Venture Capital in MSP SaaS: Insights on Investment, Challenges, and Future Trends w/Joel Abramson

[00:00:01] Dave Zubel here at IT Nation Connect for another bonus episode. I'm sitting down with Joel Abramson, Managing Partner at TopDown Ventures. Joel, thanks for joining me today.

[00:00:11] It's great to be here.

[00:00:12] I was excited to talk to you because you bring some venture capital specifically on SaaS applications focused on the managed services space. Tell me a little bit about what the fund is and what the investment thesis is.

[00:00:25] Absolutely. So we've been investing in MSP software companies for six years now.

[00:00:29] We came from the IT Glue company that Chris Day built and our other partner Mark Scott built Enable back in the day.

[00:00:37] We also operated a large MSP that we sold to Telus in 2022. So we've got a good amount of experience just being in the MSP space for a long, long time.

[00:00:47] We started investing in early-stage MSP software companies in 2018 with Quoter and Backup Radar and then subsequently ControlMap and BenjyPace.

[00:00:56] And so the thesis was we just wanted to help these companies out at a really early stage, help them know what features to build, where to spend their time, how to serve the audience and help them scale in the MSP market.

[00:01:07] And so we've been doing that for a long time and now we've put together a fund where we actually have pooled the capital to make 10 investments out of the fund.

[00:01:15] So encoded in that is a lot of what you talk about early-stage investments. Tell me a little bit about what defines the kinds of investments you're looking for.

[00:01:23] So if you want to talk venture capital language, you have different stages. So pre-seed, typically just an idea and a PowerPoint.

[00:01:31] Seed is you've started to build something, then you have your Series A, which is when you've developed a bunch of revenue and you can raise capital on that revenue.

[00:01:38] So we play in this really the seed stage. I say pre because you always get dragged in both directions.

[00:01:46] So but but we're seed and early Series A. So we're typically looking for companies that are around their first million of annual recurring revenue.

[00:01:55] And so they've they've got a product that's built. They're out there selling it. They've seen the market feedback.

[00:02:01] And now they're looking to figure out how do we go from one to ten. And typically our skills and playbook help a lot with that. And capital helps, too.

[00:02:10] Gotcha. Now, it's interesting to talk about the skills and playbook. You've come, you've worked at Fully Managed.

[00:02:14] You've got experience in the space. Tell me a little bit about the lessons that you're applying from that, those being an MSP experience to investing.

[00:02:23] Tell me a little bit about how that's coloring your thinking.

[00:02:25] Yeah, well, there's the experience of running an MSP and going through massive transformation of tools time and time again.

[00:02:31] I mean, at the end of it, we were running ServiceNow as a platform.

[00:02:34] So we saw the whole gamut from early stage PSA, RMM, every tool that you can imagine through to ServiceNow.

[00:02:40] So that's really helped us understand the ecosystem around the tools that these MSPs use.

[00:02:48] And then operating companies like IT Glue and ScalePad and the ones that I previously mentioned has helped us kind of shape how MSPs buy and what's important for them.

[00:02:58] And so we want to just impart all of those learnings and help early stage companies as they're getting going with the lessons that we've learned.

[00:03:07] So what I'd like to get a little additional insight into is one of the things that's becoming fascinating about the space is that we've got a number of MSPs that have started building their own tools.

[00:03:16] Right now, every MSP listening probably thinks of I have an idea for a tool.

[00:03:21] Right.

[00:03:22] But there's a big difference between the idea and it actually being viable for the market and being able to take it to market.

[00:03:28] And that involves not only the difference between there's a difference between running a services business and a product business, but there's a whole lot more to it.

[00:03:35] Knowing that you can't capture everything.

[00:03:38] Yeah.

[00:03:39] Give me a little bit of the kind of key things that you look for in an idea or like that pre-seed seed that those listeners are saying like, oh, I have an idea.

[00:03:50] What are the things that you look for that validate a good idea?

[00:03:54] Yeah.

[00:03:54] Well, let's start with running an MSP is hard.

[00:03:57] Like I know that firsthand.

[00:03:59] I know that most of the listeners are going to be first like MSP operators.

[00:04:03] It's a tough business.

[00:04:05] Running a SaaS company is equally as hard.

[00:04:08] So it's not like this shortcut to an amazing, easy job or company.

[00:04:13] It's really hard to know what to build, what's around the corner, how to build, how to structure the team, how to take it to market, how to message it right.

[00:04:23] And so there's a lot of learnings that can be taken from I operate an MSP so I know what I need.

[00:04:30] But to actually go out and build those things is tremendously challenging.

[00:04:34] And so it's a lot of different challenges.

[00:04:36] You're dealing with hardcore infrastructure coding, like actually writing features, the user experience.

[00:04:43] A lot of things that MSPs just take for granted in that you're providing a service which is a whole bunch of products wrapped up.

[00:04:50] Not thinking about what the user's clicking next and what the success rate of that's going to be and then how to measure that.

[00:04:57] So it's like anything.

[00:04:59] It's like I don't know how to drive a forklift.

[00:05:02] Building software is very different than running an IT service company.

[00:05:07] But it can be learned.

[00:05:08] There's some great products that are coming out of the MSP ecosystem.

[00:05:12] There's a lot of great products that are coming from outside the ecosystem and seeing how great of a market this is to sell to and sell through.

[00:05:20] And so one of the things that we always kind of joke about is our crystal ball is to just look at what ServiceNow is building, look at what Workday is building.

[00:05:27] These non-core companies that MSPs are looking at, but they've got some incredible features that are just a little further down the maturity chain than what MSPs have adopted now.

[00:05:39] So you can build some of those things and bring it to MSP and it can be pretty lucrative.

[00:05:44] So development skills sounds like a key pit.

[00:05:46] It's actually figuring that out and doing it.

[00:05:48] But give me a little bit of a sense of like because you've probably done enough now to start to have successes, to have some lessons learned on ones that may not be quite as the success you'd hoped for.

[00:05:57] Give me a little bit of a sense of what you're looking for in terms of, say, a minimum viable product or the core of an idea that tells you, yes, they're on to something.

[00:06:08] Well, this is a great environment to ask that question because you walk 100 feet and you can see a ton of people that are probably, some are coming from the MSP space saying, I can build this product and now I can sell it to MSPs.

[00:06:18] Some are not coming from that space.

[00:06:20] They're saying there's a great market and I know what's out there in enterprise software and I can build it for MSP.

[00:06:26] But the first thing that I look for when I walk that floor is, is this a feature?

[00:06:30] Is this a feature masquerading as a product?

[00:06:33] Or is, like, God forbid, they're saying, I'm a platform when they're really just a feature.

[00:06:37] Sure.

[00:06:38] So really try to delineate between what is the big opportunity here and it doesn't have to be a unicorn.

[00:06:43] We don't invest in what we think is going to be unicorns.

[00:06:46] Maybe some of them will become unicorns, but we take companies from their first million of ARR until their tenth or their twentieth and then we bring in the big guns to help them scale the next stage.

[00:06:56] But they need to have either the vision or the foundation to become something large.

[00:07:02] If you're a feature, then you're just going to be tucked into a platform or you're going to kind of hit this critical mass of people that will invest in that feature and then start to fizzle out.

[00:07:11] So one of the things is learning top-down employees at a venture studio model.

[00:07:15] Yes.

[00:07:15] Oh, you asked about it.

[00:07:17] That's great.

[00:07:26] The last thing we would ever want to be perceived as is just putting money in and then walking away and saying good luck.

[00:07:32] We're really proud of the fund because the fund is our LPs or the people that commit funds to invest with us are over 50% of them are from the MSP community.

[00:07:41] And what that means is we can have these committees that help define the tech strategy for each of our investments, but then help with the portfolio companies.

[00:07:51] We have a ton of advisors, Dan Wensley being our first named operating advisor, but we have many, many LP advisors that are lining up to work with the companies we invest in.

[00:08:01] And so we also found companies and I don't know if we're going to do it again, but we do have a couple of companies that we founded that currently sit under the top-down umbrella.

[00:08:12] One of them is really large, ScalePad.

[00:08:14] One of them is an incredible technology that we've put nearly $10 million into that's just, it's early and it's breaking through and that's ProduceAid.

[00:08:22] So we think that both of those as venture studio companies are doing incredibly great things for the MSP community.

[00:08:29] But we take that same approach to founding companies as we do investing in companies and that's wrapping them with all the support that we can around go-to-market product to help them scale.

[00:08:40] So talk to me a little bit about the challenges and what you're seeing with building that collaborative network, right?

[00:08:46] Because you've got to do a bunch of different things at the same time.

[00:08:49] You're looking for opportunities, you're making sure that they're well-run, investing in the individual companies.

[00:08:54] And then you've on top of that layered this collaboration piece.

[00:08:57] Talk to me about what you have to make sure to get right in the collaboration across the organizations.

[00:09:01] It's a great question because we could have all the best people around this top-down thing in the world.

[00:09:08] And if you don't have the right processes to help them engage the companies or engage in the right part of deal selection, then it's all that brainpower going to waste.

[00:09:16] So first of all, you can't sleep as a fund operator.

[00:09:18] So you give that up.

[00:09:19] And then you try and figure out the right process to engage all these great people with all these decisions that need to be made and strategy that needs to be built.

[00:09:26] So, but the net out is we have this incredible group of people, both as investors and as advisors, that are just kind of lined up here to support the first round of investments that we're making and beyond.

[00:09:39] So give me a little bit of a sense of, you know, I think this is one of those areas where people talk about it in vague sense, but not a lot of people understand.

[00:09:46] They talk about the concept of like the pitch deck and what I have to get ready in order to talk about this.

[00:09:51] Give me a little bit more.

[00:09:52] What is it?

[00:09:53] If somebody is saying like, hey, I have something I want to work on.

[00:09:56] What do they need to be thinking about putting together in order to describe it accurately?

[00:10:00] Yeah.

[00:10:00] I mean, I don't have super high expectations of pitch decks at this stage simply because they probably haven't done it before.

[00:10:08] And so they're not going to be the best pitch deck builder in the world.

[00:10:11] They're probably, hopefully they're a really good company builder or product builder, but they don't need to build the best pitch deck.

[00:10:16] To me, it's all about just getting something down on paper that I can understand what your company does, what your vision is, what you've done to date, who the people are, what they've done.

[00:10:26] But then really it's going to be about when I sit down with that founder or those founders and I hear their story and hear their vision for this.

[00:10:34] If that is something that I believe that I would buy as an MSP, that I would partner with as an MSP software company.

[00:10:41] And that's when I really start to get excited about kind of working with those founders as an investor.

[00:10:47] Gotcha.

[00:10:47] Are there certain key points, particularly if we think about something like, say, seed or thinking about a little further in the process, not someone who's purely idea.

[00:10:56] Are there like magic points of numbers of partners or revenue lines or something like that that you think about as this is something that I can say is working?

[00:11:06] Yeah.

[00:11:06] Well, they should have some positive customer feedback on their product.

[00:11:10] They should say, these guys love us for that.

[00:11:13] That really helps to kind of get there quickly on, okay, well, you've proven that some people love it.

[00:11:19] Now, well, a lot of people love it because software is really just about kind of scaling out your impact across many, many different customers because you've got this incredible digital distribution engine to do that.

[00:11:32] So having raving fans early is good, but we also like there's a lot of forgiveness.

[00:11:36] Maybe it's not the most beautiful product in the world.

[00:11:38] Maybe it's missing this and that, but you've got people to kind of sign up and say, yeah, this is something that I can believe in that's going to transform my business.

[00:11:47] And that's a really good sign.

[00:11:49] And revenue, I mean, again, we anchor things in a million because a million is a really big common number.

[00:11:56] But if it's two, if it's half a million, all of that's still within that what we would consider seed range or kind of early Series A.

[00:12:05] We had this one company that we started tracking as we started forming the fund.

[00:12:10] But then by the time we were finished our first close of the fund, they had already grown from two to five million.

[00:12:15] And we were like, ah, now you guys are too big for us.

[00:12:18] But it reassures you that you had a great pick back then and you're super happy for them now, but they've just outgrown the kind of.

[00:12:26] So now we've understand the who.

[00:12:28] I think it's important to understand the how.

[00:12:31] So tell me a little bit about how you make decisions.

[00:12:35] Like what's the framework you make decisions under?

[00:12:37] So for our investments, we have an investment committee and we bring forth a model and a bunch of data.

[00:12:44] And we do basically a full diligence on the company.

[00:12:46] And we present our thesis to each other.

[00:12:49] And we say, you know, what does success look like for this company?

[00:12:53] Who would be a natural acquirer down the line or a natural next partner?

[00:12:57] We run red team, blue team exercises.

[00:13:00] What does success look like?

[00:13:01] Take the side of the deal that we do this deal.

[00:13:04] Take the side of the deal where we don't do this deal.

[00:13:06] We do what's called a postmortem where it's imagine this deal fails.

[00:13:11] Why did it fail?

[00:13:13] And so we do a lot of that work just to make sure that we're confident about the right bets.

[00:13:18] But ultimately, like investing this early stage, it's about the people.

[00:13:22] And it's about just the vision of the product.

[00:13:24] And is it the right time for the market to absorb some product like that?

[00:13:28] So one of the things listeners tell me they love knowing is getting from people that study the markets what they're looking for.

[00:13:33] So my last question that is, as you think towards 2025, what's some of the thing you're keeping an eye on that's of most interest?

[00:13:40] Well, good question.

[00:13:45] So I still feel like there's a lot of wood to chop in cybersecurity and cloud.

[00:13:50] And that's just because it's taking a long time to move all MSP's customers to these table stakes platforms that we know are standards.

[00:14:00] So that's a really good thing, knowing kind of that there's a lot to cover, a lot of ground to cover there still.

[00:14:06] So then we know that.

[00:14:08] So you can still invest in cybersecurity and create good returns.

[00:14:12] But then we start to think about what's next.

[00:14:14] And so one of the Venture Studio projects, Produce Aid, is about productivity.

[00:14:18] We really like thinking about the 80 percent, about the people and not just the technology.

[00:14:23] Obviously, we like anything with an AI in it because we're thinking, how is that going to transform what managed service providers do and the value that they bring to their customers?

[00:14:31] So I don't think that there's anything crazy surprising in the themes that we're looking at.

[00:14:37] But we are really trying to figure out not what's impactful tomorrow, but what's impactful and what does the industry look like five years from now, eight years from now?

[00:14:46] What does a request coming in from an end user look like?

[00:14:48] How is that end user working?

[00:14:50] And then solve problems for that.

[00:14:52] Well, I look forward to hearing how that works out.

[00:14:54] Thanks for joining me today.

[00:14:55] Yeah.

[00:14:55] Thank you very much for having me on.

[00:14:57] Thank you.

[00:15:24] Thank you.

[00:15:29] Thank you.

[00:16:12] Thank you.

[00:16:19] Thank you.

[00:16:29] And I will talk to you again on our next episode of The Business of Tech.