State of Scaling: The Great Sorting

AI is creating a Great Sorting in software, with AI-forward top-quartile companies separating sharply from incumbents as investors demand both faster growth and measurable efficiency.

• The study analyzes quarterly operating and financial data from 137 software companies, including 11 selected public companies, with portfolio data available through Q2 2026 and public filings through Q2 2026.
• ICONIQ defines Pacesetters as AI-native or AI-driven companies in the top quartile for ARR or revenue run-rate growth over the past three years within four ARR bands: below $10 million, $10–25 million, $25–100 million and above $100 million.
• Leading companies are reaching $100 million of ARR in just 1–3 years, with new-logo ARR contributing more than 70% of gross new revenue; the report presents this as a new benchmark for scaling.
• The broader software index fell 3% over the year while semiconductors gained 47%; high-growth software companies saw median forward revenue multiples recover from about 7x in Q1 2026 to 9.2x in Q2 2026.
• Free-cash-flow margin has regained importance as a valuation driver, while the share of U.S. businesses paying for AI products rose from 7.5% in January 2023 to more than 50% by July 2026 and monetization mentions in leading software earnings calls tripled from 5% to 15% between Q2 2025 and Q2 2026.

Takeaway: Investors should distinguish AI-forward, high-growth software companies from slower incumbents and assess whether growth is accompanied by improving AI unit economics and free-cash-flow efficiency, while recognizing that the analysis is based partly on ICONIQ portfolio data and selected public-company samples.