I just spotted this on The Wall Street Journal’s Business Technology blog:
In a study released Wednesday by the University of San Francisco, Mark Cannice, founder of USF’s Entrepreneurship Program, found that venture capitalists’ confidence is at its lowest level since the university began surveying venture investors in 2004.
But that doesn’t necessarily mean bad news for the managed services industry. Here’s why.
Fact is, many managed service software providers are privately held and/or self funded. As a result, they don’t need to press the panic button. Plus, they don’t have irate investors or concerned venture capitalists dialing their investor relations phone lines.
A few examples:
- Kaseya CEO Gerald Blackie in June 2008 told me his company is entirely self-funded and not seeking to enter public markets.
- N-able CEO Gavin Garbutt told me in August 2008 that his company also is self-funded and has declined investor money.
- Nimsoft recently raised $12 million (from companies like Goldman Sachs), proving that risk-averse venture capitalists still believe in selected managed services software companies.
- Vembu CEO Sekar Vembu says his company is self-funded and could sustain operations without any revenues for at least two years. Vembu is driving revenue growth by positioning its software for managed storage providers.
Of course, many MSP software companies have raised venture capital and will need to pursue IPOs (initial public offerings) at some point. This could lead to a market shakeout or accelerated M&A activity in 2010 or so, I believe. And I’m starting to hear that the economic crisis is slowing down some MSP customer decisions.
But overall, I believe the MSP market is holding up better than the broader economy.
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Tags: Kaseya CEO Gerald Blackie | Managed Service Provider Industry | Managed Services Funding | MSPs | N-able CEO Gavin Garbutt | Nimsoft CEO Gary Read | Vembu CEO Sekar Vembu
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Bravo. You are the first web site to identify why the MSP industry will hold up better than other emerging IT markets.
I do think SMBs will slow down on their managed services spending.
But the MSP software providers have been very conservative in the way they find and raise money. It sounds like they learned from the excesses of the dot-com boom.
Frankie: Are you saying I can now relax? Kidding aside, thanks for the note. I don’t want to suggest that ALL MSP software companies have been conservative with their money, but many of them certainly were.
Anybody that can get funding in this economic climate must have one heck of a business
LabTech Software gets calls every week from Venture Capital firms. We are self funded as well and have never needed investment money. I do not feel that the venture firms that contacted us understand the growth potential in this industry, so their offers do not even come close to the true valuation of the business. They are just looking to get a good deal for a share of the business. The funny thing is that only firms desperate for cash would be willing to take funds from Venture capital, so they miss out on profitable firms that need funding to grow…
While I think that it is great that companies are able to sustain themselves financially, I don’t think that being a company backed by private equity is bad either. The tone of this article seems to be negative toward private equity.
I believe that whether private equity is good for your business or not depends a lot on your goals for the business. Companies that set out on a high-growth track (usually positioning themselves to be involved in an M&A later) know that in order to compress time and accelerate growth they are going to need to rely on a large capital infusion in the beginning, as well as add-on rounds of funding later. Of course from the perspective of the owner, this may not be the best option if retaining more than 2/3 of your company is vital to you.
To Matt’s point about valuations; you are right, private equity groups are always looking for a good deal. Nothing wrong with that, we are all looking for good deals. But part of a good deal means that the company is (or can be soon) profitable. Depending on the circumstances, a “profitable firm that needs funding to grow” is often time more capable of taking on debt financing at a better rate than equity financing. Again, it just depends on the circumstances.
Private equity firms have helped to bring some great technologies and companies to us. There is a valuable role for these firms to play in the future for the right companies.
Mark: You’ve offered the other side of the story. You’re right. The original blog post read as if private equity is a “bad” thing. Certainly, that’s not an accurate message and you’ve accurately called me out on it.
-jp