Dave Sobel is host of the podcast The Business of Tech and co-host of the podcast Killing IT. In addition, he wrote Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business.
In this video, Sobel revisits a prediction he made in 2020 about Datto claiming the MSP stock ticker after the company filed its initial public offering (IPO). However, more than a year since that filing, Kaseya acquired Datto and will take the company private. Datto's acquisition has demonstrated that MSPs can't count on the value of managed services alone to propel their growth. MSPs must invest in other technology areas -- such as robotic process automation (RPA) and hyperscalers -- to achieve explosive growth beyond a steady 11%.
Transcript follows below. Minor edits have been made for brevity and clarity.
Dave Sobel: I've been thinking about predictions, and I've been thinking about one that I got wrong.
In my piece in October 2020, I called out Datto for claiming the MSP stock ticker. My prediction was that Datto would take the marketing value of MSP and redirect it to them as a company.
Here's what I said:
'Every google search for MSP points to Datto. Every inquiry about managed services results in Datto. Any investor inquiry, every market analysis, every customer search, every consideration of what an MSP is now has all roads leading to Datto, the publicly traded company with the stock ticker name.'
I think my reasoning here is entirely logical. The move was very much intended to capture mindshare. It's just that the capture didn't happen. There's not a capture of the MSP market from individual MSPs to Datto. No rush of interest from the market that's being captured.
Here's what I got wrong. The mindshare and the market isn't there. Wall Street Traders yawned. The stock comes out at $29, and except for an initial pop, has never traded that high again. It's up slightly right now on rumors that it's going to be taken private, but this is a company whose stock is declining.
Here's where my reasoning was wrong. I assumed their bet that the market would value MSP existed, that the market would value MSP, that the interest they claimed was there was there.
Frankly, that people I thought were smarter than me on the stock market valuation would be proven right: Those investors and finance leaders who have studied the market understood their value and would go into public markets and have a successful launch and drive up the value.
Well, down and to the right is not the direction the stock ticker is supposed to take. The phrase for what has happened is busted IPO, where the value of the company is below the initial value of the public offering over 18 months. Although to be fair, it's not quite been 18 months. We're just shy of that, and a busted IPO is generally considered 18 months after launch. Barring some miracle, it's a busted IPO.
I was wrong on the prediction that Datto would take the marketing value with the stock ticker MSP and take the value from their customers because the value they were proven through was not to be as valuable as a publicly traded company. The market wasn't there. The emperor has no clothes, and I'm a little surprised so far no one has said it. This is a failure. If you are a retail investor in this organization, you have not been rewarded.
The reason I've been thinking about the value of the MSP market is a comment Jay McBain made in an interview I did with him recently.
'Every MSP should be looking at this market. We track 250 categories of technology, and you should be staring at that list from biggest growth numbers to the smallest. We talked two years ago about RPA, robotic process automation, growing at 73%. UiPath went public and was worth $30 billion the next day. This 73% growth is more than the 11% growth that MSPs as an average are driving in their businesses. We're watching the hyperscalers last week report another quarter, the seventh in a row at 50% growth. They're growing 50% on top of 50% on top of 50%. MSPs are growing at 11%. So, I would be asking more questions out of Microsoft and AWS and Google about where that growth is and how every one of those dollars is kicking out $5 or $6 for us. But it's getting collected by other people, system integrators, ISVs, everybody's coming in. We got millions of people coming into our space, but they're collecting these big multipliers and they are making 70% margin for every dollar of that multiplier. These are the questions that I would be asking. For any industry or for any product that is growing faster than 11%, I'd be looking at how adjacent that is to me. Can I build out our business practice? Can I build out some skills? Can I do maybe a small acquisition? How would I go and grab onto that opportunity?'
Think about what Jay is saying. Among all the categories of technology, there are a lot that are growing really well. Jay mentions two -- robotic process automation and hyperscalers -- with 73% growth and 50% growth, respectively. And he cites MSPs growing at 11%.
Now, what lesson is to be learned here. If you want to grow your business more than 11%, you're going to need to be in a technology market beyond managed services. The core managed services infrastructure-focused technology space is not the one that will power explosive growth for your organization. You're going to need to be in something else.
Now, I happen to think that's an 'and,' not an 'or.' If you're an established organization -- meaning you need to be in managed services and something else: managed services and robotic process automation, managed services and business process improvement, managed services and industry specialization. If you're new -- and thinking about my 'if I was starting an MSP today' reasoning -- you may elect for this to be an 'or.' You get only into business process improvement. You launch a practice entirely around an industry and the technologies they need. For those established, don't lose sight of the fact that you may have new competitors in this space who don't value what you consider your core business. They do not value it. Let that sink in.
My key mistake in my prediction was assuming the investors at Datto were right about the value they placed on their organization -- that the market was going to be interested in a business with revenue growth around 18% from Q4 2020 to Q4 2021, 9% partner growth. No, it wasn't enough for Wall Street, and thus the lesson: This is not considered a valuable market.
Now, don't get me wrong, I'm bullish on the services market in general. Jay's comment refocuses our attention, asking questions of Microsoft, AWS and Google of where the growth really is that's kicking out five or six dollars to their partners for every dollar with them.
Look for the companies that are growing at a rate of 30%, 40%, 50%, 70%, 100%, and determine what services are attached to those products. There's obvious players like the cloud ones or less obvious ones, such as Allscripts, seeing great one-year growth in their valuation. What's there? Practice management and electronic medical records, or bottom-line technologies, who make electronic payment and invoice solutions for corporations, financial institutions and banks; CSG systems, who make support systems software and services for the telecommunications industry; Innovative Solutions and Support, who focus on flight guidance, autothrottle and cockpit display systems.
Now, what was I looking for? Companies who hit 52-week highs in their stock prices. What's the theme? They're all living in the work layer where the business is done and directly tied to revenue for their own customers.
The market yawned because doing infrastructure isn't enough. Learn from the mistake and figure out what value to bring to customers that is directly related to how they do business.
About the author
Dave Sobel is host of the podcast The Business of Tech, co-host of the podcast Killing IT and authored the book Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business. He owned and operated an IT solution provider and MSP for more than a decade and has worked for vendors such as Level Platforms, GFI, LOGICnow and SolarWinds, leading community, event, marketing and product strategies, as well as M&A activities. Sobel has received multiple industry recognitions, including CRN Channel Chief, CRN UK A-List, Channel Futures Circle of Excellence winner, Channel Pro's 20/20 Visionaries and MSPmentor 250.