Thursday 05 March 2026 5:35 am  |  Updated:  Thursday 05 March 2026 10:52 am

Why network effects, taste, and rails are the new software moats

By: Lewis Z Liu

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In an era of AI coding agents, the true moats for companies now lie in four key areas: deterministic rails for critical systems, non-replicable network effects, genuine taste and strong branding, and core software infrastructure that is too integral to replace, says Lewis Liu

I sit on advisory committees for several investment firms, and over the past few months, one question keeps coming up: how do you think about moat for software companies now?

Recently I had breakfast with a partner at a large-cap PE fund who put it this way: “At least it’s not boring. Better than just doing vanilla leveraged buyouts”. He was joking – sort of. But the underlying anxiety was real.

SaaStr, the well-known SaaS community platform, recently published a chart showing roughly an almost 80-percentage-point gap in share price performance between traditional SaaS workflow companies and infrastructure and cybersecurity firms. Earnings per share at many of these software companies are still going up. And yet the market is already pricing in disruption. That bifurcation tells you everything.

We’ve seen this before according to Goldman Sachs. Around the dot-com boom, 25 years ago, newspaper companies were printing money, earnings had never been higher. But the share price decline had already started. It took five years for the fundamentals to catch up with what the market had already priced in. Those two lines eventually converged. I think the same thing is happening to software right now.

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