Thoma Bravo's buyout of ConnectWise, disclosed Monday, is just one piece in a larger MSP software market puzzle. As that market puzzle comes together, it could set the stage for dozens of MSP-focused software startups to eventually find venture capital funding. The thesis comes from SolarWinds CEO Kevin Thompson. And it goes something like this: As more private equity moves into the MSP software market, it further legitimizes and strengthens the industry -- and could eventually inspire venture capital firms to fund startups in the market.
Thompson, in a phone conversation with ChannelE2E, summarized the MSP software market's stepping stones so far -- and where we could be headed next. The sound bites went something like this:
- The early 2000s: MSP software companies are self-funded -- largely built and run by entrepreneurial founders.
- Around 2010-2012: Second-tier private equity firms wake up to the market. They discover MSP software providers are growing and profitable -- but not yet the big-bang opportunities that venture capitalists pursue.
- 2013: SolarWinds, publicly held at the time, extends from corporate IT management software and jumps into the MSP software market by acquiring N-able. Thompson and his team see MSPs as the preferred delivery model for SMB business management.
- 2015: SolarWinds goes private in a PE buyout. Lots of other PE activity accelerates.
- 2018: SolarWinds returns to public markets in IPO.
"In the last one to 1.5 years, a bunch of people woke up to what we believed in 2013 when we acquired N-able," Thompson tells ChannelE2E.
The only thing that has somewhat surprised Thompson along the way: Buyout activity moved beyond tier-two private equity firms and extended to Thoma Bravo, Vista Equity (owner of Datto) -- and other heavyweight PE bidders that are now taking a look at the market.
What pulled in those potential bidders? SolarWinds takes some credit. As the company shifted between public and private and now public markets again, private equity firms could closely monitor the company's finances. Along the way, PE firms could see clues about the company's MSP software arm (aptly named SolarWinds MSP). The result: PE firms have been eating the MSP software market, as ChannelE2E has repeatedly reported. "It's a good, profitable market and now the world has woken up to it," Thompson says.
Private Equity and MSP Software - Potential Risks and Rewards
Still, all the Private Equity activity begs two questions from ChannelE2E:
- Should MSPs be concerned about private equity controlling so many of their software suppliers?
- Private equity firms will eventually need to sell their MSP software investments. When that day comes, will the next round of truly qualified buyers emerge?
Instead of worrying about a glass-half-empty scenario, Thompson sees the glass half full -- with plenty of opportunity ahead.
Maturing MSP software companies, he notes, have largely shifted from founder-run, sell-funded businesses toward more traditional technology businesses. "That should be a good trend for small, MSP-focused software startups that want to get true venture capital funding," he says. "I don't really care specifically about Thoma Bravo acquiring ConnectWise. But I do care about what it means for the next 40 startups coming into the MSP channel."
Among the developments he's hoping for: Something that potentially disrupts traditional PSA software. "I'd like to see something way better than PSA. So far nobody is funding it. And I'm not sure what it would look like. Does it look like ITSM but designed for MSPs? Does it redefine workflow management? I don't know and I don't want to build it. Instead, I want someone else to build it -- and I'll buy it."
MSP Software: Example Venture Funding and Angel Investors
Some funding is already starting to reach startup MSP software companies. Thompson notes that NinjaRMM has gotten its business up and running. ChannelE2E, meanwhile, has been tracking funding over at Auvik Networks; growth-oriented chatter at Liongard and Passportal; and funding for MSP-friendly security companies like Arctic Wolf Networks and Perch Security.
In addition to venture capital dollars, a growing number of angel investors are in the market -- including former IT Glue CEO Chris Day at Top Down Ventures. It's a safe bet ConnectWise Founder Arnie Bellini, who stepped down as CEO as part of the company sale, will soon jump into the angel investor market as well.
Still, larger MSP software companies need a longer-term bridge to tomorrow -- something that extends beyond the current PE firm craze. Generally speaking, SolarWinds is the only "strategic" publicly held software company making MSP software acquisitions. (Though in some ways, Carbonite now fits that title as well following the recent Webroot buyout. And Barracuda, though privately equity held, has public market experience and market clout.)
Where Do We Go From Here?
It may take a few years -- and another round of PE-to-PE sales -- before the overall MSP software market is robust enough to attract more strategic buyers and/or IPO interest, Thompson predicts. In the meantime, SolarWinds is the rare strategic, publicly held buyer scouring the MSP software market for more acquisitions.
