On Organic Growth & Bootstrapping – What you should understand when serving SMBs through the MSP channel

Recently there has been news about companies laying off people and closing down offices. We take note, especially when it is happening to companies that focus on the MSP segment. It is not a surprise to us that this is happening to companies with a strategy based on an assumption that raising massive amounts of venture capital will automatically translate into an unrealistic growth trajectory. The problem with that approach is that, this particular ‘Fast growth through VC funding’ business model doesn’t scale well in the MSP segment. We have seen that in the past. Now more companies falling in this category is a sign that this model is ‘NOT’ working especially when it comes to the MSP segment. SMB segment, which is more than 75% of the world economy, is known for its combination of frugal spending and prudent risk taking. When targeting such a highly perceptive segment through the channel model, vendors have to align their business model accordingly. Vendors have to prepare themselves for a slow and steady growth and should have a very long term mindset. Trying to grow as quickly as possible and then exiting through an M&A or an IPO is not a very suitable business model. SMBs have very limited budget and they are also very conservative when it comes to trying new technologies. Hence it is very difficult for vendors to meet the expectations of the VCs.

A case in point is Intronis which had earlier raised close to $20.9 M in funding (crunch base profile report). While the MSP industry initially wondered about their plans with that kind of funding, the picture that is emerging now is not very reassuring given the recent news on quick management changes at all levels and occurrences of laid off employees ranting on industry blogs on how the company has lost direction.

I would like to quote the following comment posted on MSPmentor article by an ex-employee of our competitor dated Feb 27th 2013

Darryls says, “The VC’s are not at all pleased with the way the company is being run (or not run). The newest services that channel partners and customers are screaming for are way, way behind. By the time the VC’s try to pawn off this emaciated skeleton of a company, the channel will have bailed, along with their customers. There may be some IP left to offer, but what is left of the revenue stream will rapidly disappear. Customers will easily see past this thinly-veiled masquerade of “Absolutely. Customers will see no change in our service levels.” Right. The ship is sinking – better send those still there some life rafts and scuba gear. Better yet – send some to their MSP customers that will be left holding the bag with their customers.”

The above quote says a lot on what happens to companies under VC pressure. Worse is the situation of employees who were laid off. Many a time employees get carried away by the hype surrounding raising of venture capital. But what matters is whether we have a solid business model backed by a mature and flexible product platform. Suffice it to say we are more than convinced that Vembu’s long term and sustainable organic growth model, based on the reality of the markets, is the right fit for companies focusing on the MSP segment.

At Vembu, we are able to take a steady and sustainable organic growth approach because we are not under any pressure from VCs. Our employee numbers have grown by more than 25% in the past 6 months even with our frugal model. We are not trying to be opportunistic about what’s happening with our competitors. But we want the MSP community to know that this ‘VC funded fast track’ model does not work in the SMB segment they serve. So we would like the MSP community to be aware of the pitfalls if they simply choose to partner a vendor because of the fact that the vendor is backed by venture capitalists.

What our CEO, Sekar Vembu, once wrote in the context of an impending “Great Recession” is still relevant especially when there is no sign of the revival of the economic growth we all got used to during the dot com bubble of late 90s and during the subsequent housing bubble. To quote our CEO:

Common sense dictated that there is something wrong with what was going on around us. If we had followed the hype and planned for a 10 or 50 times growth VCs expect I am sure we would have come a cropper. It is all quite easy to follow the crowd, revel in the hype and convince yourself you are some genius who has directly descended from heaven. Fortunately, we had the guts and the confidence to question the popular wisdom and stay the course based on our instinct. As a business, what did we do right during those times of euphoria? We just followed our instinct and decided not to participate. That is when startups and VCs were talking about raising money with a fictitious 5-year business plans based on the steroid induced economic growth, we told VCs who contacted us that we would not do business plans based on the then market euphoria. When common sense dictated that those were abnormal times we were uncomfortable in cooking up a plan without conviction.

At Vembu, we have created a long term and sustainable business model which is the ideal fit for both the MSPs and their SMB customers. We have been doing this diligently for more than 8 years. We are continuously fine tuning our business model to ensure that we stay on top of all the challenges and become a one stop shop for MSPs and VARs to enable them to profitably offer value added IT services to their SMB customers. We started off with StoreGrid cloud based backup & disaster recovery. And based on feedback from our MSP partners we launched SyncBlaze, our cloud file sharing & synchronization service last year. Further, we will be developing more products and services in the subsequent years and at the same time improving our current products and services.

We believe we have the right mix to win big in this economy and industry segment – Stable Organic Growth Business Model + Best products and services for MSPs + Right Pricing for SMBs + Fanatical Support. It does not matter to us whether we will ever see the hyper economic growth the world got used to, as our frugal business model is sure to work for all scenarios. I am sure MSPs, who themselves are small businesses, would completely relate to the Vembu model.

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  • BrianSJ

    Interesting perspective and thoughtful commentary. I feel there’s probably a middle ground here somewhere. I agree with the opinion that the VC community can force unnatural behavior, not necessarily what’s best for the company, when it puts a pile of cash into the company. I do believe in the Organic model until you can clearly see when your product and business model are becoming sticky and the rate of adoption is moving faster than you can sustain with your current h/c and cash position. I call that state “escape velocity”. That’s the point where going out for capital may make sense to support the accelerated growth. It’s definitely a high class problem! VCs are one route to funding at this stage, not the only route. Also, not all VCs are created equal so you have to understand the firm and the partnership to see if there’s a good fit for the company. References are good to speak with, particularly founders of the companies, they’ve funded.

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