The Software Bubble is Going to End Badly for Investors

Everyday I read about some new software company doing something very cool. Then, a few months later I notice there are at least a handful of additional companies either doing the same thing or doing it better. Given the incredibly low costs of creating software and the sound-barrier-breaking speed in which software can be coded, I think 99+% of investors will get their faces ripped off.

Deja Vu: All eyeballs and no profits

The slicksters say, “It’s all about the apps,” or “It’s all about the social web.” They are correct. But the new software bubble will end just like the dotcom bubble: only an infinitesimal fraction of the first movers will ever turn a profit.

If you don’t think there’s a bubble in software, start reading TechCrunch. There are tons of app developers and social web platforms raising millions … and their business models are, well, nonexistent. Sound like 1999? Sure does to me. However, this time investors will get burned worse because broadband is almost ubiquitous, the cost of developing software is a few pennies more than raw sweat equity, and around the world millions of college students are building better apps as I write this.

Run, Forrest, Run, Forrest, Run: Are you a sucker?

So, what was once a 400 meter race is now a 100 meter sprint. Investors who plunk down for app makers or Web 2.0 platforms are simply praying they can find a Fortune 500 company to buy them out before the entire known universe realizes anyone can completely copy the same software for a fraction of the price with a few coders on salary plus stock options. Once that secret gets our, simply building from scratch will surely seem smarter than the continued blunders made by companies like AOL.

Nosedive: Pricing power is in free-fall

I know. You think I’m overlooking the sophistication of some incredibly innovative software. Really? Just ponder that last year I was quoted $20,000 to build a mostly basic mobile iPhone (APPL) app, and now I can get the exact same one for $199 from AppMakr. Yikes! That’s what I call a pricing power nose dive into Hades.

A similar phenomenon is occurring in the enterprise software space. Google Wave (GOOG) and ManyMoon are now encroaching on project management celebrity Basecamp. Remember the white hot link shorteners? Now there are hundreds, and almost all of them offer the same metrics, etc. How about buzzing Foursquare? If Google offered the same app (which it could probably build in a few days), it would have millions more listed places and better functionality from Google Maps and Google Earth.

If you are investing more than a few hundred grand in a software company, you will probably do little more than help fund a “100 Biggest Busts from the Software Bubble” list in the blogosphere ten years from now.

Agree? Disagree? Let us know in the comments below …

—— Update ——

Twitter just announced it will offer many resources currently offered by 3rd Parties. This is the tip of the iceberg for investors who will get their faces ripped off.

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