Venture Capitalists Evaluate Managed Services Software Market

managed-services-venture-capital

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:

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.