Meanwhile, Claude Code is gaining rapid traction among developers as this AI coding engine is ramping quickly. Together, they are driving the marginal cost of writing software towards zero. These tools compete with each other, and can work on top of each other, but together or separately it is a lethal arms race against legacy SaaS incumbents whose moats were built on the assumption that software was difficult and expensive to write. For investors in legacy SaaS, this demands serious re-examination of what once seemed like a stable business. The SaaS incumbents loaded up with debt serves like a ball and chain around one's ankle. 

Key Considerations:
- Pricing Model Disruption: If AI can replicate core software functionality at near-zero cost, the traditional SaaS model of charging per-seat or per-module faces structural compression. Customers will increasingly question why they're paying premium prices for commoditized capabilities.

- Eroding Switching Costs: AI-native tools allow enterprises to build custom solutions in days rather than months, weakening the lock-in that legacy vendors have relied on for decades.

- Bottom-Up Displacement: Developers adopt tools like Cursor and Claude Code individually, then drive organization-wide adoption, bypassing traditional enterprise sales.

- Moat Degradation: Proprietary codebases, complex integrations, and institutional knowledge, once formidable barriers to entry, become less defensible when AI agents can rapidly replicate and improve upon existing workflows.

The Takeaway: Legacy software companies have seen valuations collapse in 2026. Valuations based on ARR and traditional moats protected after years of developmental costs now compete in a world where it becomes possible for an equivalent software application can be replicated with a more efficient user-interface in a matter of just one week makes valuations and future cash flow unpredictable for incumbents. The moat isn't gone just yet; however, 'at-risk' software companies will be tested in the years to come. What multiple would you pay for this uncertainty? How much debt can the company support going forward? Who will refinance the debt at maturity? A company with 8x debt-to-EBITDA might only be able to secure 3x at time of refinancing. What is the clearing price of a highly leverage software loan in the private placement marketplace? Where will valuations bottom (see chart below).

"You cannot solve a problem with the same mind that created it" by Albert Einstein.