How Many Software Firms can the Economy Support?

In my daily and weekly perusal around the internet in general, and especially on LinkedIn, I am amazed at just how many software companies exist.  Some are US-based, but of course many are not.  We are in a global marketplace and generally a software developed and sold out of India, or Belarus etc, can function just fine within the US for a US company.

Right now, depending on who you believe, there are between 600,000 – 700,000 software companies in the world!  Some experts believe by 2027 there will be a cool million.  Right now, in 2021, how many of these 650,000 (??) are profitable?  That is a tough question to answer.

It is often said and estimated that, within 5 years, 90% of start-ups will fail and go defunct.  Clearly if they are not profitable, they are going out of business.  Do we extrapolate that and assume that only 10% of the 650,000 software firms are profitable on a regular basis?  Perhaps.  If so, there would be roughly 65,000 active and at least borderline successful software companies in the world today.  But more and more come online every day.

What can a healthy and robust economy support exactly?  If there are 65,000 today- can the world economy support 90,000 software outfits?

I’ll make a comparison to an industry that is very different from software, for whatever that might be worth.  Let’s take a quick look at the auto manufacturing industry.

There are 30 auto manufacturers within the USA; worldwide the total amount is 62.  Sixty two brands in the world, to service 7.8 billion people.

It appears that with these 62 companies there is enough competition, and variety, to adequately service everyone’s needs in regards to cars and trucks.

Of course making autos and developing software are 2 different worlds, in many aspects.  The barrier to entry for a new auto manufacturer would be enormous, and that is why we rarely see them.  Conversely, to create and then sell (online) a new software program is relatively “easy” and cheap- in many cases.  Overheard is fairly minimal, and as such it does not take a crazy amount of sales to turn a profit for some of these small software companies.

Software marketers naturally point to widespread digital transformation, and also more likely software use in developing nations/ economies.  Once you start looking around, there really is a software program for nearly every conceivable business and purpose.  So maybe the optimism is warranted.

In conclusion, there is no true conclusion.  Start-ups in software will continue unless and until it doesn’t make fiscal sense to do so.  But I do wonder where we are on that industry growth curve.

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