Podcast Summary

The Path to Exit | Episode 37: Why Retention Is Now Driving Software Company Valuations

Host: Mike Lyon (Vista Point Advisors)
Guest: Sara Beth Sandweiss (Senior Associate, Vista Point Advisors)
Date: February 17, 2026

Overview

This episode offers a deep dive into the evolving landscape of software company valuations, focusing on how and why retention metrics have become the top priority for buyers and investors. Host Mike Lyon and guest Sara Beth Sandweiss explain retention's new role as a decisive ("gating") metric, the exact numbers buyers look for, common mistakes founders make when calculating and presenting retention metrics, and tactical advice for founders considering M&A or capital raises.

1. The Changing Priorities in SaaS Valuation

[01:15 - 04:29]

• Valuation priorities for SaaS businesses historically included growth, retention, gross margins, market size, and sales efficiency.

• Market cycles have caused shifts in emphasis:

  • 2022-2023 high capital costs meant a focus on profitability and cash efficiency.
  • In the current environment, retention has moved center stage.

• Key Insight:
  Retention metrics, previously a "supporting" measure, are now "gating"—you must clear a certain retention threshold to be viewed as a true recurring revenue business and achieve higher valuation multiples.

• Quote:
  “Growth is all the new water… churn is the water that’s leaking out… Buyers want to see a bucket that holds more water.”
  — Sara Beth Sandweiss [01:41]

• AI and increased competition make growth harder and more expensive, which increases the value of existing, durable revenue streams.

• Quote:
  “Retention has become a proxy for product-market fit… If you’re retaining a lot of customers, people are enjoying what they’re getting out of the product.”
  — Sara Beth Sandweiss [03:20]

2. Why Retention Is Now a 'Gating Item'

[02:20 - 04:29]

• In a low interest rate (“growth on”) environment, investors tolerated less efficiency; now, with higher rates and more competition, buyers scrutinize pure retention.
• Trends move with the market cycle; founders must pay attention to macroeconomic conditions as they determine which metrics buyers will prioritize.
• Recurring revenue must be proven to get top multiples.

3. Key Retention Metrics and Benchmarks

[05:26 - 07:40]

• Net Revenue Retention (NRR):

  • Measures expansion, churn, and downsell in a cohort over a year.
  • Benchmarks:
    • Over 110%: Excellent
    • Over 100%: Stable
    • Below 90–100%: Raises concerns
  • NRR is most easily influenced via upsell, pricing, or packaging changes.

• Gross Revenue Retention (GRR):

  • Focuses solely on revenue lost to churn and downsell—not offset by expansion.
  • Benchmarks:
    • Over 90%: Excellent
    • 80–90%: Acceptable floor
    • Below 80%: Suggests churn risk—harder to get a deal done.
  • Segment-specific: enterprise targets should see higher GRR, SMBs can tolerate lower due to more involuntary churn.

• Logo Retention:

  • Year-over-year percentage of logos (customers) retained.
  • Useful as a proxy, especially for founder-led businesses, but less critical than revenue-based metrics.

• Quote:
  “While we track logo retention, we generally see with a lot of businesses we work with that it might slightly lag behind gross retention.”
  — Sara Beth Sandweiss [07:19]

4. Real-World Trends and Impact

[07:40 - 08:50]

• As markets shift, buyers now give more weight to gross retention (not just net), reflecting concern for true customer stability.
• Vista Point’s internal data:
  • Even a 5% change (e.g., gross retention of 85% vs 80%) can materially affect how competitive a transaction is and what valuations are offered.
• Quote:
  "Five points of gross is actually a pretty big number and...impacts valuations."
  — Mike Lyon [08:17]

5. Common Founder Mistakes in Retention Analysis

[08:50 - 12:05]

• Inconsistent Calculations:

  • Retention can be calculated hundreds of ways; lack of a standard formula or clear definition confuses buyers.

• Mismatched Timeframes:

  • Not specifying whether retention is annual, monthly, or quarterly.

• Masking Churn by Aggregation:

  • Lumping all customers together can hide at-risk segments.

• Including One-Time Revenue:

  • Onboarding charges or services create phantom “churn” when they naturally drop off.

• Trusting Off-the-Shelf Metrics:

  • Quoting retention from software dashboards without raw data backup. Failure to reconcile reported metrics with transactional history can kill deals.

• Case Study:

  • A founder quoted excellent retention from a dashboard but lacked the raw transaction data to back it up. The team spent 200 hours reconstructing the customer revenue cube—an error that could have cost the deal.

• Quote:
  “The worst possible and most stressful situation… Founders weren’t paying attention to the underlying data. This is key.”
  — Mike Lyon [12:20]

• Key Takeaway:
  “There are 500 ways to run retention… Every investor does it a different way… Coming across with a consistent formula and definition… is super important.”
  — Sara Beth Sandweiss [08:52]

6. Practical Steps for Founders to Get Retention Right

[13:37 - 15:01]

• Step 1: Customer-Level Revenue Tracking

  • Maintain monthly MRR per customer—align billing, CRM, and accounting as early as possible.
  • Track contract amount, term, and product if possible for segmentation.
  • Segment data (by customer size, geography, product line, industry vertical) to identify your best-performing cohorts.

• Step 2: Data Validation

  • Reconcile your revenue-by-customer (customer cube) with your financial statements:
    • Summed MRR per month should closely (~3–5% variance max) match your P&L revenue for that period.
    • Variance >5% suggests a problem—usually with the customer cube, not with financials.

• Step 3: Be Fluent, Not Outsourced

  • Don’t just rely on a dashboard; ensure you can build these metrics from raw data if asked.

• Quote:
  “If I took the sum of my December MRR, that should tie pretty closely to my December revenue on my P&L… Anything north of 5%, but really we’d like to see that within 3%.”
  — Sara Beth Sandweiss [14:28]

7. Memorable Quotes & Takeaways

• “Retention has become a proxy for product-market fit and how you compete.”—Sara Beth Sandweiss [03:21]
• “Buyers want to see a bucket that holds more water.”—Sara Beth Sandweiss [01:41]
• “The most important thing is to have good raw data… this is probably the biggest mistake we see founders make and where, frankly, they just have a blind spot.”—Mike Lyon [12:17]
• “[Founders] need to be fluent in this data. You don’t outsource it… This is key.”—Mike Lyon [12:20]

8. Final Thoughts

[15:33 - End]

• Good retention data is not a “nice-to-have”—it’s essential for maximizing valuation and sale prospects.
• Advance preparation—clean, reconciled, and segmented customer data—reduces deal stress and increases leverage.
• Founders should not wait until diligence to prepare; take time early to ensure data quality and understand your business through the buyer's eyes.

Key Timestamps

• 01:15: How retention has moved to the forefront of valuations
• 03:03: Why buyers’ priorities are changing (crowded market, cost of capital, AI)
• 05:26: Core retention metrics explained with benchmarks
• 08:50: Common data and calculation mistakes SaaS founders make
• 13:37: What “good retention hygiene” looks like practically

Useful For:

• SaaS or software founders prepping for M&A or capital raise
• Investors or operators keen to understand current buyer focus
• Finance professionals standardizing retention reporting

The tone of the discussion was candid, practical, and filled with real-world war stories—both cautionary examples and best practices—to help founders avoid pitfalls and position their company optimally for a transaction.