When we started Tercera two years ago, things looked a little different. The COVID vaccine was just rolling out, with in-person events still a distant memory. Tech valuations were skyrocketing, and interest rates were about as low as they’ve ever been. Capital was cheap, unicorns were running rampant, and companies couldn’t hire fast enough.
That brings us to January 2023. While COVID has become more manageable, tech valuations are now in the toilet. Last year the Fed raised interest rates seven times, making capital more expensive and difficult to secure. The hiring boom went bust, and by the end of last year, 159,000+ tech workers had been laid off. This month alone another 60,000 tech workers have joined those ranks with companies like Google, Salesforce, Microsoft and Amazon announcing large swaths of layoffs. So yes, it’s been a wild ride.
However, cloud consultancies and IT services firms seem to be weathering the storm better than most.
IT Services: A bright spot amidst turbulence
In 2022, many SaaS vendors saw valuations decline 60-90%. The valuations of publicly-traded tech services also took a hit, but it was a much smaller correction (closer to 20%). If you listen to earnings reports from the GSIs, you’ll hear a tone of cautious optimism. They are all keeping an eye on the macro trends, but most are still beating their top and bottom-line plans, continuing to expand through both organic growth and acquisitions.
Tercera’s own IT services investments performed well in 2022. In aggregate, our seven portfolio companies, which represent about $150 million in annual revenue, grew 52% year-over-year.
Tercera’s IT services investments performed well in 2022. In aggregate, our seven portfolio companies, which represent about $150 million in annual revenue, grew 52% year-over-year.
This economy is even bringing some tailwinds to third wave services firms:
- Employee attrition is improving. While finding (and retaining) top notch talent is never easy, the market for that talent has eased a bit.
- As customers reduce their own workforce and limit hiring, many are leaning on external services partners to supplement their teams and move initiatives forward.
- For those that have the capital and cash on hand, acquisitions have become more affordable than they were in the heady days of 2021 and early 2022.
- Tough times force companies to make hard decisions. Focusing on processes and data-driven decision making will put companies in a better position once growth returns.
While many of the IT services firms we speak with are planning for slower growth in 2023 to focus on better margins and profitability, there is still a huge opportunity for cloud consultancies, digital engineering firms, and managed service firms – especially those that focus on the fundamentals and bring skills that are scarce in today’s market.
Companies will continue to depend on technology, and it is the people who design, create, implement, integrate and manage that technology that make it successful. That’s true in any economy.
What 2022 taught us
As former operators who take growth very seriously (both personally and with our investments), we’re always looking to learn and evolve. Here are a few things we took away in the last year.
Diversity matters. Diversity matters on so many levels, especially as you scale. From gender and racial diversity, to portfolio and investment diversity, to regional and practice diversity. When war hit the Ukraine, firms who relied only on an Eastern European workforce had to scramble. Some industries and ISVs stumbled this last year, while others accelerated, which had an impact on growth for some partners. We’re big proponents of focus, but if you’re single threaded, you need a plan.
Investing is truly a team sport. In the second half of 2022, we closed 6 transactions in as many months. We added three new investments – Black Diamond Advisory, Orium, and Valiantys – and closed on three acquisitions. We did all this with a fairly small team, and without compromising on quality or our commitment to help every company in our portfolio thrive. Without our capital partners (Trilantic North America), our Advisors, and our partnership with Keensight on Valiantys, it couldn’t have been possible.
The ecosystem matters as much as the ISV. A key part of our thesis is finding service providers that are focused on a specific software partner, but this year it became clear that the ecosystems around those partners are equally important. In the third wave, systems are becoming more and more connected. Customers are relying on hundreds of SaaS apps and work across hybrid environments. Partners need to be more than a one trick pony. They just need to be clear who the winning horse is.
A few highlights
Our portfolio. We couldn’t be more proud of the companies in our portfolio, which now cover 14 of the top 30 cloud ecosystems for services partners (and many of the fastest growing). More than half our portfolio companies won “Partner of the Year” in their respective ecosystems, and every single one achieved a major win this year.
Our first Tercera retreat. In December we held our first in-person Tercera leadership retreat, bringing together all of our portfolio CEOs and their top lieutenants to network, share best practices and learn from each other. Hearing leaders leaning in and sharing ideas (and leads) may have been my highlight of the year.
The Tercera 30. We released our first Tercera 30 report. Releasing a portion of the data we use to guide our own investments might not come naturallyto many investment firms, but we knew it would help founders make better decisions.
Our extended team. This year we welcomed two new team members, amplified by Tercera’s unique Advisor Community – a group of 30 experienced executives who are deeply engaged with us and provide regular insights to the leadership teams across our portfolio.
In 2023, we’ll be applying the learnings above and keeping a close eye on the trends we believe will impact IT services this year. We’ll be building on the investments we’ve made, and supporting our CEOs and their leadership teams in their quest to reach the next phase of their growth journey. And we’ll be exploring new investments – segments and ISVs within the Tercera 30 that we believe are ripe for disruption and an exceptional services company at scale.
The year ahead will test all of us in ways we can’t predict. However, when you’re in the right market, with the right people, doing the right things, good things happen.