private markets are leaning harder into M&A and sponsor-led roll-ups, while IPO windows have opened just a crack. Underneath it all, the core health of enterprise software businesses is deteriorating, not from a crash, but from a steady erosion in Rule of 40 scores. The path forward may not be linear, but capital is watching and is ready to move when signals firm up

GenAI: The Modern-Day Klondike Gold Rush

On August 16, 1896, a young Yukon miner named “Skookum Jim” struck gold on the banks of Bonanza Creek. When word finally made it to Seattle and San Francisco a year later, the Klondike Gold Rush exploded. Forty thousand prospectors stormed the frozen north, staking claims, throwing up boomtowns, and dropping $60 a bottle on French champagne in Dawson City saloons; about $2,300 in today’s money.

The Cast Then

But just 14 months later, it was all over. The crowds packed up and chased the next bonanza in Nome, then Fairbanks, and dozens of strikes beyond. Here’s how it all shook out:

• The Sourdoughs: The early birds--like Skookum Jim—cashed in big on royalties.

• The Provisioners: The folks selling shovels, whisky, beans, and jeans made out like bandits.

• The Prospectors: The dreamers who broke their backs for that one lucky shovelful, mostly went broke and moved on.

• The Grubstakers: The sideliners who financed prospectors for a slice of their find, lost on most of their gambles; but hit on enough to make sizeable returns.

• The Consolidators: The real visionaries bought up the little guys’ claims for pennies, merged them, and built massive, profitable strip-mining operations.

That is how fortunes were made and lost in the Klondike.

The Cast Now

Fast forward to today’s “AI Gold Rush.” Just like back then, the world’s getting swept up in a frenzy. Only this time, breakthroughs in artificial intelligence, especially generative AI, have everyone chasing the next big score. Venture capital is flooding in, with $56 billion going into generative AI in 2024 alone, and the fever hasn’t cooled off yet.

But if history is any guide, not everyone is walking away rich. So, who is actually going to win in the age of generative AI?

• The Sourdoughs: The early pioneers who built the foundational AI models and platforms — think OpenAI, Anthropic, Cohere — are already cashing in big.

• The Provisioners: The folks selling the “picks and shovels” of the AI era — NVIDIA, Databricks, Microsoft, Google, AWS — are stocking up on today’s French champagne.

• The Grubstakers: The VCs and angel investors bankrolling thousands of AI startups will fall short on most of their bets but will hit enough jackpots to come out ahead.

• The Prospectors: Most of the dreamers building low-tech GPT wrappers, point-and-click AI agents, and “vibe” coding guides will go broke and move on.

• The Consolidators: The real strategic opportunists will swoop in to buy up IP, talent, and brand names from the failed prospectors, rolling them up into massive, profitable platforms. We’re not quite at the AI consolidation phase yet, but it’s coming, and you already know who most of the big players will be. They are the ones already mining their database, security, infrastructure, and services customer bases today.

Generative AI, just like the Klondike, the PC boom, dotcom mania, and the blockchain craze, will leave plenty of prospectors empty-handed. But there will be winners: those who sift through the hype and uncover real, lasting value.

Or, as the great Klondike poet Robert Service might put it if he were around today: “There are strange things done in the AI sun by the men who moil for gold.”

Thank you for reading the fourth edition of The Opportuna Assembler.

— The Opportuna Assembler

If you’re looking for deeper insights into the convergence of private and public tech investing, look at our latest monthly newsletter, Opportuna Newsletter #8: Don’t Call It a Comeback (But Maybe It Is): Sunlight, Silicon & Secondary Markets.

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