Could AI Replace Your Software Company? How Buyers Are Evaluating Defensibility

Historically, software buyers have prioritized growth. Retention and market position mattered, but the premium went to businesses adding revenue quickly. That priority has shifted.

What buyers are currently underwriting is defensibility; how hard a product would be to replace, and the replacement buyers currently have in mind is AI. AI has been reshaping what makes a good software business over the past several months. Where a business sits in the AI stack now drives valuation more than almost any other factor.

The underlying distinction is not new. The idea of being a system of record, the single source of truth that other software and business processes rely on, has always mattered to buyers. Systems of record have typically carried higher retention rates and traded at higher multiples than point solutions.

What has changed is that buyers and investors are now drawing a hard line between being a system of record and being a point solution, and that line is starting to determine not only where they land on price, but whether or not the deal gets done at all.

Why Buyers Are Focused on Defensibility Right Now

The shift traces back to late January and early February, when the arrival of capable agentic AI tools left buyers and much of the investment community, across both public and private markets, openly concerned about their existing portfolios and about the economics of software development going forward.

Investors respond to uncertainty of that kind defensively. Evaluation moved away from growth and market share capture and toward whether a product has a durable, defensive moat.

Software buyers are asking whether any AI-native upstarts might emerge within the next 12 to 18 months, or whether frontier models could absorb the functionality outright before the end of a four to five year hold period. Point solutions and horizontal products are attracting that scrutiny the most.

Some of that concern has moderated in recent months, though the focus on defensibility has largely held.

A related distinction is drawing attention alongside it: the move from holding the customer's record to acting on it. Businesses are increasingly positioning as a system of action, but acting on the record generally requires holding the record first.

What a System of Record Is, and How Those Businesses Are Being Evaluated

A system of record is the single source of truth for a specific business function. It is the canonical record that other software pulls from and that multiple business processes depend on. The horizontal examples are familiar: Salesforce for customer and sales data, Workday for HR and employee records, QuickBooks or NetSuite for financials. Within vertical software, the same role exists across a long list of narrower use cases.

A vertical-specific example could be an electronic health record platform for patient care. It houses patient and billing data in a highly regulated environment, and the business has been operating for a number of years.

Investor interest in these types of businesses has been substantial, and only part of that is explained by strong gross and logo retention. The larger factor is the product's role and the market it serves. Care providers in that setting are unlikely to build a replacement internally or route the workflow through a general-purpose model, because the work requires a human in the loop.

The more useful test is what the customer loses if the product goes dark

The practical diagnostic is to ask what happens if the software is switched off. In the example above, the customer could not bill, could not collect reimbursements, and would face immediate regulatory exposure. That outcome would be catastrophic, and customers in that position have little appetite for experimentation.

The sharper version of the question is not whether a replacement could be built, but whether an imperfect replacement would be tolerable. Software that works acceptably rather than reliably is not a viable option inside a regulated billing workflow. Other tools in the same operation would be swapped out without much hesitation.

Who Is Most Defensible and Who Is Most Exposed

Most defensible: proprietary data, reinforced by regulation

At the top sit businesses holding proprietary data on behalf of their customers. Regulated industries add a reinforcing layer, because a human has to stay in the loop and fully automated agentic solutions are not a practical substitute.

The contrast is instructive. An AI sales development agent sending email on a company's behalf carries relatively low compliance risk. AI treating patients in a clinical environment is a different proposition entirely. Regulation does not manufacture defensibility on its own, but it strengthens it considerably where the data position already exists.

The middle: verticalized workflow software

The middle tier is verticalized software functioning as something close to an ERP for a specific category. Construction software is a representative case: billing clients, managing projects, generating proposals.

What makes this a strong category is depth of workflow combined with integration into other systems, including whichever platform holds the customer's financial data. The key variable is verticalization. The product needs enough category-specific nuance to create real differentiation against larger horizontal players and against the frontier models.

Most exposed: thin AI wrappers and horizontal point solutions

At the bottom are thin wrappers, BI dashboards, analytics layers, and point solutions, particularly those serving horizontal use cases. Email automation and mail merge functionality are examples of capabilities the frontier models have begun absorbing directly. There is meaningful nuance between the tiers, but the direction of travel has been consistent.

What Buyers Are Asking to Determine How Defensible Your Business Is

Any significant market shift drives sellers toward the new definition of value, and buyers to establish what the business actually is. Current diligence reflects that tension.

What do your retention numbers show?

Gross, logo, and net retention are the current reigning metrics. Retention has become a proxy for whether or not a software has a defensible AI moat, and accordingly, the bar has moved. A claim of deep entrenchment is difficult to sustain alongside gross revenue retention in the mid to high 70s or below, and most buyers would treat that combination skeptically. Pushback on gross retention in the mid-80s has also become common in current processes. What we’ve been increasingly seeing is buyers putting a high priority on gross retention in the 90s.

Could an AI-native competitor rebuild your solution in 18 to 24 months?

The next question is replication speed. How soon might it take for new technology to catch up to your software? 12, 18, 24 months? Some buyers extend the frame considerably further, asking who wins a five-year race between an incumbent software business and an AI-native competitor, and whether the incumbent can innovate quickly enough to stay ahead of it.

Where does your product sit in the workflow?

Engagement frequency still matters, with an important caveat. As vendors embed agentic features, users can spend less time inside the platform than they did before, which makes raw usage time a less reliable signal than it once was.

The more revealing question is workflow position. Does the product carry a task most of the way toward completion, or does it handle only the final step. Buyers are also asking whether the vendor has a credible path to owning more of that workflow over time.

Have your customers already tried replacing it?

One line of questioning has receded. In February and March, buyers frequently asked whether customers had attempted to replace the product with a general-purpose model and what happened when they did. That concern remains in the background for most investors, but with noticeably less urgency than a few months ago.

What does this business look like in five to ten years?

Founders tend to assess the business in the present tense, and statements like "no impact from AI, and growth is still strong" are frequently accurate. The disconnect is that uncertainty compounds across a holding period.

A strategic buyer is, in theory, underwriting the asset indefinitely, or at least across the next five, 10, or 15 years. A private equity firm planning a recapitalization with a three to five year hold is underwriting what the story looks like at exit, not what it looks like today.

Most private software companies are performing well right now and are not reporting significant AI-driven deterioration. The current distance between buyer and seller valuation expectations is therefore less about present results than about how risk accumulates over the horizon each party is pricing.

What to Focus On Without Being a System of Record

Most businesses are unlikely to hold the system of record for their customers. That role is typically occupied by one to four major products in the market, and the number of vendors that fill it has not meaningfully changed.

Value measured in hours removed

The more productive focus is where the business creates the most value for its customers, and whether that value can be extended through agentic AI. Anything that reduces the hours customers spend on individual tasks carries weight regardless of who holds the record, and many of these capabilities integrate cleanly into existing products.

Payments as a retention lever

A more nuanced option, seen often in the SMB category, is payments integration. Adding payment processing or billing functionality makes a product materially harder to displace, because the customer comes to rely on it to collect revenue.

Refactoring is still on the table

Having built a software business over the past 10 years does not preclude becoming AI-native. Vista Point Advisors' working perspective is that a meaningful number of existing software vendors may refactor their products over the next six to 18 months to make AI core to the solution rather than adjacent to it.

AI has become table stakes. A competitor starting today builds it into the center of the platform, to the point that disabling those capabilities would leave the product close to unusable. That does not mean older software businesses are facing an extinction event, the outcome the term SaaSpocalypse suggests. It means catching up to where the market already is.

The Bifurcation Appears to Be Widening

Our observation is that the gap between the most defensible and the most exposed software businesses is widening rather than narrowing.

In that view, founders who understand where their business sits and can demonstrate it credibly, with retention data and workflow evidence, may be better positioned in a competitive process. Founders who cannot may face a discount almost regardless of how fast the business is growing.

For founders unsure where their business lands, that assessment is worth having early, well before a process begins. Vista Point Advisors is available to help founders assess where their solution sits and understand their options.

This material and the opinions contained herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.