Your King Sucks

Why SaaS feels terrible to invest in

I am a middling blitz player of online chess. To the uninitiated, in chess, there is a concept called material. You have a queen, I have a rook; I am “down material.” Usually, this means I am losing. If we trade everything off and go into an endgame, your extra queen will eventually hunt down my king and the game ends. But there is a massive, structural caveat to this: none of it matters if your king is unsafe. You can be up two rooks and a bishop, but if your king is stuck in the center of the board with no pawn cover and my queen is hovering nearby, the computer evaluation will read total equality (neither side with a winning advantage, despite the material showing otherwise) or, more likely, it will say I am winning. Your material is a theoretical advantage that you will never live long enough to realize. Your king sucks, and the game is over.

This is the “Your King Sucks” theory of software investing. For the last decade or so, public market investors treated annual recurring revenue (ARR) as the ultimate form of material. If a company had $500M in ARR growing at 30% with 80% gross margins, it was a winning business with a material advantage. You could argue about the valuation—is it worth 10 times revenue or 15?—but there was never a doubt that the revenue was real. You also assumed that because the product was “sticky” (a word VCs love because it sounds like a moat but often just means “too annoying to uninstall”), the material advantage would eventually translate into a win.

But AI has effectively turned every software value-prop chessboard (I’m stretching the analogy here) into a tactical mess where every almost every “safe king” is suddenly exposed. If you are an enterprise software company whose primary value proposition is “we provide a slightly better UI for a database” or “we help your HR department fill out forms,” your material doesn’t matter anymore. You might have $1 billion in revenue, but if a generative AI agent can do that same task for the cost of a few API calls, your product sucks. Your king is standing in the middle of an open file, and the half-trillion-dollar-backed-AI is the opposing queen coming down the board for your margin.

The problem with being a material-focused investor in a technology market is that you tend to value the past. You look at the 12-month trailing revenue and the net retention rates and think it’s a solid foundation. But in software, your product quality is your king safety. If the product is fundamentally disrupted—if it becomes a legacy solution overnight because the underlying workflow has been automated away—then those high switching costs you relied on are just a slow way to die.

Of course, everything in this world is a trade-off between quality and price. You buy the mediocre business because it is trading at four times earnings; you sell the great business because it is trading at eighty times earnings. This is the fundamental grammar of investing. You weigh the “material”—the cash flows, the EBITDA, the recurring revenue—against the price you pay. It’s logical, very spreadsheet-friendly, and, in the current environment for public software companies, potentially a very sophisticated way to get steamrolled.

This is the widening gap between the AI winners and losers. Really, the genesis of this post is around Salesforce. I want to believe their CRM product is super sticky and value-add and can’t be disrupted by a spreadsheet and AI automation, but it seems like it very well could be. They have a great balance sheet, they’re showing growth. They have “material.” They might even be buying back stock net of stock comp issuance! But will the market ever look at them and not see a checkmate in twelve moves? The revenue growth is a ghost; it’s just the friction of large organizations taking two years to realize they don’t need the software anymore. And even as I write this, I’d like to hone my critique to seat-based pricing. It’s a relic, an artifact of the 1990s. How can a piece of software be sticky if there’s an enormous financial disincentive to train more people up on it? Headcount in sales teams is probably going to fall anyway.

Ultimately, the lesson of the “Your King Sucks” analogy is that terminal value is somewhat binary. In a stable environment, you can win on points. You can be a slightly better operator with a slightly better margin profile and get rich. But when the game becomes tactical—when a new technology like LLMs changes the basic economics of software, effectively putting a ceiling on pricing—the only thing that matters is whether your product (or pricing) is actually defensible.