The System of Record Fallacy
I was having dinner with a VC friend and we ended up talking about the meltdown in SaaS valuations. When discussing SaaS, I often hear this logic: AI will commoditize a lot of software. But the Systems
I was at dinner recently with a VC friend and we ended up talking about the meltdown in SaaS valuations. When discussing SaaS, I often hear this logic: AI will commoditize a lot of software. But the Systems of Record are safe. If you are the SoR, you have a moat & valuations will certainly recover.
I’m very skeptical of this logic: System of Record → Defensible valuation.
What’s a System of Record
A SoR is one where the authoritative write happens. The primary store of truth for a domain. The ledger, the CRM master, etc.
Yes, those are critical and risky to replace but that’s not the only reason why they are valuable!
Look at your own company. Your actual SoR is probably a transactional database. Postgres, SQL Server, etc.
But no serious architecture stops there. You replicate data, reshape and repurpose it. You build warehouses and lakes because your OLTP database is not designed for aggregations, ML feature extraction, or complex reporting.
This is why Databricks exists at its current scale. Databricks isn’t anyone’s SoR. It sits downstream, consumes replicated data, and clearly commands a massive valuation. The value is in participation, not custody.
Which suggests the story is more complicated.
A SoR is one node in a broader graph of systems. Analytics engines. Workflow tools. They all exist because the primary store cannot and should not serve every read pattern or operational use case.
Now add AI.
If AI agents become the orchestrators of workflows, they will sit above many of these systems and interact with them programmatically. From the outside, that can make the SoR look like a commoditized state backend.
Commoditized! That’s a word inversely correlated with valuation multiples. :)
If you’re a SaaS vendor and you sense that risk, a defensive reaction is understandable. Tighten APIs, constrain access, and rate limit aggressively.
Essentially make autonomous agents harder to integrate. Preserve control over the primary interface so you’re not reduced to dumb store. Some vendors are already doing some of this.
But as we just discussed, the value customers extract from a SoR rarely sits inside the SoR box itself. It emerges when that data participates in a broader system. When it flows into the other nodes.
The whole is greater than the sum of the parts.
If you restrict access in order to defend a moat, you are shrinking the surface area through which that excess value is created. And customers will notice that. They will feel that the system is less flexible, less compounding, less future-proof.
At that point, you are not just defending a moat. You are forcing your customers to ask whether the box is still worth the constraints.
None of this means systems of record are unimportant. They clearly matter.
It just means that “is it a system of record or not” is the wrong question.
The right question: does this system become more valuable as the graph around it grows? Or does it depend on restricting that graph to preserve its position?