← The Path to Exit
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- [00:02]
Podcast Host
Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.
- [00:19]
Mike Lyon
Hello and welcome everyone. I'm Mike Lyon, Founder and Managing Director of VistaPoint Advisors and this is the Path to Exit. This this show is dedicated to helping founders of software and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. My guest today is Jeff Koons, a regular guest on the podcast who's a managing director at VistaPoint Advisors. In this episode we'll discuss the significant trends for 2025 and talk about our expectations for 2026. Please enjoy my conversation with Jeff. Jeff, get us started here. Maybe talk about a few trends from 2025 that you noticed that were pretty pronounced.
- [00:52]
Jeff Koons
Yeah, absolutely. Mike, thanks so much for having me. Always love being on the podcast. So 2025, if we start at the macro level, one of the key themes we saw was that the number of deals was slightly up, but the aggregate size of total M and A volume was also up. In a lot of that was driven by a lot of big megadeals happening. But our world founder led software SaaS businesses I think was pretty stable from the year prior. There's a couple things that I think it's worth us getting into, but I think if you think about 2025 overall you had a lot of megadeals that pushed the average deal price up. Volume was okay. It certainly wasn't back to 2021. But within our world founder led bootstrap things were largely consistent to slightly better with some nuances in 2025.
- [01:44]
Mike Lyon
Yeah, I think there was a fair amount of bounce back. What did we see with the strategic buyers? I know there was a positive change there with strategic our process.
- [01:52]
Jeff Koons
Yeah, this one was really encouraging. When VistaPoint runs a process, we always want to have multiple options for our founders. We want to have a private equity deal, a full M and a deal. We'd like to have public company buyers. And 2025 really marked a strong rebound of public company strategic buyer interest. So there's been in you'd interest among private equity backed strategics. But last year we really started to see a thawing out for our companies of the public's actually bidding up evaluations that could win a deal. And so it was really, really positive to have that competitive dynamic back in the process. And we think that is poised to continue into 2026 here.
- [02:32]
Mike Lyon
I think just to add onto that, we think about the buyer universe as three legs to a stool. You have the public strategic Buyers, you have the pure platform private equity firms and then you have the private equity backed strategics, which act like both ends of that spectrum in some ways. And 2023 and 2024, we really only had two legs of that stool. Private equity backed strategics and pure private equity platforms were winning the deals when you looked at what they would pay. So it's nice to have that third leg of the stool back and creates the strategic deals. Public ones typically are full liquidity. So that's a different option for some of our founders. And good to see that trending back. And as rates continue to go lower, I expect their stock prices will go higher and you'll see them be even more aggressive and confident about wanting to do M and A. So as Jeff said, good trend.
- [03:17]
Jeff Koons
Absolutely. And on the debt financing part, that's a good point to bring up. It definitely felt like 2025, the debt financing component of A. Not all of our deals that have leverage on them, but the ones that did it really did not feel nearly as risky as 23 and 24 if 20, 30% of the transaction financing was coming from debt. And so I think there was just a more positive risk associated with debt financing in 25 than we've really seen over the past couple of years. So that was really encouraging because 24, 23, if we had a deal that one of the parties had, let's say, 30% debt, the other party had 0% debt, we really factored that in. I don't think that financing risk is nearly as important as the rate environment gets better and everybody's retrenched around the current valuation levels.
- [04:05]
Mike Lyon
Absolutely. Still something to pay attention to in terms of how much debt. And there's other reasons why you might not like debt, but it definitely feels the debt markets are more confident and we have more confidence in them.
- [04:14]
Jeff Koons
Yeah.
- [04:14]
Mike Lyon
Another trend we saw last year was companies just missing projections, and that was particularly acute in the market in Q2. So a lot of private SaaS businesses just had a lot of troubles in the end of Q2. Some of it had to do with the tariffs and all the uncertainty. And that's one of those things that can really open you up to a retrade. We talk in many of our podcasts about how to manage projections and how to avoid a retrade. But I would say that was really acute in Q2. Kind of tailed off as a risk going into Q4, as the tariff policy became a little bit more stable and people just had more confidence. That was definitely something we saw related to that PE firms were definitely trying to be more aggressive on retrade. So we hear this from founders who were dealing with PE firms on a one off, right? They spend 60 days in exclusivity and get retraded. And then occasionally we see people try and do that. In our process we have maybe six buyers in the second round and one or two of them try to retrade. Obviously it's a little more neutered when there's multiple buyers in the process. But I think PE buyers felt a little more emboldened to try and retrade at the last minute. As the market continues to get more and more competitive, we'll probably see less of that, but definitely something to keep in mind heading into 2026. Jeff, what other trends did we see to kind of wrap up 2025?
- [05:25]
Jeff Koons
I think there's two other things I'd hit on. One also on the private equity side, we saw a lot of start to come down market. So firms that we think of as really focused on businesses of 250, 400, 500 million plus in enterprise value, we started to see a decent amount of those firms participate pretty heavily in a process for maybe 175 million enterprise value company. And a lot of that was just the dearth of deal making at some of the mega level. So outside of like the Silver Lakes, the blackstones of the world, we did see a lot of these funds start to come a little bit further down market. Whether that was a result of chasing better growth rates because some of the growth rates at the bigger end into the market were a little bit more tepid, or a lot of firms it seemed, were going back to their roots where they'd raised big funds, they increased their check size, the returns weren't as good. You could argue maybe it's a skill set mismatch, that what makes you take a company from 150 to 500 is different than what helps you take a company from 400 to a billion. But that was definitely a dynamic we saw where there were some bigger funds out there participating in processes that we thought would have been too small for them. The counter to that is I do think that's probably going to go away this year in 2026 and we'll talk about that. But like the other trend, and I would love to get your perspective on this, was how you saw in everybody's talking about this AI manifest from the founder's perspective in 2025. What were your observations around AI within our type of client base?
- [06:49]
Mike Lyon
I think there was A lot of talk last year, particularly earlier in the year about AI basically just wrecking vertical SaaS businesses, right? The ability to code at low cost and really that hasn't played out to a large degree. There's certainly some risk profiles moving forward, but I think what we've seen is AI has made some of these businesses more efficient. Driven the cost down, so driven the cost of goods sold. If you think about things like customer support, a lot of companies were really over invested with headcount there to keep retention rates high because that's where the valuation is. But I think we just saw it being more of a catalyst to drive expenses down rather than wrecking all these vertical SaaS firms. I would say though that founders are worried about it. So I think the outlook for the next three years for a vertical SaaS business is probably the most uncertain it's been in a long time. So will the business model and the way you go to market now, will that work three years from now? I think that's where a lot of the uncertainty is coming from and founders are thinking more about liquidity to de risk that. But it certainly didn't play out exactly the way some of the fears were in the beginning of last year. Anything you want to add to that, Jeff?
- [07:51]
Jeff Koons
No, I think that's right, Mike. I mean I think what we saw consistently was that there are good business applications for the LLMs and what we would consider the bigger AI platforms out there, they have consistently been unable to deliver specific business results in a verticalized context. So hey, can you help a company that's focused on a self storage ERP or a highly complex healthcare IT business? There's some things you can do but in terms of real business value, the models just aren't good enough yet or the implementation is not good enough yet for them to actually drive meaningful value. Whereas on like the more consumer y side of things or education side, we are seeing those platforms like really deliver meaningful value. We just haven't really seen it on the B2B side compared to a nice ERP system that's vertically focused and purpose built for a specific vertical, driving tons of ROI for that end customer who adopts it. We'll see that converge over time. But yeah, I absolutely noticed that Mike. And then the other thing I would say in terms of the founder perception of risk around AI, that is absolutely true. I think where we saw come up in processes was more are you thinking about this? Do you have an answer for it? Like there's not an expectation that if you're A vertical software company, you're developing.
- [09:03]
Mike Lyon
Your own LLM, which would be a bad decision, right? That'd be a really bad decision.
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Jeff Koons
Horrible decision. But you do have to be able to answer the question, hey, can ChatGPT do this? Or hey, if ChatGPT or OpenAI anthropic, whoever wanted to do this, would your business be susceptible? So you need an answer for it, but you don't need to be spending $10 million to try proprietary LLM to help your vertical software company.
- [09:26]
Mike Lyon
I think what we are starting to see now, at least for the types of businesses we worked with, is some AI businesses that are at scale. So there's 7 to 10 million of ARR. Those are transactable deals. And so we're starting to see some actual recaps happen with those companies, which is exciting to see. Before we move on to 2026, I think the last thing we noticed, and this is more of a tactical point, we saw buyers, mainly PE firms, shift their focus from the NRR retention metric to the GRR retention metric. And so as the market's a little bit more conservative, gross retention is kind of the pessimistic view of retention, if you will. Right. No credit for upsells. But we did see buyers focus on that more and make that more of a disqualifier for an investment or the linchpin for how they're valuing an investment. And you can have pretty big discrepancies between NRR and grr. And also on a relative basis, you can see a pretty big difference. Like, you might have a really good net revenue retention because the clients you keep grow really quickly, but you're still losing or downselling a fair amount of the clients. And so there can be some real massive implications for overall interest and valuation. I expect that to continue into next year. I think as we get more into a growth environment, that will start to reverse a little bit and we'll go back to NRR maybe being the dominant metric. But at least for right now, all the retention metrics are important. But we see people leaning into GRR the most.
- [10:47]
Jeff Koons
Absolutely. Mike, at VistaPoint, we ran a really interesting regression analysis on some of our recent deals. And the R squared on the gross retention was like materially higher than the net revenue ret, which was just really interesting because as you said last year, there was a little bit of that, but the year before it was all upsell. Right. Can you land and expand and grow your book of business from there? As you said, it's a little bit more of a conservative underwriting position to say, well, if I don't upsell anything and I just think about down sells and churn, how long is this book of business going to last? How valuable is this book of business? And that did seem to be the way to create a little bit more enterprise value on the margin. Little bit better gross retention compared to a little bit better net retention. Gross retention would have been more valuable to you.
- [11:28]
Mike Lyon
Absolutely. So let's transition to 2026. One of the things we looked for earlier in the year actually is what's going on with the big bulge brackets. What are they doing from a hiring perspective? Because obviously that speaks to do they expect to see the deal volumes be really high? So Jeff, what are some of the big bulge brackets like Goldman, Morgan and Merrill doing? What are they doing with their headcount? Are they beefing up or are they skinnying down?
- [11:49]
Jeff Koons
They are beefing up. They're hiring very, very aggressively. And for 2026, we think there is a potential for a really big positive perfect storm for the bulge. You have a ton of private equity backed companies and private equity funds that have yet to return capital to the LPs. And the way the whole machine works is private equity firm raises money from LPs, they invest that money, they then sell those companies or take them public. They return the LP money plus the return they get, and then they can go raise the next fund to make new investments. Because they just printed out whatever 25, 30% fund return for those LPs that makes those LPs want to give them more money to make more investments. The problem over the past couple years, and really it's because valuations were so high in 2020 and 2021, they haven't been able to exit those companies at an attractive return. So they've held them. It's now to the point though, where they've held them for so long that a lot of these LPs who are big endowments and pension funds and real big institutional investors, they really want their liquidity, they want their return. And so it's been one harder for private equity firms to raise that next fund, which limits some of the amount of capital that comes into the market. But more importantly, it's created a little bit of a concern on the asset class as a whole. But to your point, Mike, on the big banks hiring up, we're seeing a lot of the big IPO shops and then a lot of what will be these very large private equity exits. So think multibillion dollar plus deals on exit. We're seeing the bank staff up in preparation in anticipation of that glut of deal volume happening. So that I think is a really interesting dynamic for our world. Founder led companies. Mike, how do you see the puts and takes for a wide open IPO window, a big private equity exit window? How do you see that impacting our part of the world?
- [13:35]
Mike Lyon
Obviously the liquidity on the IPO is good. So as private equity firms are making these smaller investments, these founder led businesses, they're always thinking about their exit and what that looks like. That's a risk and an opportunity for them. So IPO market being open, that's great. The bigger funds selling some of their portfolio companies kind of has a dual impact. On the one hand, Jeff mentioned earlier that last year some of the big, bigger funds were coming down and doing these smaller deals. They'll obviously go back up to do some of their bigger deals. So that will take some attention away from the founder led market. So just a little bit less competition. But if those PE firms are successful in getting exits, that will also drive demand to make more investment. So I think overall it's really good. But you will see some of the larger private equity firms who were maybe writing a 50 to $100 million check last year, not really look at those deals anymore. They wanted to deploy capital. They didn't want to deploy a lot of capital, but they wanted to stay in the game, if you will. They're going to pivot back to those bigger deals that make sense for them. And obviously they have huge funds, they have to deploy a lot of capital. So they're kind of locked into that part of the market. So overall a positive. But there will be some puts and takes as we go forward.
- [14:39]
Jeff Koons
I think it actually brings up a really nice corollary on the banking side. We also saw some relatively large banks start to come down market and take on slightly smaller deals. They're not going to work on those if they are engaged. They're going to put it down to a junior banker, but they're going to not pitch for those deals as they go. Again, focus on their core work which is advising the private equity firms and the IPO work. So I would expect to see some of that dislocation as well.
- [15:02]
Mike Lyon
Other trends I think we expect to see, and these are more evolving trends. So if we went to, you know, 2022, 2023, growth became a lot less important and profitability or unit economics became important, we saw that in spades. Right. That's why a lot of the heavily backed VC companies who were burning a lot of money but growing quickly, really struggled as interest rates are coming down. We're going to slowly, but I emphasize slowly shift to more of a growth on environment so you' more about valuations being tied more to growth rate than to profitability. But again that's going to be a longer term trend. I would still encourage founders to focus on unit economics and balancing that rule of 40 between growth and profitability, but I think we'll expect to see that change a little bit. Jeff, how do you feel about just vertical SaaS in general? How do you see vertical SaaS businesses performing and more importantly their exits? What do those look like next year?
- [15:51]
Jeff Koons
I think we've been lucky at vistapoint in that the types of clients we advise are these founder led, relatively bootstrapped, if not fully bootstrapped businesses that almost always have a vertical nature to them. It really does boil down to core fundamentals in that our client's software has positive roi. You are going to pay X for the software and it's going to generate X plus in either additional revenue or cost savings. And I believe that the fundamentals underpinning good vertical SaaS businesses are still incredibly valuable because of that economic reality. AI you can really slice into, hey, is this vapor? Is this all hype? And it's actually really handy for writing some emails and doing some other things. There is value there, but when you put it into the B2B context, that is a whole very, very direct ROI measurement. And everybody who we work with has built a solution to solve specific business problems that either hinder growth, hinder profitability, or allow you to do more with less. And when you solve those kind of actual business problems, create economic value and that is valuable in terms of revenue growth, which ultimately translates into valuation and exit proceeds. And so until the AI world can seamlessly integrate into a complicated and complex business data environment, I still think the purpose built B2B SaaS companies have a lot of value left in them. And just based on our own processes and experience in the market, we are not hearing anything close to oh well, this doesn't have an LLM underpinning, so there's no value here. We're not hearing anything like that. So I'm still very bullish on it. But there will still be just the business fundamentals that really drive the day. What's the growth? What's your gross revenue retention? What's your net revenue retention? How should we think about profitability? Is there a big market? All those fundamentals today are still going to be true. And until there's whatever the next generation leap in AI is and look it could be coming, I don't see the next couple years as being bad in any way, shape or form for B2B SaaS. I think it's going to continue to be on a very, very strong traject.
- [18:02]
Mike Lyon
Absolutely. And I think overall our expectation for founder led software businesses, it's going to continue to be a strong market next year like it has been frankly for the past 10 or 15 years. We do think there's some differences though, right? Some of these bigger deals are going to come back, so that's going to take some attention away from these founder led businesses. But those exits happening is going to drive more capital deployment because PE firms show that they can get a return and get liquidity and that will lead to more investment taking place. So on today's podcast we talked a lot about some of the key trends we saw in 2025 and what we see in 2026 moving forward. Jeff, thanks so much for joining us.
- [18:36]
Jeff Koons
Simeon thank you so much Mike. Really enjoyed it.
- [18:40]
Podcast Host
VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.