State of Software 2025 (ICONIQ)

Summary

• The study summarizes quarterly operating and financial data from 127 software companies.p.4
• 94% of public earnings calls mention AI.p.8
• AI company funding in 1H 2025 (~$377B) has already exceeded the amount in all of 2024.p.8
• 80% of companies report active experimentation or implementation of internal AI tools across workflows.p.9
• Offshore headcount rose from 24% to 30% of the workforce YoY.p.9
• Net dollar retention is settling at a ~110-120% range, and CAC payback remains extended at ~16 months for top quartile companies.p.9

Key insights

1. The Rule of 40 has emerged as the strongest predictor of valuation.p.8
2. A 1-point increase in revenue growth has ~2x the impact on valuation compared to an equivalent increase in FCF margin.p.8
3. Median beat versus guidance is ~2.2% in Q1 2025.p.8
4. ARR growth has leveled off across the broader software market, with green shoots in mid-stage ($50-100M ARR) companies.p.9
5. Rule of 40 is holding at ~50%.p.9