UK Small-Cap Software: Who Gets Paid When AI Does the Work?
Revenue, pricing power and what I’d check before buying.
Investment framework
First thing I check with a software business: how does it get paid?
If AI does more of the work, does the supplier get paid more or less?
What changes when AI does the work?
Fewer people?
Fewer licences could mean less revenue.
Can the supplier charge for productivity instead?More transactions?
Checks, requests and data traffic could grow.
Is that extra usage billable?Same annual fee?
More workload might bring no extra revenue.
What happens to margins?Extra usage helps only if it brings in more revenue than it costs to serve.
Where AI may strengthen software businesses
Useful data and high switching costs don’t automatically mean higher profits.
Follow the revenue
Seat-based software could lose licences if customers need fewer employees. AI could also mean more identity checks, transactions and data moving between systems.
But more usage doesn't always mean more money. If the contract is fixed-price, the supplier could end up doing more work for the same fee.
Four things I'd look at
- Seats. Can customers cut licences, or will AI make the product worth more?
- Proprietary data. Is the information genuinely hard to recreate, and can the company charge for access?
- Trust and compliance. Does more automation lead to more paid checks, or just tougher competition?
- Embedded infrastructure. How hard is it to replace, and does extra activity translate into revenue?
I’d check renewals, pricing and cash generation, not just the product description.
The double discount
The double discount I’d look for: a UK software share marked down for poor liquidity and again for AI risk.
Two reasons for a lower valuation
Thin trading or limited coverage.
Uncertain future demand.
A falling share price doesn’t make something cheap. Maybe the old valuation was wrong. I want to see disruption being priced in when the numbers suggest the business is holding up.
Before I’d buy
- How does it get paid?
- What if customers need fewer people?
- Is extra AI activity actually billable?
- How hard is the product to replace?
- Does it turn revenue into cash?
- What am I paying? And what would prove me wrong?
What would change my mind?
Customers cutting licences, weaker renewals, lower prices or costs rising faster than revenue.
More activity doesn’t necessarily mean more profit. That’s what I want to establish before buying anything.
Personal investment notes, not financial advice. AIM and small-cap shares can be volatile and illiquid, and you could lose all your capital. Full disclaimer.