Only Two Paths Left in the Software Industry—No Middle Ground?

Deep thoughts on AI and aspirations —— ByteDance Deep Thought Circle

A harsh judgment has been circulating in the software industry recently: the middle ground has disappeared, leaving only two paths. Either build a genuinely new AI-native product and boost the company’s overall revenue growth rate by more than 10 percentage points within 12 to 18 months, or restructure the organization to achieve a real operating profit margin of 40%—ideally above 50%—after deducting stock-based compensation. Companies stuck between high growth and high profitability have no path forward.

This judgment deserves serious consideration. It essentially pronounces a death sentence on a certain way of operating: software companies with mediocre growth, mediocre profits, and valuations sustained by narrative.

How the Middle Ground Collapsed

Over the past decade, software companies grew accustomed to a playbook: talk about profits when growth slows, talk about growth when profits look bad, and talk about ecosystem and stickiness when neither stands out. Capital markets used to buy it because the certainty of software stocks was worth a premium. That logic has now been dismantled by two developments.

First, growth is no longer scarce. After AI-native products drove down the delivery costs of certain workflows, customers began reassessing their software budgets. Companies that can’t sustain high growth no longer command growth stock premiums. The second development is more subtle: stock-based compensation is finally being counted as real money. Software companies used to tout free cash flow margins while excluding stock-based compensation, as if dilution wasn’t a cost. Now the market treats every share issued as a wealth transfer from shareholders to employees, and real profit margins after deductions look far less attractive than what’s on paper.

These two forces combined have collapsed the middle ground. Companies that occupy neither end face only valuation compression and continuous dilution.

Why You Can Only Choose One Path

Twelve to 18 months is only enough time for one path. On the surface it’s a resource problem; at a deeper level it’s an organizational problem.

Taking the growth path requires the company to enter wartime mode. A repeatedly validated playbook: first identify the undervalued core talent in the organization—regardless of rank—and assign them frontline missions. Conduct an information audit around high-value workflows, gathering materials like SOPs, work orders, meeting minutes, requirement documents, and support logs to build a dynamically updated contextual data layer, not a pile of static documents. Then use a one-month observation period to determine executive retention: who’s cooperating with this elite squad and who’s watching from the sidelines—the signal is crystal clear. Quickly have conversations with executives who fall behind and hand their positions to people who’ve won the information war and proven AI talent.

Then commit half your R&D resources to pure AI new business. The organizational approach matters: four-person strike teams, with design, product, and development fused into a single combat unit writing code from day one; cap team size strictly while leaving compute budgets unlimited. Reserve the best time for product managers closest to customers, keep top engineers in the central engineering department guarding the technical foundation rather than scattering them across peripheral squads—otherwise fragmented tech stacks become debt that takes years to pay off. This approach assumes AI has raised individual engineer output ceilings dramatically, while communication costs in ten-person decision layers consume most gains. So cap headcount, provide budget, let decisions concentrate upward rapidly, and have executives block out full days weekly to clear obstacles for the frontlines.

The other path is transforming yourself into a profit margin machine: within 12 to 24 months, achieve an operating profit margin above 40%—ideally 50%—after deducting stock-based compensation. Laying off 10% of employees won’t cut it. It requires reducing management layers, standardizing delivery, compressing custom services, raising prices where you have pricing power, moving long-tail customers to more expensive tiers or simply abandoning them. Broadcom offers a ready reference: when Hock Tan took over, the company was losing over $200 million annually; within three years, headcount dropped from 6,500 to 3,600, unprofitable business lines were cut, gross margin floors were enforced, ultimately creating a cash flow machine. This path works, but the cost is brutal and most founders can’t replicate it.

You must also honestly face a premise: old moats are failing. Data alone isn’t enough, the replication barriers of system integration are falling, when agents can operate across systems, workflow and interface advantages depreciate, and data migration becomes easier. Companies taking the profit margin path need to first audit which moats still exist and concentrate resources on core advantages that still have pricing power and retention rates.

How to Choose: Look at Your Chips, Not Your Posture

Neither path is superior—only suitable or unsuitable. The growth path requires high-value workflows, excavatable internal talent, channels close to customers, and cash to survive a 12-month sprint. The profit path requires core modules with pricing power and the resolve to operate on the organization. The most dangerous answer is “we’re pushing both”—the cost of strategic ambiguity is the market continuing to compress your valuation. This judgment deserves to be on the first page of every board deck: which path are we actually taking? The answer doesn’t need to be perfect, but it must exist.

Don’t Treat “Wait and See” as a Third Path

The most common self-rescue for companies stuck in the middle is announcing “stabilize the core business first, then charge when the wind comes.” This posture sounds prudent but often just hands judgment to time, and time only brings continued valuation compression and ongoing dilution. The truly honest question is: is our cash enough to get us to a validation point on either path?

If not, only two options remain. Proactively seek acquisition channels and package the team and product for a company willing to pursue growth; or immediately contract to the smallest core, press all resources into the business that still has pricing power, and turn it into cash flow. Mergers and acquisitions in the software industry have never been disgraceful outcomes—they’re simply the normal exit for middle-ground companies after valuation logic changes. The fear isn’t choosing wrong, but refusing to choose while unable to stop, letting the company become the frog in warm water, burning through cash until forced to decide at zero.

One final boundary. Boosting growth by 10 percentage points in 12 to 18 months is a very high bar for most companies; falling short doesn’t mean the company has no value—it simply means old valuation methods no longer apply. The real starting point for decisions is auditing the workflows, customers, people, and cash you have, not rushing to announce which path you’re taking.