By Dave Sobel, The Business Of Tech Podcast
Every time a vendor serving the MSP community is sold, there is a cry of collective panic. These providers act like the world is ending, or that there is some level of uncertainty.
There isn’t. First off, the software product being consumed is the same as it was before. What’s important next is to understand what will happen next, and many believe this is difficult to predict.
It’s quite straightforward to predict the behavior of most companies in the software space simply by understanding their ownership and financial investors. Tracking a company through its financing life cycle provides the guidance we’re looking for.
A founder or series of founders create a company to solve a problem. Their focus is simple: get customers to give them money in exchange for the product they have created. Their core value is entirely related to the product they have created. Their moves are simple – get more. This is more customers and more revenue, but their goal in this stage is to ensure they reach a point of profitability. All of their actions will be driven by this goal – cross the valley of death into profitability.
Those that reach the break-even point and move into profitability exist in that place of complete control, yet often are limited by the amount of profit they generate. For some, existing here is enough… but for many, they will look to bring in outside investment to accelerate their growth beyond what they can do with their own bootstrapping.
This is where the formula begins to change. Any decisions made once outside financing is brought in becomes more complicated by those that want to see a return on their investment.
Angel investors will generally be the most generous, working with a founder to determine what the expectations are. As the model moves to venture capital or private equity investments, the driver becomes a ticking clock – the investor wants a return on their money within a period of time, generally between 3 and 5 years.
For many, a VC or PE investment is a driver toward the sale to a larger fish… or the ultimate largest fish, the public market where a company can be publically traded.
The financial incentives are in place to these companies to hit their goals based entirely on growing the business based on the formula of return on cash. Each day, these companies determine how to invest their cash to create that return. Their options are quite simple – invest in what they have, invest in building something new, or invest in buying something and adding in the revenue.
Readers may believe this is elementary and obvious. It is but is so often overlooked by the consumers of these products. In this case, that would be solutions providers and MSPs whose collective bellow was heard so loudly.
Any vendor can easily be understood – how do they maximize their revenue, minimize cost, and drive to their next value goal. Founder led company? They will be focused on building the value of their core to drive and achieve profitability or drive to their eventual sale.
Invested in by a VC? Start the countdown clock and set it for 3-5 years, and know the goal is to achieve some multiple. PE looks much the same, although these investments will usually be about combining companies, either from their portfolio or by acquisition. Public company? That’s about achieving an increase in stock price.
MSP owners have this analysis skillset already. Think about the motivations of people – compensation related to performance indicators is an area of active study and education for providers. Salespeople are measured and compensated based on performance, SLAs are built based on measuring performance, and basic financial management is all part of what a business owner does.
Thus, examining the behaviors of their vendors and predicting the future is that simple – follow the money. Ask and understand the ownership and investment model of those vendors you work with and plot them on the life cycle.
The further left a company is, the more they are driven by a founder and by simple profit and loss. The further they move to the right, the more they are driven by a collection of investors and that related return on investment model.
It may seem daunting… but it’s all just math. Follow the money.
About The Author
Dave is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business. He owned and operated an IT Solution Provider and MSP for over a decade, both acquiring other organizations and eventually being acquired. This firm was a winner of multiple awards, including Kaseya’s Cutting Edge and ConnectWise’s Best New Idea, as well as being a finalist for Microsoft’s Worldwide Partner of the Year in the Small Business Specialist category. After his MSP experience, he has worked for multiple vendors at such companies as Level Platforms, GFI, LogicNow, and Solarwinds, leading community, event, marketing, and product strategies, as well as several M&A activities.
As a technologist, Dave is the host of the podcast “The Business of Tech” and co-host of the podcast “Killing IT” and authored the book Virtualization: Defined. He was named a CRN Channel Chief multiple times, to the CRN U.K. A-List, as a Channel Futures Circle of Excellence winner, to Channel Pro’s 20/20 Visionaries, and has been an MSPmentor 250 member for multiple years Dave has been recognized as one of the top virtualization experts globally as a Microsoft MVP for Virtualization. Dave has served on the executive council for Managed Services and Emerging Technologies, the Vendor Advisory Council, as founding Chair for the Mobility Community for CompTIA.
Dave holds a bachelor's degree in Computer Science from the College of William and Mary. He is a dynamic voice within the IT community, a former member and facilitator for Heartland Technology Groups and passionate about collaborating with clients and peers on utilizing technology to advance organizations. He lives just outside Washington DC with his wife and two cats. His interests include travel and food, cheering the Washington Nationals and Capitals, smoking barbeque, enjoying craft beers, and collecting and playing retro and modern video games, among others.