Cloud ISVs

How to be a services leader in the cloud’s third wave

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Something big is happening in the cloud computing space. Salesforce calls it Cloud 3.0. We call it the cloud’s third wave. Far too many call it simply digital transformation. Whatever you call it, there is a perfect storm happening right now, with multiple forces coming together to drive more mindshare and more money into cloud technology and the vendors that play in that space.

The first force is no surprise to anyone — the pandemic. COVID dramatically accelerated digital initiatives inside most companies. As Satya Nadalla, the CEO of Microsoft put in, “we saw two years’ worth of digital transformation in two months.” Those initiatives aren’t slowing. In fact, they’re accelerating.

The second force is the maturation of cloud computing. Businesses of every size have bought into the cloud model, and are finding new and creative ways to embed it into their business and customer-facing processes. A maturing space also brings a bigger, more diverse group of vendors, which means more choice for customers, and unfortunately, more complexity.

A third force is the surplus of capital in the market today. Consider just some of these stats:

  • Cloud companies now have a $2 trillion market cap (Bessemer)
  • In 2020 alone, $186 billion was invested into private cloud companies (Bessemer)
  • In Q4 2020 alone, five cloud vendors generated $37 billion in revenue (Cloud Wars)
  • 45 cloud consultancies were acquired in the first 5 months of 2021 with an aggregate value of more than $3 billion (Tercera/451 Research)

Most entrepreneurs and investors will tell you at least 50% of success is being in the right place at the right time, and for those in cloud services, you couldn’t pick a better time. But being in the right place at the right time is only half of the equation. The other half comes down to execution, and building and scaling a business (especially a services business) in the cloud’s third wave looks far different than it did 20 years ago.

As an operator in the services space for more than 25 years, a founder of one of the earliest cloud consultancies, and now an investor and advisor to the next generation of cloud consultancies, I’ve seen the evolution of cloud services first hand. So has Jeff Kaplan, the founder of THINKstrategies, a strategic consulting firm focused on the business implications of transitioning from product-centric to services-centric business models.

Jeff has been a thought leader in both services and cloud computing for three decades. He’s a respected industry analyst, and is now a strategy and go-to-market advisor for Tercera’s portfolio companies. He’s seen A LOT over the years, so when it came down to documenting what’s going on at the intersection of cloud and services right now, I couldn’t think of a better partner.

Our newest ebook, What It Takes to Be a Services Leader in the Cloud’s Third Wave, covers the evolution of cloud computing, the new players in the space, as well as the business models, labor models and skills that consultancies need if they want to succeed in the third wave.

Jeff and I will be holding a webinar and live Q&A about the third wave and some of the concepts in this ebook on Thursday, June 3 at 10am ET. To join that webinar (or access the recording), register here.

We hope you’ll join us!

The case for verticalizing your cloud services portfolio

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We are living in a world that is becoming increasingly specialized, from how we consume information, to the brands we buy, to the resiliency in supply chains. This has become increasingly true post-pandemic as companies look to adapt and transform their business models. That focus on specialization is happening in cloud computing as well.

Industry-aligned cloud solutions and companies are taking the market by storm, so it shouldn’t be a surprise that the same is happening in cloud-focused professional services, where combining business process and industry expertise is critical to deliver innovations faster. If you are a cloud IT services firm who doesn’t have an industry-driven approach in your portfolio, you may be ignoring a critical path to delivering sustainable value to your customers.

 

If you are a cloud IT services firm who doesn’t have an industry-driven approach in your portfolio, you may be ignoring a critical path to delivering sustainable value to your customers.

 

In its 2021 State of the Cloud report, Bessemer Venture Partners predicts that “the vertical SaaS wave will become a tsunami” in the coming year. Veeva, a cloud-based CRM company focused on the life sciences industry, is perhaps the most cited example. With nearly $1.5 billion in annual revenue, Veeva continues to grow 33% year over year. Brightwheel, Procore, Majesco are just a few other vertically oriented SaaS companies. The larger cloud platforms (e.g. Salesforce, Microsoft, Adobe, AWS) have also been placing a larger emphasis on verticals over the past decade.

During the first two waves of cloud computing, software providers focused on building out their underlying platforms, leaving it to services partners and clients to customize and integrate them into industry-specific business processes. That worked well, but it leaves customers to finish the job — to manage and evolve those platforms to serve a business that is always changing.

In the cloud’s third wave, customers are looking for more help guiding them in the context of their business. That need is accentuated in regulated industries such as healthcare, financial services and government agencies that have specialized security requirements and risks. For example, a digital healthcare solution may require an operational transformation, analytics and workflow redesign, but it also needs a deep understanding of what patient/clinician engagement looks like across the value chain and how that aligns with HIPAA compliance.

Breaking the horizontal mindset

Specializing in one or two verticals is a smart move for almost any cloud-driven services firm. Unfortunately, many have been slow to adopt an industry-focused approach for a couple of underlying reasons. First is the assumption that you need to be at scale to verticalize. Many companies think they’re too small or simply don’t have the resources to do it well. The second revolves around fear. Fear that it requires significant effort without immediate ROI, or that they might pick the wrong industry, or that it will limit them in some way.

Let’s start with the scale issue. When consultancies get started, many begin with a more general approach to build their customer base and reputation with channel partners. The natural inclination for many founders, especially those who are technologists rather than industry experts, is to build up the firm around a specific platform or technical capability, rather than specializing in an industry. However with a generic approach, differentiation starts to diminish over time as more partners enter a space and there is a risk for services to be commoditized.

 

However with a generic approach, differentiation starts to diminish over time as more partners enter a space and there is a risk for services to be commoditized.

 

An interesting case study for verticalizing a portfolio is Onica, a cloud specialist in Amazon Web Services (AWS) consulting and managed services, which was a spin-off from a larger IT services firm. It delivered cloud migrations, big data and cloud-native development with a razor-sharp focus on AWS, but in parallel, also strengthened its competency in industrial and manufacturing oriented solutions with IoT and AWS. Onica was <$50 million at one point when it started focusing on industry solutions and grew 800% from 2016 to 2018. In late 2019, it was acquired by Rackspace for $323 million.

To alleviate initial fears, a vertical approach doesn’t have to be big-bang. A lesson from the above case study is the approach can be incremental and complementary to what a firm is already doing. For example, it may make sense to start with an industry-specific accelerator that speeds delivery or sets you apart in your go-to-market. Cloud vendors have made it a lot easier to create vertical IP and reusable assets by architecting their platforms to be more open and accessible. Or instead of building organically, consider a tuck-in M&A transaction to get the industry vertical expertise needed.

 

The bottom line is you no longer need the scale and resources of an Accenture or Deloitte to have a vertical play. It’s less about size, and more about having focus, picking the right vertical and partner(s) for that industry, and having confidence in your strategy.

 

When it comes to developing the right strategy, here are five areas where I recommend focusing your efforts: 1) Target your industry bets; 2) Align with your partners; 3) Co-create with customers; 4) Innovate at the intersections; 5) Tie your strategy to execution.

Target your Industry bets

Not all industries are created equal — like people they come in different sizes, and have different requirements, and not all will be the right match for you. The traditional approach is to look at the Total Addressable Market (TAM). David Kidder, CEO of Bionic and author of the book “New to Big” instead suggests looking at the Total Addressable Problem (TAP).  According to David, “the TAP model is based on discovering brand new customer problems or uncovering new untapped markets and that can lead to exponential growth.”

 

The TAP model, disruptive trends, unique expertise, and industry micro-segmentation should all play a role in finalizing your industry bets. The goal shouldn’t just be to have an offering in the space, it’s to be positioned within the top three service providers for that particular vertical or micro-vertical.

 

Start by looking at your unique expertise, and the verticals or micro-verticals that are a fit for that expertise. A great example of this is Snowflake, the cloud data platform that allows businesses to unlock insight from data. Snowflake’s financial services solution provides a strict approach for security and regulatory compliance that can be tailored to the needs of customers in banking, insurance, or mortgages. It is the services partner’s role to implement, integrate and amplify the solution.

If you’re a cloud services firm aligned to Snowflake helping clients monetize the large amounts of data being generated in financial services industries, don’t stop at banking or insurance. Instead specialize further in micro-verticals such as consumer finance, commercial banking, life insurance or property & casualty insurance. Or think through how you can help clients create new fintech offerings that take advantage of the disruptions happening in eCommerce and cryptocurrency.

The TAP model, disruptive trends, unique expertise, and industry micro-segmentation should all play a role in finalizing your industry bets. The goal shouldn’t just be to have an offering in the space, it’s to be positioned within the top three service providers for that particular vertical or micro-vertical.

Align with your partners

The partner ecosystems for large cloud platforms have grown substantially in the last two decades. Salesforce alone has more than 1,600 services partners around the world. As cloud vendors look to expand market share, they are looking to consultancies to create industry-specific solutions that add stickiness to their platforms. To differentiate in an increasingly crowded space, more and more early-stage services firms are now leaning in on a vertical orientation.

If you are a service provider focused on a particular vendor’s platform, it’s important to understand that vendor’s vertical strategy. In most cases, they probably have one. If not, perhaps that’s an opportunity to add value or fill a gap in their go-to-market strategy. What industry roadmap has the cloud platform provider laid out for growth? How does that align with your strengths, customer base or future bets?

When ServiceNow first announced their industry bets, they started with financial services and telecom. As ServiceNow grew from IT service management to customer/employee workflows to AIOps, it has continued to build on its domain capabilities. The company now specializes in more than 10 industries, from healthcare to public sector to manufacturing to retail and logistics. In a statement last year, ServiceNow CEO Bill McDermott said, “by creating industry-specific solutions, delivered through a partner-led model, we can better address the unique challenges that companies in key vertical markets face.”

Co-create with customers

Picking one or two anchor customers can make a big difference in how quickly you can gain traction with a vertical strategy, and the positive reference that will help you get the next set of case studies and references. You might start with an existing customer or identify a customer to pursue in parallel with your vendor partner.

 

By working hand in hand with customers you will avoid the classic trap of a solution looking for a problem. The bottom line, make the customer part of the solution.

 

Whether you’re working alongside your cloud vendor partner or directly with the client, attach yourself to a strategic and well funded program. Many companies have roles solely focused on future innovations, titles such as Chief Digital Officer or Chief Growth Officer. Find a customer willing to wade into uncharted territories with you and co-create some intellectual property for an industry problem that hasn’t been solved or is just emerging.

Innovate at intersections

There will always be historic and economic events, such as the financial recession or recent pandemic, that drive new levels of innovation, but smaller disruptions shift markets all the time. It’s important to be on the lookout for signals and trends while betting on the future. For example, renowned futurist Amy Webb recently released the 2021 Emerging Tech Trends report and talks about health care as the next battleground for big-tech and how drone delivery will disrupt transportation & logistics industries.

Also, industry lines are blurring. This can be seen in retail solutions that create a connected consumer experience across various points in the shopper journey, or a media solution that engage audiences across channels, or a solution that provides banking customers with a consistent streamlined experience across different interactions. There is a lot to leverage across industries and in some cases it might make sense to build your differentiation/IP around a business process that cuts across 2-3 different industries. A classic success story is Adobe’s experience platform that can be tailored to provide personalized marketing solutions across various industries.

In the Salesforce economy, several services partners have focused on a cross-section of business processes like Configure-Price-Quote (CPQ) or eCommerce. In this example, partners could take it one step further and create a differentiated solution for B2B industries (e.g. manufacturing or hi-tech) where CPQ and commerce are integrated to drive business outcomes across the “Quote to Cash” value chain.

 

Whether it’s between industries, between business processes, or between technologies, innovation is amplified at the intersections.

 

We’re also seeing firms create use cases that incorporate and integrate big data, automation, or the disruptive application of 5G and AI across industries to differentiate. Whether it’s between industries, between business processes, or between technologies, innovation is amplified at the intersections.

Tie strategy to execution

Tying strategy to execution seems rather intuitive, but too many companies don’t go deep enough when laying out how they are going to be successful in this new space. An effective vertical strategy requires more than some IP or people with relevant skills. It requires an understanding of the unique sales and procurement processes within the industry, and an effective customer engagement model with top notch resources. How should your Go-to-Market plans (GTM) change, and what people and processes do you need to have in place, to pivot to a vertical focus?

Once you know that, find the right talent to build into that customer engagement model. In many cases, you might need to hire outside experts. People who have lived and worked in that industry, who understand the unique nuances, terminology, challenges, and opportunities in the space. In some cases, you might already have the right people and just need to cross train them through shadow or train the trainer programs.

As you progress and gain more customers in a given industry, or expand into new ones, you can grow your IP and build your team accordingly. Be prepared that results will not come overnight, but once you tie your holistic strategy to the execution plan, the potential upside can be exponential with the right bets and partnerships.

Conclusion

Taking a verticalized approach to a services portfolio isn’t a new concept. Large software companies have been pushing their services partners in this direction for more than a decade, and as cloud vendors mature they are following suit.

To compete in this market, third wave cloud consultancies will need to specialize in some way. While some may specialize in specific platform capabilities or at business process intersections, many can do it through an industry approach. In some cases, a hybrid strategy might be best. Whatever your strategy is today, you should be experimenting. You must be willing to work a year or likely more with the right investments before you see real ROI. You’re learning through the process, creating assets, repeatable practices, refining capabilities, etc.

 

To compete in this market, third wave cloud consultancies will need to specialize in some way. While some may specialize in specific platform capabilities or at business process intersections, many can do it through an industry approach.

 

A final thought: it’s good to start your journey with the end in mind, but remember, in the end, it is the journey that will matter. To be successful in the third wave of cloud, you will have to adapt quickly along the way, integrate new cloud technologies and business models to drive digital innovations for your clients. A salute to the non-profit organizations who worked tirelessly through the pandemic to protect and save lives.

Tercera’s best practices, playbooks and growth capital may be able to guide your success in this competitive environment, where differentiation now is more critical than ever. If you think Tercera can help, send the team a message here.

The rising volume and valuation of services signals a market shift

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Last week the valuation of professional services firms reached a high water mark when Hitachi announced plans to acquire digital engineering services company, GlobalLogic, for $9.6 billion, or 8x revenue! While this is the largest IT services acquisition year to date, it’s certainly not going to be the last.

GlobalLogic’s 20,000 professionals in 14 countries will be integrated into Hitachi’s Lumada IoT business, and is part of the company’s ongoing evolution from hardware to digital services.

While the 8x revenue multiple Hitachi paid for GlobalLogic is a high water mark for an IT Services M&A transaction, the multiple is in line with valuations for publicly traded high growth digital engineering services firms like EPAM, Globant and Endava. These firms are currently trading for 7.7x, 10.1x and 13.2x revenue, respectively.

These valuations, along with the volume of acquisitions, signal a market shift which entrepreneurs, acquirers and investors should take note.

For decades, investors have viewed professional services firms as less attractive and riskier than software companies. Whereas product company valuations might range from 20-100x forward-looking revenue, services firms saw historic valuations more in line with 0.5x to 1.5x revenue. While multiples have been creeping up over the last decade for services firms — especially cloud consultancies that specialize in disruptive technology — we’re starting to see 2x to 4x valuations become the rule rather than the exception. Services firms are finally getting the cred they deserve!

Why is this shift happening?

The most simple answer is that companies of every size are reshaping their business for a digital world. I won’t bore you with the stats because you’ve already heard them. But I will say digital transformation is now a board-level conversation, not just a talking point among IT leaders, and companies need help navigating this next wave of innovation.

No one understands this more than the global systems integrators (GSIs), which are seeing their traditional services businesses decline, while competing more with these digital engineering firms. They’re looking for growth and capabilities in new areas, and most of that growth is happening in the cloud’s third wave.

Cloud computing is now mainstream. For 20 years it’s been upending the way companies operate and build, and enterprises are now using public, private and hybrid clouds as a backbone for their digital transformation. In the cloud’s third wave companies are building their own customer-centric, data-intensive, digital experiences from the ground up, not just relying on a small handful of vendors. Those experiences cross organizational boundaries, and require orchestration between hundreds of different cloud building blocks. This is why third wave cloud consultancies and digital engineering firms are so attractive.

In the cloud’s third wave companies are building their own customer-centric, data-intensive, digital experiences from the ground up, not just relying on a small handful of vendors.

Unlike GSIs, which are built around large (often legacy) platforms, these next gen firms are not tethered to a specific platform. They have capabilities across them, and are more focused on custom development rather than platform configuration. According to Gartner research, the 13 largest GSIs hold only 30% of the market for custom software development with the remaining 70% of the market held by more than 10,000 local, regional and midsize players.

This is why companies like IBM are being so acquisitive. By bringing on firms like Nordcloud, a European cloud integrator with 500 consultants certified in Amazon Web Services, Microsoft Azure and Google Cloud Platform, IBM isn’t just specializing in its own stack of technologies. It’s working across them, supporting customers no matter what their digital strategy may be.

The digital era requires new skills, new models

Third wave cloud consultancies and digital engineering firms also bring something that GSIs, customers and vendors need desperately — specialized skills in areas like IoT, APIs, cloud integration, data science, cybersecurity, DevOps, e-commerce, new programming languages, etc.

The war for talent is real, and based on our conversations with hundreds of services firms and the cloud vendors, it’s getting worse. Talent acquisition and retention is a core competency for services firms, and the firms that are adapting their talent capabilities to this new world are those that will thrive.

Workforce models are evolving quickly. Next generation services firms have been optimizing for distributed and remote workforces for the last few years, not just as a response to Covid. It’s been a competitive differentiator, giving them access to specialized talent no matter where people live. These firms have also been learning how to use on-demand “gig” talent in new ways, which requires different internal processes. These aren’t overnight changes.

Delivery and pricing models are evolving as well. Next generation firms (like more and more customers) are less focused on big-bang transformations and project work. It’s more about providing capacity and skills for ongoing programs that add value in an iterative way over time – and pricing it accordingly. Services firms that make it easy for customers to get started quickly, scale up and down as needed, offer free ‘demo services’ up front, and that offer packaged IP to speed time to value will have a leg up on the competition.

The GSIs are well aware of these trends. But they’re big. They have entrenched relationships with legacy vendors and cash cow businesses that, while declining, still need support. For them it’s better to be a fast follower than a first mover, and to let the boutique services firms incubate these capabilities and then use their large stockpiles of cash to acquire them.

That’s not a new model, but there’s a lot of cash in the market and stakes are getting higher. This is going to be an interesting few years for services!

BeyondID secures $9M in series A funding from Tercera

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Tercera’s Investment Spotlights the Market Opportunity for BeyondID’s Identity and Cybersecurity Services, and the Growth for Services in the Third Wave of Cloud Computing

 

San Francisco, CA – February 8, 2021 – BeyondID, a leading System Integrator (SI) and Managed Service Provider (MSP) for cybersecurity and cloud services, today announced it closed a Series A funding round of $9 million from Tercera. The financing was provided by Tercera, an investment and advisory company specializing in the $460B cloud professional services market.

BeyondID helps companies acquire, deploy and manage best-of-breed cybersecurity and cloud services to become more secure, agile and prepared for the future. The company is a Platinum Services partner for Okta, and specializes in Identity and Access Management, Secure App Modernization, Zero Trust Security, Cloud Migration and Integration Services.

“We are thrilled to partner with Tercera to expand our footprint in the Okta ecosystem and broaden our identity and cybersecurity offerings,” said Arun Shrestha, CEO and co-founder of BeyondID. “Tercera’s investment will help us meet the growing demand organizations have for more secure access to their critical data and higher performing cloud identity solutions.”

BeyondID has been a top partner for Okta, the leading identity platform in the enterprise, for nearly three years. It has earned Okta’s Platinum partnership for consistently delivering joint customer successes and for building one of the largest teams of Okta certified experts to solve complex use cases.

“The BeyondID team has been an invaluable part of our partner ecosystem for many years, working with us on some of our largest customers,” said Frederic Kerrest, Executive Vice Chairman, Chief Operating Officer, and co-founder of Okta. “They’ve played a vital role in helping our customers solve their most complex security and cloud computing challenges, and we’re excited to see BeyondID continue to meet the needs of our customers and grow with us.”

“Tercera is on a mission to identify and empower people and businesses who will lead the cloud’s Third Wave, and we couldn’t be more excited to have BeyondID as our first portfolio partner,” said Chris Barbin, CEO and founder of Tercera. “BeyondID exemplifies the kind of company that customers want to work with in this new wave – agile, focused, growth minded and customer-centric. A company with the specialized skills, technology and services to meet the evolving security needs and demands of today’s businesses and their remote workforce.”

BeyondID has served hundreds of enterprises that include ATN International, Bain Capital, Biogen, Discount Tire, FedEx, Gundersen Health Systems, Johnson Financial Group and Major League Baseball.

“ATN relied on BeyondID’s expertise to deploy our Identity and Access Management solution from Okta, on time and on budget,” said Benjamin Doyle, vice president of Information Technology at ATN International. “As a result of our successful engagement, we’ve expanded our relationship to help with our Zero Trust strategy. I’m excited to work with BeyondID in this incredibly important aspect of our business.”

For more information about BeyondID, please visit www.beyondid.com. To learn more about Tercera, visit tercera.io.

 

About BeyondID
BeyondID is a leading provider of managed identity services to help companies acquire, deploy and manage their cybersecurity and cloud service needs. BeyondID enables organizations to streamline their adoption process and ensure that their implementations are secure, agile and future proof. A few of the customers that trust BeyondID to keep their organizations secure include FedEx, ATN International, Bain Capital, Biogen, Discount Tire, Gundersen Health Systems, Johnson Financial Group and Major League Baseball.

 

Tercera
Tercera is a new kind of investment and advisory firm founded to accelerate the growth of people-centric businesses. Specializing in the $460B cloud professional services market, the Tercera team is composed of invested operators who know first-hand what it takes to build and scale a successful cloud services business. Tercera (Spanish for ‘third’) is on a mission to identify the people and partners who will lead the next wave of cloud computing – the Third Wave – and provide them with the capital, counsel and connections they need to scale faster and take an outsized share of the market.

Tercera launches to invest in people, not products

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Tercera Looks to Accelerate Technology Professional Services Businesses Specializing in the Third Wave of Cloud Computing

EVERYWHERE – Jan. 28, 2021 – Tercera, a new growth-focused investment and advisory firm specializing in technology professional services, launched today to accelerate consultancies and managed service providers in the $460 billion cloud services space. Tercera will put $225 million in equity capital to work building the next generation of cloud leaders, focusing on services firms that specialize in analytics, automation, data, security, enablement and management of cloud technology.

The company, which is led by a team of seasoned investors and advisors who are deeply ingrained in professional services, is on a mission to empower the people and businesses who make technology work. Spanish for Third, Tercera provides those leading the cloud’s Third Wave with the capital, counsel and connections they need to scale faster, do more and achieve outsized outcomes in today’s digital age.

CEO Chris Barbin founded Tercera based on his experiences as the co-founder and CEO of Appirio and his recent work as a Venture Partner at GGV Capital. Appirio, a pioneer in cloud services, was among the first enterprise services partners of Salesforce, Google, Workday and AWS. Barbin led Appirio to be one of the largest cloud consultancies before it was acquired in 2016 for $500 million. The Tercera team is seeking to help other services companies achieve similar success in a market segment that has been historically neglected by other investment firms.

“We believe the professional services space has been underserved by investors for too long, especially as it becomes clear just how important these partners are to customer adoption and market growth,” said Chris Barbin, founder and CEO of Tercera. “Cloud professional services is already a massive market opportunity, growing more than 20 percent year over year. With the pandemic driving more digital connections with customers, partners and employees, and enterprise cloud adoption happening faster than expected, we believe this market is poised for significant growth over the next few years.”

“Businesses rely on cloud computing like never before and it underpins so much of the innovation happening in technology, so it’s not surprising cloud professional services are booming on G2,” said Godard Abel, founder & CEO of G2, the world’s largest B2B tech marketplace. “Businesses are in dire need of systems integrators and managed service providers who can help them manage their increasingly large and complex cloud deployments, and yet the capital flowing into this space has significantly lagged investment in the technologies themselves. Tercera fills a gaping hole in this area, and we’ll be closely watching the firm’s portfolio in the coming years.”

Trilantic North America, a private equity firm that manages aggregate capital commitments of $9.7 billion, partnered with Chris to form Tercera, joined by a network of individual investors aligned with Tercera’s people-first vision. Tercera looks to partner with services firms that are founder-led, growth-focused and cloud-driven.

Tercera typically takes a minority stake in companies, investing between $5 million to $20 million of capital, selectively partnering with other firms and strategic investors as businesses scale. However, the company will provide more than just growth capital. It is also building out a services-oriented Advisor Network that will provide practical and diverse guidance and support to founders.

“Capital is only one component to growth,” continued Barbin. “Experienced guidance and a support network play an equal role in helping founders and teams scale faster and more gracefully than they could on their own. The Tercera Advisors are services professionals who have built, bought and sold services organizations, or run critical functions in services businesses. They bring the pattern recognition, diversity and playbooks that growth companies need.”

Useful Resources
Definition and players in the cloud’s Third Wave
Read Tercera’s people-first manifesto
Connect with Tercera on LinkedIn
Follow Tercera on Twitter at @TerceraCapital
Follow Tercera’s blog for news, trends and advice in cloud services

About Tercera
Tercera is an investment and advisory firm founded to accelerate the growth of people-centric businesses. Specializing in the $460 billion cloud professional services market, the Tercera team is composed of invested operators who know first-hand what it takes to build and scale a successful cloud services business. Tercera (Spanish for ‘third’) is on a mission to identify the people and partners who will lead the next wave of cloud computing – the Third Wave – and provide them with the capital, counsel and connections they need to scale faster and take an outsized share of the market. For more information, visit: https://www.tercera.io/.

Empowering the people and businesses that make technology work

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At Tercera we have a pretty simple mission: To empower the people and businesses that make technology work. “People” being the crucial word here.

Everyday we hear how technology is reshaping the world in profound ways — from the Artificial Intelligence in self-driving cars, to the Machine to Machine interactions (or IoT) responsible for our smart devices, to 3D printed hearts and homes, to the genome editing technology that made it possible to create a COVID-19 vaccine in months rather than years.

We pour trillions of dollars every year into advancing products and technology, but forget technology is of little value without the people who invent, design, develop, deploy, integrate, test, use, secure, manage and advance it.

So why is it that people-centric technology services firms (the integrators, consultancies, and managed service providers) get so little attention from the investment community?

Isn’t it surprising that the venture capitalists who pride themselves on identifying the next big thing overlook the fact that technology – especially information technology (IT) – rarely makes it big without talented people who have the special skills to put it to real use.

Over the last 25 years of building, leading and advising IT services organizations, I can’t tell you how many times VCs told me “why not stick with products?” or “sorry, we don’t do services.” When my co-founders and I were building Appirio in 2006 to capitalize on the then nascent enterprise cloud computing market, we heard “no thank you” from more than 25 different investment firms before Jim Goetz and Sequoia Capital took a bet on us. A bet that panned out when we eventually exited for $500M in 2016.

 

Services Doesn’t Suck

The IT services market is not small.

In fact, by 2021 it’s expected to be a $1T market (Grand View Research) and the outcomes for services firms are nothing to sneeze at. Just take a look at EPAM, an IT engineering services whose market cap at the time of this writing is more than $19B. Or the likes of Globant and Endava, next generation publicly traded services companies that trade at premium multiples unheard of for IT services companies just a few years back. There have also been plenty of impressive exits and mergers over the years for IT services companies. While they might not be at the same valuations and multiples as software companies with an 80% profit margin, the value of these firms has been steadily increasing as the war for engineering and IT talent rages on.

Here are a few more reasons why we believe services companies deserve a closer look:

  • They are undervalued relative to the often bloated valuations of software companies. Because so few investment firms seek out and truly understand the dynamics of professional services firms, and these firms can be self funded in some cases, competition for deals is less fierce. This means valuations haven’t been driven through the roof like product companies have.
  • They have a much easier path to profitability. Most IT services companies are profitable out of the gate because their “assets” can get to work right away. They don’t require years of development like a product might before they start bringing in revenue. And when demand and margins are high, many of them can actually throw off cash.
  • They require less capital investment. Series A funding rounds have grown steadily over the years, and as of January 2021 average about $25M according to some sources, whereas the average early stage round for services firms is much lower — namely for the reasons mentioned above.
  • They often have far more predictable, stable and non-linear revenue than investors expect. Services companies are thought of as unpredictable and lumpy by some, but with the right combination of customer retention strategies, embedded IP and managed services offerings this doesn’t have to be the case. These strategies can often drive growth that is non-linear to headcount additions, an often cited issue by the VC and PE community.

Plus, it’s just a lot more fun and rewarding to invest in people than 1s and 0s. In fact, I can think of no greater mission than one focused on people.

 

Services Businesses are Different

There are of course some fundamental differences between people-centric organizations and those built around products and technology.

For one, leadership, company culture, and having the right things in place to recruit, develop and manage talent is a much bigger priority in services companies where people are the key asset, unlike software companies. People aren’t binary the way code is, and talent (especially talent that is in high demand) has certain needs and expectations.

Then there are differences in how you plan and forecast, how you organize and enable sales, how you go-to-market and what elements of marketing you prioritize, and the importance of channels and alliances in how you scale. All of these areas look different in a people-centric organization compared to a product-centric organization, and they are constantly evolving. Especially as outcome-based pricing, pre-packaged IP, renewable services and vertical orientations gain steam.

I could go on, but my point is that different shouldn’t equal “bad” or “hard.” It’s just different. Once you appreciate those differences, you can hone investments, priorities and processes accordingly. The problem is that most VCs and PE firms have a playbook, and that playbook is optimized for product companies. Not people.

 

What Makes Tercera Different

When it comes to people-centric businesses, the Tercera team has learned a great deal about what works and what doesn’t over the last 30 years based on real-world experience. We are all services business veterans who have developed the pattern recognition it takes to know when it’s time to grow or time to slow, when to double down in a market and when to expand, and most importantly, what elements must be in place to scale a successful, sustainable business.

We’ve learned from our successes, but also from our mistakes. We believe it’s this insight, along with the industry connections we’ve built over the years, that can help the next generation of service businesses quickly grab market share, and build highly scalable businesses that go on to do great things.

We realize that there are thousands of investment firms out there, with more popping up every single day. Our goal is to make sure we aren’t like everyone else. That we offer something different, and do things differently. This is why “different” is one of our core values.

We don’t fit easily into a category. We’re a unique balance of venture capitalist and private equity, where we look to both build something new and make something more profitable and operationally sound. As former operators and entrepreneurs, we look at opportunities through those two mindsets — not just what looks good on a spreadsheet.

We realize that great founders with a great business can get capital from any number of sources. So while we are primarily an investment firm, we believe our real value is our services-centric counsel and connections we can provide, not only from our own experience but through our Advisor network as well.

Tercera’s Advisors aren’t a loosely connected group of people put together to fill up a website. It is a curated, highly experienced and invested community of professional services professionals who have walked in the shoes of our founders, or led critical functions within successful services businesses.

That focus, a core value for us, helps set us apart. Tercera is razor-focused on investing in people-centric technology businesses, however, our first fund is even more targeted on the $460B cloud professional services space. This, along with our real world experience in these spaces, allow us to go a mile deep rather than a mile wide, and make us infinitely more valuable and successful in our endeavors.

We also strive to have a different vibe than your traditional investment firm. While we take our work seriously, we try not to take ourselves too seriously. As a team, we’re pragmatic, approachable, honest, optimistic, and appreciative. In short, we’re fun (our last core value). We want to be the kind of team who you want to work with during these exciting times, people who you aren’t afraid to call when things go wrong and who you want to celebrate with when they go right. Because building a business might not be easy, but it should be fun.

This is who we are as a team, what we believe, and what you can depend on when you work with us.

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