In 2011, Marc Andreessen, co-founder of Andreessen Horowitz, one of the world’s most successful venture capital firms, wrote his famous essay “Why Software Is Eating the World.” The core argument of the article, published in The Wall Street Journal, was that software was no longer a standalone industry, but was everywhere and had become the infrastructure on which all global business is built.
That essay fired the starting gun for an investment frenzy, as funds poured money into startups developing enterprise software and inflated them into a herd of unicorns at the peak of the 2021 bubble.
But 2026 is shaping up as a turning point. Software may have eaten the world, but now AI is eating software, and the world along with it.
The rapid adoption of programming solutions based on natural language rather than code, often dubbed “vibe coding,” the rise of increasingly user-friendly AI agents and fears over what AI could still do to the software market are already battering stocks. Wall Street, known on the one hand for its nervousness and on the other for spotting trends about six months before they fully materialize, is sending a clear signal.
While Wall Street closed 2025 as one of its best years ever, led by the so-called Magnificent Seven tech giants, the software sector lagged far behind. The SaaS index, tracking companies that sell subscription-based software to organizations, fell 6.5% compared with a 17.6% rise in the S&P 500.
All the hottest names of the past decade, from Intuit and Atlassian to DocuSign and HubSpot, showed weakness throughout last year. In the first two weeks of 2026, the situation worsened further, with most already posting double-digit negative returns.
Examples are not hard to find, and they are close to home. Israel’s leading software companies, the most recognizable names domestically and abroad, led by NICE, Monday.com and Wix, lost tens of percentage points in value in 2025 and started 2026 on the wrong foot as well.
In fact, the reshuffle among the largest Israeli companies traded on Wall Street neatly reflects the drama unfolding in the global software market. Three to five years ago, NICE, Monday.com and Wix sat near the top of the rankings, just behind Check Point and Teva, and at times even ahead of them. Today, there are no enterprise software companies in the top 10, aside from cybersecurity firms, which are considered a separate sector.
As a direct reflection of the AI era, which relies on hardware to replace software, chip-related companies such as Tower Semiconductor and Nova have taken the place once held by veteran software giants. The shift has reached the Tel Aviv Stock Exchange as well. Dual-listed NICE was the only stock in the TA-35 index to post a negative return in 2025.
Software out, hardware in
Companies that once enjoyed investor favor, both in Silicon Valley and on Wall Street, are fading as talk of “the death of SaaS” gains momentum. Until recently, the main threat came from a handful of trendy vibe coding startups, programming via verbal commands that allow almost anyone to build simple applications, such as BASE44 founded by Meir Shlomo.
But last weekend, the launch of “Claude Code,” an AI agent from Anthropic’s Claude, sent shockwaves across the internet. Tasks that people postponed for weeks because they were too technical, tedious or unclear are now completed by Claude Code.
A few simple instructions and the work gets done. Shlomo himself tweeted this week that he had heard of a client who canceled a $350,000 contract with Salesforce after building what they needed on BASE44.
In the United States, a story is circulating about a former Amazon executive who built an entire CRM system, a core product for Israel’s NICE, over a single weekend. It was not a massive system on the scale of NICE’s offerings, but a lean one tailored precisely to the company’s needs.
The successful rollout of Anthropic’s co-pilot reignited panic over the fate of software companies. At the start of 2025, the median revenue multiple still stood above seven. Today, it has fallen below five.
At the same time, the heavy and once-boring world of hardware, long neglected by both public investors and venture capital funds that favored SaaS for its fast growth, low capital requirements and lofty multiples, is heating up and trading at valuations far higher than software.
A new business model for software
AI is not only changing how software is built, it is dictating a new business model. Major companies are discovering that their value lies not in code, but in their ability to adapt to the upheaval.
Still, as with any revolution, enthusiasm in the AI versus software duel is high, but in practice, entrenched systems such as ERP or CRM platforms that organizations have relied on for years and invested millions of dollars in will not be discarded overnight.
Moreover, as many developers note, once the excitement around AI-based coding fades in 2026, experienced programmers will have to hunt down the errors and bugs seeded by vibe coding in 2027, a process likely to consume significant time, energy and frustration.
The gap between vision and what will actually be possible in the future reminds many of the long-promised autonomous vehicle revolution, which was supposed to upend the traditional auto industry but has yet to do so.
There is also a scenario in which the use of traditional software actually increases alongside AI agents. For example, a marketing professional who once could send only a limited number of outreach messages may now use an AI agent to instantly generate double or triple that volume. In the end, they may still need software like today’s CRM systems to manage the flood of responses.
AI agents can dramatically boost efficiency, but they will also select the software best able to absorb the consequences of that efficiency.
‘A SaaS startup will not even reach the pitch stage’
Beyond the conclusions investment funds must draw for themselves, many of which are still holding inventories of software companies whose prospects for a Nasdaq IPO are increasingly uncertain, the upheaval has significant implications for Israel’s tech sector.
Over the past decade, Israel produced a generation of unicorns, most founded around 2015 and focused on enterprise software. An entire ecosystem of employees, investors and new startups grew around them, seeking to replicate that success, which now appears far from guaranteed.
The SaaS model, whose golden age peaked during the COVID-19 pandemic, worked extremely well for Israel’s tech industry. Products could be marketed online, required no complex installations or training and were billed simply per user. The fact that the companies were Israeli was largely irrelevant, as market access was uniform.
Another advantage Israeli companies leveraged was speaking the language of tech itself. Many focused on selling to other tech firms, and today those same customers are the first to replace traditional software with nimble, in-house AI-based solutions.
In a world of software out and hardware in, geography becomes far more relevant. Growth is harder and requires heavy investment in development and later in manufacturing, and sales processes are entirely different from cancelable software subscriptions.
Alongside questions about the fate of public software companies and enterprise software startups, an equally pressing question emerges: what will this software earthquake do to Israel’s high-tech sector?
“A founder who approaches a venture capital fund today with a SaaS startup will not even reach the pitch stage,” says Dean Shahar, managing partner and head of Israel operations at European fund DTCP, which manages $3 billion.
“The SaaS world is dying. It is not dead as software, but as a business category. AI has turned software into a commodity where competitive advantage is nearly impossible. Features, user experience and interfaces that once created differentiation can now be rapidly copied by AI agents,” he says.
Lior Handelsman, now a managing partner at Grove Ventures and a co-founder of SolarEdge, is less absolute but hardly optimistic. “SaaS is not dead, but it faces a challenge in maintaining growth,” he says. “The market is changing, and the rules are becoming more complex. The stock market is always a bit hysterical, and it may be pricing in an exaggerated scenario.”
“Coding skills and deep understanding are still needed, but barriers are falling and it is easy to reach the market quickly with a first product to prove feasibility,” he adds. “At the same time, the existing market is shrinking. Where companies once paid Salesforce for every module and feature, organizations now try to build smaller tools themselves using AI.”
Anyone considering launching a non-cyber enterprise software startup today, he says, must ask whether they are targeting a domain with highly unique data inaccessible to AI models, or whether they can develop a truly distinctive algorithm.
Hardware’s return
Alon Houri, a co-founder of Next Insurance, sold last year for $2.6 billion to Munich Re and now a partner at venture studio Team8, also believes it is too early to eulogize software companies.
“The question has changed,” Houri says. “It is no longer what you give the customer, but how. Any company with more than 500 employees must rethink its structure. CEOs need to wake up and decide which functions are still necessary and which are not.”
Houri notes that he is currently building a startup at Team8 with three founders who are also the developers, plus two or three outsourced programmers in India and Ukraine. “This small group is doing what 30 employees did at Next. That is the real earthquake. AI needs to create a productivity multiplier of one to 10. What once required 10 employees should now be done by one.”
Both Houri and Shahar believe the software market will not disappear quickly, but pricing models and efficiency metrics will change. Houri predicts investors will no longer focus on absolute ARR, but on ARR per employee. Shahar expects pricing for marketing software, for example, to shift toward charging based on the increase in sales generated by the software.
While much of Israel’s ecosystem still relies on software, optimism about the future persists, largely because of Israel’s deep roots in hardware and deep tech. From the mid-1990s, the foundations of Israel’s tech sector were built more in physical communications infrastructure and chips.
Those areas lost favor with funds seeking fast exits, but the wheel is now turning again. “Historically, Israel has always excelled in deep tech, so there is no reason we cannot succeed in the new world as well,” Shahar says.
Handelsman adds that unlike the dot-com bubble, AI faces real physical constraints, from power shortages at data centers to long waits for GPUs and electrical transformers. “The physical infrastructure cannot keep up, and that is where Israel has a real opportunity to deliver critical solutions,” he says.
The current reality is not the final word. We are in the midst of a revolution whose endpoint even top experts struggle to imagine. Sharp declines in software stocks may prove exaggerated and stabilize as fears ease.
Organizations, especially large ones, move slowly and are reluctant to replace core systems that centralize customer data, billing and account management. They will continue to buy software, albeit at a slower pace.
Veteran companies flush with cash are not standing still. NICE has paid $1 billion for a German AI startup to accelerate its entry into the field. Monday.com has rolled out a series of AI-powered products. Wix has done both, acquiring BASE44 last summer and recently launching a new AI-enhanced website builder it plans to advertise during the upcoming Super Bowl.
Younger startups and tech firms are expected to adopt new technologies more quickly, contributing to slower growth at established software companies, which may instead evolve into profitable value stocks with dividends.
The more complex story lies with newer software firms that planned IPOs at high valuations. Pressure there is likely to fuel a wave of mergers and acquisitions, as private equity funds seize the chance to buy at lower prices. Orlando Bravo, founder of Thoma Bravo, told CNBC over the weekend that the market is full of “unbelievable buying opportunities.”