Where Are the Angel Investors in Managed Services?

There continue to be many startup managed service provider companies from all over the world, even in 2018. I take this as a very good sign of continued growth in our profession.

What is interesting is the surprising lack of angel or early stage investors focused on the managed services profession. At first, I was concerned this void of investors in our market might be a symptom of a deeper problem. But, upon further consideration, I believe there is a perfectly reasonable explanation for why investors are not focusing heavily on startup stage MSP businesses.

Startup MSP Costs in 2000

I have seen more than my fair share of MSP startups over the years. MSP owners are part of a unique breed of entrepreneur willing to take risks, invest their time and money, and create a technology service company designed to help other business entities. Many years ago this type of venture had significant risk, both in time, money, and other resources. I saw MSPs start in the late 1990s and early 2000s with investments of a hundreds of thousands of dollars to a few million.

The time required to create a MSP practice in 2000 was around 1-2 years. Part of this was simple acquisition of capital. Once you had the money you would buy tools (monitoring, ticketing, etc.). Then, once the tools were purchased, you had to hire someone (at a very high salary) to come in and tie the tools together so they worked in an efficient and cohesive fashion.

Startup MSP Costs in 2018

Today, starting a MSP business has never been easier, or cheaper. In 2018, the cost of setting up a full functioning managed services operation, with a decent suite of services is probably less than $3,000. When it comes to time, a MSP could be fully up and running in a matter of weeks, if not days.

Darwinian Managed Services

I believe the lack of angel or early stage investors (and I do tend to focus on non-family and friends investors, more of institutional or professional investors) is because the barriers to entry have been significantly reduced. More MSPs entering the market means more chances for success, as well as failure.

Investors tend not to like risk. I liken this investment strategy as why some animals have large litters of offspring. The chances of failure need to be mitigated by having at least 1 child succeed and survive.

If I had to probe further and be even more brutally honest, I would say the low barrier of entry into managed services means that MSP operators need to have something meaningful in order to distinguish themselves from the pack. Absent such a unique characteristic in their business model, early stage investors may want to take a "wait and see" approach. This is exactly what I think is happening.

Managed Services Investments in 2018

Don't get me wrong. There are a lot of investors circling around the managed services community these days; more than there ever have been. These investors are not, however, looking for early stage MSP startups; they want mature, proven, and growth oriented companies.

The investment community sometimes call these mezzanine financing opportunities, or "growth" companies where there is a fixed time period when the investor can extract their money, typically in a M&A transaction, which can include a strategic deal involving another investor.

The point is, these investors want MSPs who are going someplace. MSPs with a proven track record, hopefully showing some profitability, and a unique niche in their market. Something which sets that MSP apart from the rest of the herd. There are a lot of these types of investors out there and they are looking for good MSPs.

What This Means for MSP Startups

I hate to say it but there should be no real need for early stage investment in managed services, until the MSP can prove some operational sustainability. Between friends and family rounds, access to credit unions or traditional bank loans, there are sources of capital for MSP operators.

What is needed for these MSP startups is for them to demonstrate viability. Doing so will attract investors. Those first few steps as a MSP, however, must be taken alone. Think of it a ritual, or rite of passage. MSPs must demonstrate some basic proficiency and competency in order to be called a real MSP.

A small price to pay for almost no barrier to enter a profession.

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