Exactly one year ago, Tercera officially launched with a contrarian position: that people — not just products — matter.
If the past year has taught us anything, it’s that people and people-based services businesses are every bit as crucial as we originally thought. Maybe even more so.
Companies across every sector are navigating a war for talent, a lack of tech skills, and a growing demand for digital innovation. This, according to Gartner, is pushing companies to rely more on external services partners. This bodes well for Tercera, and the third-wave cloud consultancies in which we invest.
But before we focus too much on the future, an anniversary is a good time to look back. After all, we talk a lot about self–awareness and a learning mindset being must-have traits in founders, so it seems only fair to demand it of ourselves.
We have four investments under our belt so it’s a little early to start reporting on outcomes. Instead we’ll grade ourselves using the same 5 elements of scale methodology we use to evaluate and advise our own portfolio companies.
It helps to be in the right place at the right time, and IT services is the place to be. It’s big, it’s growing, it’s lucrative and it’s finally getting the attention it deserves. We wish we could’ve put our capital to work across a wider variety of cloud ecosystems, but we’re off to a good start. Here’s where we think we knocked it out of the park:
Our mission: Empowering the people and businesses who make technology work has never been more relevant than now. Read our 2022 predictions to see why.
The market: In 2023, spending on IT services is predicted to reach $1.4 trillion. That’s a pretty big TAM. But we know from experience that focus leads to greater impact, so we focus squarely on the cloud and digital services segment of this market. Take a minute to Google the market value of cloud services. Needless to say, we like our odds here.
Our value to founders: We sit in a sweet spot between early-stage venture capital and later-stage private equity, specializing in companies with some scale (~$10M-$30M in revenue) who need help taking it to the next level. This, combined with our passion for services vs. products, our preference for minority investments vs. buy-outs, and our first-hand experience building successful cloud services firms, hits a nerve with founders. They want someone who’s been in their shoes.
Team and talent
Early stage companies tend to underestimate the impact of team design and structure on trajectory. When starting Tercera, I asked some of the best in the business their advice for starting an investment firm. Their number one piece of advice: get the team right. I think we did. Here’s why:
Team mix: We built a team of fun, diverse, opinionated, hard working humans with complimentary superpowers who care deeply about our mission and the market we serve. It’s a small team, but the right team, with a mix of operational and financial experience that founders can rely on.
Our advisor community: Having advisors isn’t a unique idea, but our approach is. We’ve curated a community of services experts who can help on everything from vertical strategy to value-based pricing. Our 24 advisors are a vital extension of our core team, helping with diligence, acting as mentors, supporting with execution, sitting on boards, and guiding us every step of the way. #grateful
Teamwork and coaching: Investing is not known as a team sport, but our strategy and processes are built around the team not the individual. Perhaps that’s due to our background building companies. However, that also means we have to resist the urge to reach for the steering wheel when we see things going off track. Even the strongest founders will go off course occasionally, and that’s OK. We’re getting better at coaching, not playing the game.
Investments & partnerships
This section of our 5 elements methodology typically focuses on go-to-market, partnerships and customer experience. For this exercise, we’ll focus on investments and partnerships. We believe we did a good job investing in companies with real substance, solid teams, and significant growth potential.
We give ourselves an A for the investments we made, but there was more we could’ve done – for the firms we invested in and for those that got away. Here’s what we got right:
Our first-year portfolio: When we launched Tercera, we were clear about looking for four things in an investment: companies that were 1) people-first; 2) founder-led; 3) growth-focused and 4) cloud-driven. Each of our portfolio companies – BeyondID, Terazo, Hakkoda and Zennify – exceeded expectations in these areas.
The mix: Given our heritage, we could’ve focused all our attention on the Salesforce ecosystem. But our portfolio represents a mix of third-wave cloud ecosystems, from powerhouses like Salesforce to next gen players like Okta, Twilio and Snowflake. This mix will multiply the impact we can have.
Our ISV relationships: In IT services, the software partner alignment and their level of support drastically impacts growth. We’re happy to report 50% of our current deals include a venture co-investment from the firm’s primary ISV partner and 100% have strong, executive-level channel support.
Solutions and IP
Just as a services company must differentiate on its unique point-of-view, methodology, packaged IP and reusable assets and portfolio, so must an investment partner. Which is why we’ve put a great deal of effort into our playbooks and thought leadership. This year we’d like to do more industry research and expand our playbooks.
Cloud services thought leadership: After decades in cloud professional services, it’s not surprising we’d have strongly held views on how the cloud services space is evolving and what makes a winner. But we’ve been pleasantly surprised at how aligned those views are with others, from the founders to whom we speak, to industry pundits, to cloud pioneers like Salesforce – which introduced its own Cloud 3.0 vision this year.
Playbooks and best practices: Rather than cranking out press releases about deals, our goal is to share content that’s actually useful for founders. In the last year, with the help of our advisor community, we’ve published 30+ blogs, detailed playbooks on everything from Customer Advisory Boards to Delivery Operations, and a Plateaus of Growth workshop to guide earlier stage companies. Visit our resource center to see what’s out there.
Operations & processes
Like most start ups, we could benefit from a little more focus on process. While we did a good job of putting in place foundational systems and processes, we need to smooth out the edges. Meetings could’ve been tighter, diligence could have been shorter, and we could have gotten to no faster in some cases – for our own benefit and for the founders.
We also learned that we work far better as a collective team. When we chose to divide and conquer, we weren’t nearly as good, and we didn’t offer nearly as much value to leadership teams in the process. Now we’re pretty clear…when you get Tercera, you get all of us.
What’s next for 2022?
Our top priority for 2022 is to ensure the portfolio companies that took a bet on us this first year are wildly successful. Our job is to counsel, coach and connect, whether to support their international expansion plans, to solve their talent gaps, to improve their go-to-market, or anywhere else they may need help.
From there, it’s putting more capital to work in more ecosystems. Watch for us to make another 3-4 investments this year, in categories and ISV ecosystems we believe are leading the cloud’s third wave and throwing off material services revenue.
Categories and ISVs we’re paying very close attention to:
Cybersecurity: Remote work, digital commerce and a security skills gap are driving an increase in security breaches, and a reliance on cybersecurity platforms and managed security service providers (MSSPs). By 2025, 50% of organizations will allow third parties to monitor and remediate threats remotely, up from 15% today (Gartner). While security services tend not to be as ISV focused as some categories, some of the third wave ISVs we’re paying close attention to include: Crowdstrike, Lacework, Zscaler and Wiz.
IT Service Management (ITSM) and DevOps: With software eating the world, companies are making big investments to speed and de-risk software delivery. The cloud ITSM and DevOps markets are both growing close to 20% YoY, with the global DevOps market alone estimated to be $21B by 2027 (ReportLinker). It’s a fragmented market, but the ISVs we’re watching carefully include: Atlassian, Cloudbees, HashiCorp and ServiceNow.
Commerce and martech: Commerce and data-driven digital marketing platforms are the building blocks for a great digital experience – a priority for nearly every company. In 2022, Martech will make up 25% of the marketing budget (Forrester) and headless commerce will continue to gain steam. Enterprise-focused ISVs we love include: Adobe, BigCommerce, CommerceTools and Salesforce’s Commerce & Marketing Cloud.
If you know any great companies in these ecosystems, please send them our way!
Last but not least is improving on those 5 elements of scale – adding a few new team members, expanding our advisor community, building on playbooks, and refining processes. We have no desire to be the biggest firm with the biggest fund. Just the best.
This first year has been a complete blast. I’m convinced that if we keep having fun and making a difference for every company we meet, everything else will fall into place.