Author: David George, a16z Partner

Translation: Yuliya, PANews

PANews Editor's Note: a16z Partner David George published his latest article stating that there is no longer a "middle ground" in the software industry. Companies must choose between two paths within the next 12-18 months: achieve over 10% revenue growth through AI-native products, or raise true profit margins to 40%-50%. He calls for companies to undergo thorough restructuring, clarify their growth direction, and reshape their teams and structures to adapt to the new competitive environment driven by AI; otherwise, they will face valuation compression and market pressure.

Below is the full translation:

To the CEOs, founders, boards, and investors of software companies: the comfortable middle ground is over.

The public market has repriced the industry for good reason. The market is telling us that the terminal value of software has fundamentally changed. I don't know what factors will drive the ups and downs of each stock in the next quarter, but in the medium to long term, I believe there are only two reliable paths to creating lasting equity value.

• Path One: Achieve year-over-year revenue growth acceleration of more than 10 percentage points through truly new AI-native products within the next 12 to 18 months.

• Path Two: Restructure the company to achieve a real operating profit margin of over 40% (ideally 50%), which includes stock-based compensation (SBC).

Strictly speaking, these measures are not mutually exclusive. But I think this 12 to 18 month plan must be either one or the other. By the end of next year, any states that fall between the high-growth and high-profit paths will fall into no man's land: facing growth pressure, ongoing equity dilution, and multiple compression. Today's CEOs need clear actions with one of these paths as a final goal to pursue.

The adjustment game is over

Publicly traded software companies have gone through the first half of their transformation. Growth has slowed, and valuations have compressed. But in most cases, true profitability still hasn't arrived.

Yes, free cash flow has improved; GAAP profit margins have also increased. However, once you consider stock compensation as a real expense rather than a permanent exemption, most companies in the industry are still stuck in a tough middle ground: growing too slowly to deserve high-growth valuation premiums; too diluted equity to deserve stable valuation multiples.

If revenue growth is slowing, we should see more operational leverage, but similarly, while we have seen some, it is still far from enough.

The reality is that now is the time for management to take bold actions. And those headlines of "laying off 8% or 10%" are no longer effective. That is merely a weak performance. Weak practices only trim the edges of the organizational structure without addressing core issues. In contrast, stronger measures involve redesigning and adjusting the entire organizational structure and operational model.

In the next 12 months, I expect we will see more hard-hitting practices. Regarding how to do this, you have two choices, differentiated by how you want to restructure your company.

Path One: Accelerate Growth with New AI Products

Accelerating growth with new AI products does not mean adding a chatbot or Copilot interface to the old SKU list.

It means launching new products that can boost the company’s overall growth rate by 10 percentage points within 12 months. Equally important, this means you need to reorganize your company, including your executive team, as quickly as possible to ensure that once you find product-market fit (PMF), you can swiftly seize market opportunities and achieve growth targets.

The first thing you need to do is identify who will be the leaders helping you accomplish this task. This will be a grueling journey over the next 12 months, and you need to figure out who is willing to share the hardships with you. However, there is good news: there are probably five people in your organization who will bring you value one hundredfold beyond what you imagine. But your top priority is to find out who these five people are (regardless of their resumes), explain the urgency of the situation to them, and give them a once-in-a-lifetime career opportunity to help you restructure the company.

How should you organize these people?

First, assign them to oversee those unobtrusive yet crucial information-gathering projects:

• Conduct process capture sprints around each high-value workflow;

• Gather SOPs, work orders, conversation records, requirement documents, policies, CRM notes, support logs, event data, and approval paths.

Create a dynamic context layer rather than a pile of static PDFs. Treat documents as product infrastructure. Build assessment mechanisms around accuracy, anomaly handling, delays, and costs. Get these five people started on this task immediately, with each having their own area of responsibility.

In the following month, closely monitor your vice presidents to see who is on the same page as that team and who is not.

This will tell you everything you need to know: which executives should remain in the impending company restructure, and which should part ways.

At the end of the month, have conversations with those vice presidents and directors who need to leave. Replace them with the elite team that just finished the information-gathering sprint and other proven AI-native upstarts within the company.

Now you have a revitalized and energetic executive team ready for battle.

Meanwhile, you need to allocate 50% of your R&D resources to brand new AI products.

Adopt a four-person team model; merge design, product, and engineering into one working unit, start writing code from day one, limit headcount rather than limiting computing power. Reduce communication costs to as close to zero as possible.

Ensure that all your best product managers spend as much time directly interfacing with customers as possible. They cannot waste a minute. Their job is pure product exploration; make sure they are not hindered by any legacy issues.

Meanwhile, your top engineers will remain in the central engineering organization, reporting directly to the CTO. Their job is to ensure the company’s core engineering architecture can evolve as quickly as the pace set by the pioneering product managers.

Every company’s situation may vary, but my advice is not to put all your top engineering talent on the edge. This is tempting, but it will fragment your tech stack and create years of technical and organizational debt that stifles any early promising progress.

Moreover, in the AI field, you don't need the best engineers to explore new products; you only need people who can deliver and learn quickly. The best engineers should keep an eye on the overall technical architecture of the company but prioritize new things ruthlessly.

As part of this sprint, your company needs to be very adept at upgrading controversial decisions to remove obstacles to progress. If you cannot make tough choices weekly, you cannot complete this transformation within 12 months and successfully establish a new AI-native business. Therefore, master this process, and ensure your newly formed executive team spends a substantial amount of time (at least a full day each week) clearing obstacles for designers, product managers, and engineers, as if the survival of the company depends on it.

In the process of clearing obstacles for the team, you will clearly figure out what your new business model is. It needs to make money through tokens/on-demand usage, rather than the old per-user paid model. You do have some time: the per-user paid model will not disappear overnight. But you need to take this challenge seriously: you cannot be half-hearted about the new pricing model and product interfaces. If the agents cannot autonomously use and pay for your product, then you might not have hit the mark yet.

A budget for new expenditures exists. You can do this.

But remember, your customers' most immediate and evident source of AI savings is labor efficiency, which means seats will be where they seek to cut costs. In contrast, new growth will increasingly manifest in tokens, consumption, automation, outcomes, and machine-driven workflows.

If you are not on the token path, you are not standing in the fastest-growing part of the budget.

Not every company is equipped to do this. You may assess your options and see no reliable hope of winning through Path One. However, if you do see it, and if you survive this twelve-month sprint, you will emerge as a focused and accelerating company, with a new leadership team, and a "re-founding moment" from which your team will gain unity and new energy in the years to come.

Path Two: Restructure for 40%+ Real Profit Margin

Over the past decade, software companies have been very good at talking about free cash flow profit margins. But if we take this issue seriously, we should stop excluding equity incentives and pretending that equity dilution is not an expense borne by shareholders. For those companies not planning to re-accelerate growth, I think the right goal is to achieve a real operating profit margin of 40% or even over 50% (including SBC) within 12 to 24 months.

Achieving over 40% profit margin requires more than just a 10% or 20% layoff. It means flattening management layers, standardizing implementations, minimizing customization, dismantling committees, raising prices where workflows or switching costs provide an advantage, moving long-tail customers to higher base prices or letting them churn, and treating every share issued as a transfer from owners to employees.

AI should change the form of the company. The cost structure should change as well.

This will require a similar level of effort to that of Path One. Even if your goals are different, you should still aim to build an AI-native company within 12 months, maximizing engineer productivity and efficiency. From day one, you need to figure out what a smaller, but more motivated and productive workforce in your organization looks like twelve months from now.

Counterintuitively, the first thing you need to do is significantly increase the token expenditure budget allocated to each engineer. If your engineers are not spending real money on tokens, they may not be pushing themselves hard enough. A thousand dollars per engineer per month is not excessive; it is almost a basic requirement.

An important premise is that the output ceiling of individual engineers is rising much faster than most company organizational structures can leverage. Some of the best operators have described top engineers seeing orders of magnitude improvements in productivity while managing 20 to 30 Agents. Whether 20 times is an extreme case or merely the frontier, the impact on the organization is the same: a company built for a ten-person committee will lose in speed to one built for a four-person strike team.

At the same time, you need to be prepared for significant layoffs—you already know this.

You can't just prune the leaves on the edges of the company: if you cut a large portion of independent contributors but retain the team of directors and vice presidents, your situation will be worse than it was at the start. It needs to be clear that this is different from Path One; you are not trying to build a "new" business. But you are still "re-founding" the company around a new set of values centered on performance and shareholder mentality, so ensure you embark on this journey with the right leadership team.

Another very important thing is that the team should honestly confront which old moats are being eroded.

Simply having data is often not enough.

Integration is becoming increasingly easy to replicate.

As Agents become better able to move across systems, the advantages of workflows and UIs become less significant. Migration is becoming easier.

Competitors will increasingly attack each other's core modules, not just the edges. This means price pressure on core businesses is coming, so prioritize those advantages that help you maintain pricing power and customer retention.

This is achievable: Lessons from Broadcom

Before the advent of AI, there was a case study of hard-hitting practices in the public market: Avago/Broadcom under Hock Tan. This is a brutal model. It is not every founder's cultural blueprint. But it reminds us that radical cost control, product simplification, and price realization are possible. Hard-hitting practices do exist.

The second path may sound somewhat pessimistic, but not every software company has the option to choose the first path. If the company does not have that option, then the second path is the only way to create value.

Key Question

Founders should write a question on the first page of every board presentation: What path are we on?

Is it through brand new AI products achieving over 10 percentage points revenue growth? Or achieving a 40%+ real operating profit margin including SBC?

Investors should be even more forceful in raising the same question than they currently are.

Where is the AI product engine that can change the curve? Where is the R&D restructuring built around small, token-rich, customer-oriented teams? Where is the plan to build a human/Agent dual interaction layer? Where is the clear roadmap to achieve 40%-50%+ real profit margins? Where is the plan to reduce the proportion of equity dilution to revenue?

If the answer is some version of "a little bit of both" or "we are exploring various options," I expect the market to continue to exert pressure.

Founders: you need to choose a path, and you need to quickly decide who in your team you want to walk this journey with you. You have the opportunity to create a new entrepreneurial moment for your company, your new team, and your investors. Either grow 10%, or earn 40%. Either build the next-generation product, or create a cash cow. There is no middle ground, good luck.

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