Venture Capitalists Evaluate Managed Services Software Market
Two well-known names in the venture capital industry are trying to determine if they should pump money into the managed services software market. I had a phone call Thursday with the VCs, and they expressed a mix of enthusiam and concern about MSP software providers. It was a healthy reminder that we can't all drink the MSP Kool-Aid. Here's a recap of my conversation with the VCs, plus some good news about technology IPOs on Wall Street.
First, a bunch of positives. After extended silence amid the recession, technology IPOs (initial public offerings) are showing signs of life. Two prime examples: Open Table Inc. (an online restaurant reservation service) and Solarwinds (a maker of network management software) launched IPOs this week that enjoyed initial success.
Meanwhile, at least two VCs are taking a close look at the MSP software market. I spent more than an hour on the phone with them on May 21, 2009. Our rules for discussion: Talk openly about the market and see if we share similar views. But leave their names out of anything I write or communicate.
The VCs have a track record assisting IT security and channel-oriented companies launch successful IPOs. One of their early investments is now publicly held and competing successfully in several niche markets against larger IT security companies like Symantec .
In recent months, the VCs have been quietly researching all of the major players in the PSA (professional services automation) and RMM (remote management and monitoring) industries, seeking a potential investment opportunity. Plus, they have a feel for the on-premise vs. SaaS debate, and are watching several SaaS upstarts closely.
The VCs are enthusiastic about the fact that most MSP software is reliable, proven and solves real business problems. Plus, they've spoken directly with several MSPs to get their views on industry software and market opportunties ahead.
So far, so good. But the conversation shifted from enthusiasm to areas of concern.
Too Much Too Soon?
First up, the VCs have heard from MSPs about the shelfware problem. In one example, an MSP purchased 5,000 managed services licenses three years ago and is only using about 2,000 of those licenses. The MSP is upset about the incurred costs for the 3,000 licenses that remain idle/unused. The VCs, like me, believe this is not an isolated example.
Second, the VCs believe the North American channel has about 65,000 resellers and only about 10 percent of the market (6,500) has had substantial success in managed services. My estimates are slightly higher: I think there are between 80,000 and 120,000 North American resellers; 8,000 to 12,000 successful MSPs, and 800 to 1,200 extremely successful MSPs.
If you believe my numbers or the VC numbers, you're basically agreeing that the MSP market needs to grow in multiple ways:
- Continued growth in the VAR channel
- New growth in the mid-market, with VARs reselling MSP software into corporate IT departments.
- Additional mid-market growth, with MSPs remotely managing internal corporate IT departments.
- Enterprise growth, with more sophisticated systems going into major telecom service providers and cable companies.
Quite a few MSP software companies are pursuing two or three of those items. But the VCs don't know who is best positioned to succeed with the strategies.
Will the VCs make an MSP software investment? Near term, I suspect not. They like the market but they're still doing research to identify the industry's executive thought leaders. They also noted that some of the MSP software providers are self-funded and not seeking outside dollars.
It's good to see VCs taking a close look at the MSP market. And it's even better to see VCs doing their homework, speaking directly with MSPs and trying to determine just how much growth this market can generate. I look forward to our next call.
Nimsoft CEO Gary Read mentioned in his May 11 blog post that he was tracking the Solar Winds IPO, so I asked him for some thoughts over email.
My question: “Do you compete with Solarwinds? Any reaction to their IPO?”
Portions of Gary’s reply: “Very pleased on their IPO. Shows that there is a solid market for well run, profitable s/w companies… They are a very different company to Nimsoft and no, we do not compete. Their average deal size is $6k, all on the phone, no on-site support or sales (stack it high – sell it cheap – that let’s them achieve those incredible profit margins). Our average deal size is approx $100k and we offer very high quality support. Occasionally we will compete for the same business but that would normally mean that one of us is in the wrong place.
They are primarily a tool for the network engineer, we are primarily for the head of service delivery or the CIO – they are tactical (buy it with a credit card), we are more strategic. In many cases we co-exist.
We do not see them at all in the type of MSPs we are dealing with….where scalability, distributed architecture, customer portal visibility are very important.”
-end-
Thanks for the perspectives, Gary.
Just a thought….
I think this ties with my feeling that more and more our (HoundDog) software is being sold to Operations’ focussed people as opposed to ‘Technical’ focussed people.
I guess this might mean we could be reaching a tipping point in understanding how to run these types of businesses efficiently? …. Which, i guess means the rate of change of adoption of MSP model might speed up and drive Joe’s sentiments above.
Chris Martin
HoundDog Technology
Easy, Affordable Tools for IT Support / MSP’s
sorry, just to make it clear (i had a question from somebody), when i wrote ‘we’, i mean the industry in general, not HoundDog Technology.
….. we could be reaching a tipping point in understanding how to run these types of businesses efficiently
ie: the knowledge to run these businesses efficiently is reaching a tipping point (in my view)
Chris Martin
HoundDog Technology
Easy, Affordable Tools for IT Support / MSP’s
Chris: Thanks for clarifications on comments 2, 3. Your thoughts about a “tipping point” caught my attention. I think the industry reached a small tipping point about three years ago, when leading VARs started to really succeed as MSPs. But it was a wave isolated to the IT channel.
A bigger tipping point could be coming, where this software becomes standard operating procedure for business processes across the channel and midmarket organizations. But I’m not sure how many software companies will participate in this bigger tipping point/wave. Ironically, I think it will look like this…
1. First wave to VARs: small but successful, involving numerous software providers
2. Second wave to VARs and midmarket: much larger, but potentially involving fewer software providers amid industry consolidation
As a company backed by tier 1 VC August Capital we think about the MSP market the same way that Joe and his contacs do. We are not conviced that the MSP market by itself (and either do more than 20 VCs we’ve talked to here in Silicon Valley) is large enough for a VC investment. Whether you think there are 50k potential MSPs or 120k potential MSPs, the math just doesn’t work considering the drop off rate etc. The market isn’t large enough. The way to make this work in scale for a VC is to hit the MSP market as a stepping stone to the direct market where SolarWinds plays. You can build a cute business going direct to the MSP market, but you can’t build a SolarWinds.
Steve Rodman
Business Development
PacketTrap Networks
http://www.PacketTrap.com
Joe
One of our guys mentioned this post to me this morning. This is a great discussion. We are one of the only venture backed (August Capital) software vendor that focuses on the MSP markets. This market, in and of itself, is not a VC market. It’s not big enough, at least for the tier 1 VCs in Silicon Valley that want “game changing” returns. Together with the direct mid market, it’s a VC backable market. I’ve personally spent time over the last several years with at least 20-25 VCs in Silicon Valley talking about the MSP market as well as the direct market. Also, our management team is from SonicWALL, so we know a little bit about the type of MSPs that service the SMB market. There are great MSPs out there, but we and most of the VCs in Silicon Valley don’t believe there are enough of them (and who can sell licensees) to create a huge market. It may be enough to build a nice business ($50 MM a year in revs), but that’s not the type of business that VCs want to invest in. They want to invest in companies where they can see visibility into a $100 MM + run rate businesses.
Steve Goodman
CEO, PacketTrap Networks
Steve: Always good to have executive insights on MSPmentor. I see your Series A funding ($5M) was October 2007. Did you ever do a Series B? Or are you fine with the Series A? Keep us posted. I’m always curious about exit strategies, funding strategies, etc. And so are our readers.
Best
-jp
We have not done a Series B to date, but not because it hasn’t been offered. It always comes down to how much money we need, what valuation is right for us and our investors, and what is the proper path to execute. As for exit specifically, we are focused on building a wonderful long term business, whether the exit comes sooner or latter doesn’t really matter. Creating value creates large exits for our investors (either acquisition or IPO) and if we can continue to build relationships with MSPs and End User IT departments at our current clip, I think we’ll be in good shape.
The MSP market is clearly a focus market for us, however, it’s our experience the larger network management market (where SolarWinds is) is substantially and orders of magnitude larger. We do love the MSP market, however, because it’s a win-win for our MSPs and us.
Steve Goodman, CEO
PacketTrap Networks
http://www.PacketTrap.com
Joe –
We expect to raise expansion capital, but certainly don’t need it to be a viable profitable business in the MSP space. If we want to compete with SolarWinds, however, we’ll need it. As it relates to exit, we are focused only on building a wonderful, large, profitable business that scales. If we do that, the exit for investors takes care of itself.
Best regards,
Steve Goodman, CEO
PacketTrap Networks
Steve: I like your thought process. Too many people focus on the exit strategy first. Too few on building the asset first. Build the asset and great exit options — if desired — materialize.
Please note that a couple of your comments got caught in our spam filter because they contained linked, but I spotted them and approved for post. Sorry for the delay.
-jp
Venture Capitalists are doing right by evaluating Manged Services Software providers. Since the current market trend says do not invest money until your are fully secure.
Best of luck for your next conversation.
FromASSET
Asset: Are you a real person or comment spam?