Kaseya Buys Datto: Are MSPs Right (Or Wrong) About Private Equity?

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Some critics allege private equity is destroying the MSP software market. Proponents claim private equity built the MSP software market. So, which is it?

Before you choose sides, maybe it’s time for a reality check. Rewind to the early days of the MSP software sector. Two decades ago, the fledging world of MSP software couldn’t attract venture capital or private equity dollars.

The result? Passionate software company founders like ConnectWise CEO Arnie Bellini and David Bellini had to bootstrap their businesses. Hang out at the Tampa airport, and you’d see Arnie heading toward his next flight. Destination? Somewhere that involved personally installing PSA software on customers’ MSP systems. During a layover or regional event, perhaps a colorful conversation with Kaseya co-founder Gerald Blackie would ensue. The takeaway at the time: Within the MSP software sector, entrepreneurial passion filled a financial void until private equity arrived.

Warning – Sarcasm In Next Two Paragraphs: Dig a little deeper. Things were pretty awesome in the early days of MSP software. Oh, how MSPs long for the good old days. Instead of buying a cloud subscription for a few nodes, back in 2005 or so you could mortgage your home (twice) to buy 5,000 client/server end-nodes from Kaseya. Yes indeed: Client/server technology and associated financial models absolutely rocked.

Let’s re-run the 2005 software licensing math for you: Of your initial 5,000 RMM licenses, roughly 4,950 of those purchases were shelfware. You didn’t need them. And neither did your customers (because you had no customers). But you purchased in bulk to get a coveted discount. The good news? You found a customer who wanted 50 RMM nodes. Surely, the next 4,950 nodes would be easier to sell — or not — while you gradually paid that first and second mortgage on your house.

The Shift to MSP Software M&A

Around 2010, ConnectWise began using its own money to invest in startups. Names like LabTech come to mind. Suddenly, PSA and RMM converged. By 2013, Insight Partners acquired Kaseya, and SolarWinds acquired N-able. Gradually, private equity firms like Thoma Bravo, Vista Equity Partners and Summit Partners discovered the MSP market.

Funding from the PE firms drove mergers like Datto and Autotask, then ConnectWise and Continuum, and now Kaseya and Datto. I concede: The PE deals haven’t been perfect. MSPs have had to navigate product overlap; some R&D and contract hassles; and some support headaches.

Still, I’m surprised (in some cases) by all the complaining about the Kaseya-Datto deal. It ain’t perfect. Kaseya has got to improve its licensing terms and business flexibility. But MSPs have to realize: Without private equity, the MSP software industry would be stuck in the client-server era. MSP Software CEOs — the founders — would still need to fly to customer sites to do MSP installs. And there’s absolutely no way that MSPs would be in position to manage on-premises, hybrid and cloud services.

Warning – Final Sarcasm In This Paragraph: It would be great if private equity left the MSP software market. Mature, innovative companies like Microsoft deliver a better partner model. After all, Microsoft has absolutely wowed the MSP market lately with its licensing terms and price flexibility (up and to the right).

Kaseya Buys Datto: Some MSPs Complain, But…

Overall, I suspect hundreds of MSPs are complaining about Kaseya buying Datto. In some cases, those MSPs are raising the right questions. But in other cases, I think emotions have somehow blinded people to market realities: The most successful MSP owners have greatly benefitted from private equity helping MSP software providers to scale. And now, those MSP owners are benefitting from private equity directly — as thousands of MSPs engage in M&A each year. And in many cases, the MSP valuations are quite lucrative.

I’ll repeat what I’ve said before: Private equity isn’t all good. And it isn’t all bad. Each deal needs to be judged on its own merits and performance.

I admit, putting Kaseya and Datto together involves product overlap (fact) and corporate culture clash (my firm opinion). Still, I don’t expect thousands of MSPs to start running to alternative platforms. Remember: Kaseya was growing 20 percent annually before the Datto acquisition surfaced. Surely, CEO Fred Voccola must have been doing quite a lot right — even if he clashed on some fronts with some market players.

Proven MSP Formulas for Success: Unchanged

Looking ahead, I suspect the most profitable MSPs will continue executing proven business strategies:

  1. Standardize your stack, service catalog and pricing.
  2. Build a price and service delivery model that delivers 20% or so EBITDA profit margins.
  3. Automate everywhere possible.
  4. Swap out under-performing vendors — but do so because it solves a business problem rather than an emotional reaction.

Fast forward to 2023. Perhaps the Kaseya-Datto deal will be a mess. Or perhaps it will succeed in major ways. Either way, MSPs should park their emotions and just focus on the need at hand: Adopt automation, management and risk mitigation solutions that solve the business problems at hand.

Here Comes Venture Capital (And More…)

In some cases, the solutions will be backed by private equity. But increasingly, I suspect the conversation will shift to venture capital — as Pax8 proved this week with Softbank.

In some ways, it’s getting late in the MSP software market. But in other ways, it feels like the early innings of something bigger… … …

Either way, private equity is here to stay. Get used to it. Navigate it. Use your voice and your software budgets … and you may even influence it.

But don’t label it as all good or all bad.

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8 Comments

Comments

    Lloyd Wolf:

    Joe – Thanks for sharing your insights, sarcasm, and providing the stroll down memory lane. While my used/unused node ratio was not as lopsided as your (sarcastic) example, it wasn’t too far off. If I recall correctly, when I purchased my Kaseya licenses back in 2008, I think we were actively using about 1,000 nodes of our 5,000 node license. Although I made monthly payments, I do remember the full upfront Kaseya invoice being the single largest invoice I had ever received in the history of my business – before or since. And yes, I also purchased a brand new on-prem server that year to run my new K software!

    I have very fond memories of the early Kaseya Connect conferences at the Four Seasons in Vegas every spring. Mark Sutherland, Paul Wong and Gerald Blackie were kind enough, every year, to sit down and chat with me and my peer group friends – to talk about the product, what we liked, what we didn’t like, what we’d like to see in the future, etc. And many of our suggestions made it into future releases. They were very kind to make that time every year. I am out of the MSP industry now, but I don’t think the CEOs nowadays would consistently spend as much time with a small MSP as they spent with me.

    And I remember Arnie Bellini personally staffing the ConnectWise booth at the Kaseya Connect conferences (alongside Jeannine Edwards). He was quite convincing in our one-on-one conversations that I needed to drop my home-grown custom ticketing system and buy ConnectWise (Manage). Although Arnie didn’t personally install my ConnectWise software, he did so for many of the members of my HTG (IT Nation Evolve) Peer Group.

    I agree with you that private equity is here to stay – and that PE is not all good or all bad. Thanks for reminding me of the past – which itself was not all good or all bad.

    Joe Panettieri:

    Lloyd: Thanks for your friendship. I think many of us smile as we think about the history of this market. As a blogger, it has been incredible to document the rise of this industry. But just like you, I believe it’s important to put the memories in context. Amid all the industry M&A, some MSPs are longing for the “good old days” in this market. But the good old days had their share of problems, and so many limitations.

    Admittedly, the current market has its share of problems. But compared to 2005 or so, the barriers to entry have essentially been eliminated. That’s progress.
    -jp

    Josh Kotler:

    Joe, I agree completely with the thrust of your column, but I’ll go further. MSPs are much better off with private equity’s involvement in “our” space. Not only do we have much better solutions available as a result of their investment, MSP owners have asset liquidity that simply would not exist without PE. Listening to MSPs complain about Kaseya’s purchase of Datto makes me shake my head. Why do they care? Datto’s products and solutions will continue, but now they can be integrated and bundled into a more complete stack. Being able to buy the best products from a single vendor will streamline things considerably and may even reduce the cost for MSPs that get in front of this and negotiate comprehensive arrangements with their Kaseya rep. This strange nostalgia won’t help them deliver better results to their customers, it won’t help their teams execute, and it won’t help them grow revenue and profits.

    Joe Panettieri:

    Hey Josh: Thanks for adding your perspective. I think the nostalgia trip that some folks are on helps to explain why the best MSPs are pulling so far ahead of the overall pack. Please keep me posted on your business milestones, etc.
    -jp

    Dan Foote:

    Joe,
    Are equity partnerships good or bad for the industry? I’d say they can be both–to which you alluded. Some partnerships have worked quite well. Others–at least from my perspective–not so well.
    As for the Kaseya purchase of Datto? A few years back we had no Kaseya products in our portfolio. Now, with the Datto purchase, our Kaseya product list has grown considerably. And I will say that it has not been all bad–which is to Kaseya’s credit, given their penchant for increasing their portfolio.
    While it didn’t thrill me (concerns about overlap, consolidation, etc.), I will say that I’m hopeful that this doesn’t become disruptive to our business model and, on that note, their track record has said that it won’t. Mark me as cautiously optimistic.
    BTW, your sarcasm wasn’t misplaced. Snarky can be refreshing at times as it helps place perspective!

    Joe Panettieri:

    Dan: Thanks for your note, readership and context on your business. Please send me updates down the road as your business continues to navigate this particular deal and other M&A.

    As for me… Your note has me feeling inspired. Maybe someday I’ll co-launch a snarky, anonymous blog. Hmmm… it sorta makes me wonder: Where, oh where, has The VAR Guy gone?
    -jp

    Peter Radizeski:

    Good post, Joe. I may be jaded about PR money, but it because so many companies have been about bigger instead of better. Culture clashes, product overlap and poor execution have been common and frequent problems that have tripped up the “Synergies” that so many of these deals rely on to pay off. The Synergies are most often People who will lose their job. Then there will be People who leave because of culture problems. As Tom Peters has been saying for 30 years, poor EX means poor CX. It telecom Bigger has always meant an ugly mess. Looking at the 3-5 year window most PE firms have is hardly enough time to merge, integrate, innovate and execute. MSPs are unhappy because change is unwanted (as it often is) – and there probably was much need for change at Datto. But that’s bankers for you. Luckily there are competitors.

    Joe Panettieri:

    Hey Peter: Yes indeed, some PE windows can be too short. But in Kaseya’s defense, Insight Partners has backed the company since 2013 or so. Amid the current IPO market (weak/uncertain), some PE timelines may further extend — though we’re also seeing heavy PE-to-PE or PE-to-VC M&A deals (yesterday’s example: Thoma Bravo sells Barracuda to KKR). The deal flow is certainly keeping us busy at ChannelE2E. But we’ll always strive to cover it all responsibly.

    PS: Thanks for taking the time to weigh in with your comment above. I appreciate your time and perspective.
    -jp

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