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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.

Looking for a new breed of cloud-driven professional services firms

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While Tercera’s mission centers on empowering the people and businesses that make technology work, our investment thesis is a bit more focused (we believe strongly in having focus). More specifically, we invest in professional services firms that are defining and driving the next wave of cloud computing. We call this next wave, the Third Wave, and it’s why we named the firm Tercera (Spanish for third).

We believe the Third Wave is the biggest wave yet now that cloud technology is no longer the new kid on the block. In the last 20 years, cloud computing has fundamentally changed the way we do nearly everything, and the days of arguing whether enterprises are ready for the cloud or which cloud is better are long behind us.

Since the 2000s, when the First Wave hit, companies have been wading into the cloud in varying degrees. That first wave, driven largely by the dot.com bust and 9/11, was mainly focused on SaaS applications, department-centric apps that were focused on improving productivity. Think Salesforce for sales teams, ServiceNow for service teams, Workday for HR teams, and Concur for finance teams. You get the picture.

During the next decade the cloud’s Second Wave formed, fueled at least partly by the 2008 recession. In this wave, cloud platforms took root in the enterprise. Productivity was still important, but with businesses struggling, profitability and performance became more important. In this wave, we saw the rise of Amazon Web Services, Microsoft Azure, and Google Cloud, while First Wave software vendors acquired and developed their own platforms to expand their foothold in the enterprise.

We’re now in the Third Wave, which like previous waves builds on those earlier waves. Productivity, profitability and performance are all driving forces for cloud adoption, but now it’s also about creating connections and optimizing existing processes in an increasingly digital world. Companies of every size that are no longer new to the cloud are finding new ways to create their own unique, customer-centric digital experiences using hundreds of cloud building blocks. And they need help.

Digital experiences aren’t created with the snap of a finger. They require people. People who have the insight, skills and proven knowledge to design, develop, implement, test, manage and evolve these experiences, and those people are not easy to find. It’s one of the reasons why we’re already seeing an influx of capital investment in training programs and people-based businesses, and it’s why we believe the Third Wave is going to be huge for professional services.

 

The Opportunity for Cloud Professional Services

The cloud professional services category is already a $460B market growing north of 20% YoY. Nearly 7500 systems integrators already call this category home. And with 34% of companies planning to accelerate their cloud migration plans post pandemic (BCG) and enterprises speeding up their digital business initiatives by three to six years, we believe those numbers are poised to grow — opening up a huge opportunity for new software vendors and their partners.

The software vendors that led the first two waves of the cloud – companies like Salesforce, ServiceNow, Amazon, Microsoft and Google – will continue to play a big role in this Third Wave. One only has to look at the amount of M&A activity among these firms to see that.

However, there is a new set of software providers experiencing huge growth in this next wave. Vendors like Okta, Twilio, HashiCorp and Snowflake(just to name a few) are giving enterprises the tools they need to manage their increasingly complex hybrid-cloud environments, to fortify their security position, and to take advantage of the innovation happening in DevOps, AI and RPA (just to name a few). And these vendors have just begun to build out their partner ecosystems.

Together with our capital partner Trilantic, Tercera researched 30 of these Third Wave vendors and discovered that while Salesforce, Amazon, Microsoft, and Google all have thousands of service providers in their ecosystems, many of the emerging vendors have fewer than 300 partners. Until recently, many of them have been able to rely on a bottom-up adoption scheme, which works to a point. But in order to embed cloud systems into an enterprise, you need people who can handle everything from the integration and implementation to the training and ongoing maintenance.

It’s here where opportunity lies. Especially for the cloud-driven professional services firms that can bring the technical chops, delivery models and outcomes that these new vendors need from partners.

Just as Salesforce looked to the first generation of cloud-driven services firms — that delivered faster results, had more agile processes, and teams with specialized skills that the Global Systems Integrators didn’t yet have — this new generation of vendors will demand a new breed of partner.

These are the partners we are looking to identify, to partner with and to empower. If you believe your firm is part of this new breed, hit us up here.

Empowering growth-focused businesses and people

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We’re on a mission to change the equation for people-based businesses.

Companies and leaders come to a certain juncture in their journey when it’s necessary to rethink the approach that gotten them to where they are. Growing to $5M in revenue is not easy, but in those early stages, a powerful vision, a few talented people and customers and sheer brute force can get you pretty far. However, what might fuel initial growth spurts cannot necessarily sustain a company in the long-term. Growing an organization north of $100M takes a different approach and a different set of skills.

Not every leader is ready to scale their company beyond that first plateau, which is why the world is packed with hundreds of thousands of small professional services firms that do amazing work, but never get beyond $5M or $10M. As experts agree, it takes a growth mindset and more process-oriented approach to build something that goes beyond that, something that endures.

Our goal at Tercera is to identify those who are ready, who do have that growth mindset. And then to empower them with the capital, counsel and connections they need to grow bigger and faster than they could without help.

We believe capital is the easy part. There are plenty of equity partners out there, but finding one that really understands your space and can provide the specific counsel and guidance you need to get beyond those first few plateaus of growth is difficult. This is where the magic of our methodology and advisor community comes into play.

 

Tercera’s 5 Elements Methodology

 

We developed Tercera’s 5 Elements for Scale based on decades of experience operating and selling professional services businesses. It is the framework we use when evaluating potential portfolio partners, the methodology we use during our first 100 days of working with a partner to prioritize where investments can make a difference, and how we look at building out our Advisor network. Over the years, we’ve found that most companies are great in one or two areas, good in a couple more, but could use help in the others.

Our 5 Elements for Scale are broken up into (this should not surprise you) 5 areas:

Leadership & Talent: The people piece of the puzzle, always integral to the success of any company, is critical in a professional services company. In this area, we look at everything from the strength of an organization’s culture and diversity, to its recruiting and onboarding capabilities, to its leadership development and overall talent management processes.

Corporate Strategy: In early stage growth mode, many leadership teams lean more towards execution than strategy. For sustainable growth, you need both. This element looks at a firm’s strategic planning process, brand and marketing capabilities, sales and account management strategy, and how M&A and international expansion come into play.

Solutions & IP: The professional services firms that will lead in the cloud’s Third Wave will offer a different set of skills and delivery models than those who led in previous waves. Expertise in cybersecurity, AI, DevOps, and hybrid cloud operations are needed more than ever, and vertical IP and productized solutions are no longer nice to have, but must haves. This element looks at a firm’s overall portfolio, reusable assets, product roadmap and more.

Channels & Partnerships: For services companies, success often depends on going to market with the right ISV as well as creating the right partnerships to grow revenue, attract customers, and expand awareness. This element looks at a firms’ overall market positioning, alliances strategy, channel marketing and adjacent partnerships.

Operations & Processes: While this element may be listed last, we find it’s the one with which most younger services firms need the most help. Startups tend to look at process as a bad thing, but when it comes to scaling, having solid processes matters a lot. Those firms that are buttoned up in how they manage their financials, delivery operations, talent, marketing and sales processes have a big leg up on the competition.

 

Growth comes from all directions

While we believe this methodology can make a huge difference in preparing leaders and their organizations for that next phase of growth, if it falls upon deaf ears, it’s of little value. This is why we look for potential portfolio partners with a growth mindset — specifically, founders who are coachable and open to change. Not because we want to change everything about a company or tell founders how to run their business, but because every great company goes through periods of change, transition, and even reinvention. And we want to work with great companies.

When we say coachability, it means people who are open to feedback, self-aware, good listeners and lifelong learners. You’d be surprised at how easy these traits are to recognize, even in first meetings. Coachability is a key trait shared among leaders with the highest potential and it’s integral to building trusting relationships. People want to work with and for leaders who know their own strengths and limitations, who can acknowledge problems when they arise, and who surround themselves with others that have that same mindset.

If that sounds like you, and you are ready to do bigger things with your business, hit us up here.

Charting a course for the Third Wave of cloud consulting opportunities

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I’ve been in the high-tech industry for almost 40 years and I’ve always been a ‘services guy’. That’s why when I saw Chris Barbin’s blog post announcing the soft launch of Tercera, he had me at “hello”. Let me give you a little historic perspective to explain why I think the founding of Tercera is so timely.

 

The Rise of IT Professional Services

I started my high-tech career in the 1980s as an industry analyst at IDC at the same time the computer and telecommunications industries were facing unprecedented disruptions. The introduction of the mini- and personal computers (PCs) fundamentally changed the way organizations acquired and utilized information technology (IT). And the divestiture of AT&T led to the deregulation of the telecommunications industry dramatically changing how organizations obtained voice and data communications equipment and services.

As I watched these industries quickly change, I also saw that the enterprises these computer and communications vendors served faced significant skills gaps. Gaps which limited their ability to quickly adopt the latest technological innovations and slowed the sales of new products. These skills gaps were being filled by a widening array of professional services firms, ranging from major companies, like Andersen Consulting, to local mom and pop consultancies. The escalating demands of these enterprises also fueled a boom in systems integration and outsourcing services that brought even greater attention to an increasingly influential group of global Professional Services (PS) firms – like CSC, EDS and Perot Systems – in the 1990s.

 

Dot.Com Era Spawns New On-Demand Services and Venture-Funded PS Firms

Rather than continue to sit on the sidelines as an industry observer, I decided to join a professional services start-up that was focused on filling a similar skills gap in the rapidly growing ‘internetworking’ segment of the market led by Cisco Systems. The company was called International Network Services (INS), and it caught the attention of three highly-regarded venture capital firms – Sequoia Capital, Canaan Partners and Sigma Partners – because it promised a higher rate of growth and profitability than traditional PS firms by combining highly repeatable project methodologies with software solutions derived from its various engagements. I became the director of strategic marketing and helped the company grow and gain industry recognition, go public, grow to over $300 million, and get acquired by Lucent Technologies in 1999 for $3.7 billion – over 12x revenues!

The 90s and the ramp up to Y2K not only sparked a surge in demand for IT professional services, like INS, it also spawned new ideas about how software functionality and computing power should be distributed and utilized. It was during the dot.com era that the idea of Application Service Providers (ASPs) and utility computing was born and caught the attention of VC and market research firms. However, the dot.com bust – along with the tragedy of 9/11 – caused the investors and industry analysts to abandon most of the early ASP and utility computing players.

Despite the demise of this segment of the market, I felt the idea of ‘on-demand’ services was going to regain its footing and attract renewed interest in the marketplace. And I made a big bet on this possibility by launching my own strategic consulting company, THINKstrategies, in 2001 to focus on the business implications of moving from physical, on-premise, packaged products to virtual, web-based, subscription services. Fortunately, Salesforce.com, Amazon Web Services (AWS) and a whole host of others gained success over the next decade to prove the viability and value of cloud-based solutions.

 

The First Wave of the Cloud Services Takes Hold In Departments Acquiring SaaS

Salesforce was one of the few companies that survived the backlash created by the dot.com bust and 9/11. And the early success of Salesforce and other Software-as-a-Service (SaaS) vendors represented the first wave of cloud computing. These SaaS vendors recognized there was increasing frustration among corporate end-users about the complexities and costs associated with traditional on-premise applications. They evangelized the virtues of SaaS primarily to address the specific needs of a single department – such as the sales department in the case of Salesforce.

Yet, what stood in the way of Salesforce gaining success wasn’t persuading sales professionals to give their new SaaS solution a try, it was helping them to quickly implement it within the broader department to prove its value to the business, not just a few individuals. The major PS firms weren’t ready to focus on this embryonic market opportunity, so a new generation of start-up consultancies, including companies like Bluewolf, emerged to fill the gap and help accelerate the deployment of the first round of department-centric SaaS solutions.

 

The major PS firms weren’t ready to focus on this embryonic market opportunity, so a new generation of start-up consultancies, including companies like Bluewolf, emerged to fill the gap and help accelerate the deployment of the first round of department-centric SaaS solutions.

 

The Second Wave of the Cloud Services Washes Across the Enterprise with IaaS and PaaS

The second wave of cloud consultancies appeared in the market as the concept of SaaS gained acceptance among companies large and small, and gave companies like Amazon confidence to apply the same pay-as-you-go model to the compute and storage side of the tech marketplace. Amazon Web Services (AWS) basically resurrected the utility computing idea of the Dot.Com era and ignited the Infrastructure-as-a-Service (IaaS) market opportunity.

Once again market acceptance and adoption were slow at first because the economic drivers weren’t fully in place and a skills gap still existed. The financial crisis of 2008 created the economic imperative for enterprises to look for new ways to cast aside their capital-intensive data centers of the past in favor of more flexible and economical cloud services. That new sense of urgency brought on by the financial crisis also forced many enterprises to turn to PS firms for help leveraging IaaS – along with Platform-as-a-Service (PaaS) – across their operations.

This second stage of cloud growth was not only predicated on application and department specific skills, but on enterprise-wide integration service capabilities to pull the solutions from various ISVs and other cloud providers together. A new wave of cloud-centric consultancies, including Appirio, that were helping the leading vendors capitalize on the rapidly expanding cloud opportunities.

 

Appirio Venture Funding Opens New Chapter of Cloud Services

I became friends with Chris Barbin shortly after he, Narinder Singh, Glenn Weinstein, and Mike O’Brien founded Appirio. Chris and Appirio caught my attention when the company received venture funding from Sequoia Capital, an accomplishment which only occurred occasionally since my days at INS. And when I saw it was another alum of INS, Jim Goetz, who was responsible for Sequoia’s bet on Appirio after Salesforce did the same, I knew this would be a new cloud consulting firm worth paying attention to. So, I reached out to Chris because I was one of the few independent analysts focused on the rapidly evolving professional services side of the cloud computing marketplace and interested in Appirio’s go-to-market strategy.

 

Chris and Appirio caught my attention when the company received venture funding from Sequoia Capital, an accomplishment which only occurred occasionally since my days at INS..I knew this would be a new cloud consulting firm worth paying attention to.

 

As it turned out Appirio’s strategy echoed many of the elements I had seen pioneered at INS. First, it was aligned with a major vendor – Salesforce. Second, it was providing a combination of rapid deployment and sophisticated integration services. And third, it was developing a highly repeatable methodology and productizing its solutions to give it greater scalability and profitability that made it appealing to investors.

The success of Salesforce and AWS attracted more competitors and created greater demand for multi-vendor integration services to not only successfully deploy the cloud alternatives and ensure they were being properly utilized. Appirio was in a great position to capitalize on this opportunity.

 

Strategic Acquisitions Prove Value of Cloud PS Investments

In addition to filling an important skills gap, professional services firms are the ‘trusted advisors’ for many enterprise decision-makers. As a result, they have helped drive significant revenues to cloud vendors. In fact, IDC estimates PS firms have sourced nearly two-thirds (64%) of the $1.2 trillion market opportunity in the Salesforce ecosystem alone.

 

In addition to filling an important skills gap, professional services firms are the ‘trusted advisors’ for many enterprise decision-makers. As a result, they have helped drive significant revenues to cloud vendors.

 

Although the first wave of cloud-oriented consultancies didn’t attract a significant amount of venture funding, it did create good exits among major ISVs, PS firms and other vendors seeking to augment their internal capabilities. For instance, Bluewolf was acquired by IBM for $200 million. And another fast-growing cloud consultancy, Cloud Sherpas, was acquired by Accenture for $350M-$400M. As Appirio became a market leader during this second wave of the cloud it too achieved an impressive exit when it was acquired by Wipro for $500M in 2016.

While these may have been the most prominent PS firm exits in the first two waves of the cloud, there were plenty of other PS acquisitions that didn’t get as much attention. In fact, the pace of acquisitions in the Salesforce ecosystem alone has accelerated over the past 2-3 years, and the assortment of ISVs and other vendors making these acquisitions has dramatically expanded as a list compiled by Channele2e shows.

PS firms continue to add cloud consultancies to their operations at a pretty fast clip, including IBM which most recently acquired Salesforce consultancy 7Summits. The ISVs themselves are making more and more strategic acquisitions as well. This includes Salesforce, which most recently acquired Acumen solutions and has seeded the entire market with investments in more than 50 service firms over the years through its Salesforce Ventures arm.

This latest flurry of acquisitions has not only validated the value of cloud consultancies but has created a need for a new generation of PS firms to address the escalating demands produced by the pandemic and the latest technological advancements.

 

Welcome to the Third Wave of Cloud Consulting Opportunities

Few enterprise executives have to be educated about what the cloud is or why it’s important anymore. And they don’t have to be convinced about the viability or value of cloud-based solutions, especially as a result of the global pandemic. They now need help answering where and how to take the greatest advantage of the power of the cloud to meet their particular corporate requirements and objectives.

If the first wave of the cloud was centered around departmental requirements like CRM to satisfy sales teams, and the second wave was focused on enterprise-wide data center migration and application integration needs – then the third wave of the cloud is aimed at extending the power of SaaS, PaaS and IaaS to support escalating inter-enterprise requirements at a global scale.

 

The third wave of the cloud is aimed at extending the power of SaaS, PaaS and IaaS to support escalating inter-enterprise requirements at a global scale.

 

While many organizations responded to the dramatically different demands of the global pandemic admirably to connect their employees remotely and accommodate their customers electronically, the systems that they quickly put in place still need a lot of work to ensure their ongoing viability.

Although everyone is looking forward to returning to some form of normalcy once vaccines push back on the coronavirus, most organizational leaders recognize that the way we work, shop, and interact has changed forever. Businesses and other institutions will become even more reliant on the Internet (i.e. the Cloud) to support their employees, customers, and partners. In fact, we’re entering an era in which most organizations will rely on multiple cloud providers to support various requirements.

And every enterprise will need to augment their in-house teams with external resources to meet these escalating multi-cloud needs. In fact, the demand for PS help will grow because most enterprises will be keeping tight reins on their internal operating budgets and be seeking outside expertise to help them fortify, extend, and transform their newly digitized business processes.

 

In fact, the demand for PS help will grow because most enterprises will be keeping tight reins on their internal operating budgets and be seeking outside expertise to help them fortify, extend, and transform their newly digitized business processes.

 

The population of new cloud consultancies will also expand to surround a broader array of strategic vendors. Salesforce, AWS and Microsoft have attracted much of the attention of cloud consultancies in the past. As other cloud vendors gain success – like Workday, ServiceNow, Twilio, Snowflake and Okta – they will also need independent cloud consultancies to help their customers adopt their solutions and expand their market opportunities.

I’ve always believed that the ultimate irony about the rapid rise of the “cloud” is that it has grown because it promised a simpler and more economical method of obtaining compute power and software functionality. Yet, in reality it has compounded the complexities, and costs for many organizations because it adds another layer of complications to the on-premise applications and data center operations already in place. You can see a clear illustration of this stark reality – during ‘normal’ times – when you enter the exposition hall of the Dreamforce conference and are immediately confronted with the largest professional services firms situated in the biggest booths at the front entrance to the event.

Organizations of all sizes – and cloud vendors of all types – need professional services firms with varying skills to make cloud solutions work in real-world environments. As a ‘services guy’, I’m excited about the additional opportunities for PS in the third wave of the cloud, and the investment opportunities for Tercera in the coming decade. I look forward to them identifying and building that next generation of cloud consultancies.

Tercera’s belief in founder-led businesses

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We believe strongly in the power of founder-led businesses for two main reasons.

First and foremost, we believe in founders because founders believe in their companies. Their business is personal to them, and that gives them a unique combination of vision, passion and mission that is essential to building something that lasts.

Secondly, data shows founder-led technology businesses tend to outperform companies who are led by hired guns. It isn’t always the case, but it’s the case more often than not. Studies featured in HBR and Reuters (among others) show that companies that still have a founder at the helm often do better in price performance, profit growth, innovation and recovering faster from a crisis.

 

Founders have a passion that fuels their mission

Founders will run through a brick wall to see their mission come to life. Whether it’s their entrepreneurial mindset, personal connection to the mission, or sheer perseverance, they’re virtually unstoppable, and that kind of passion is contagious with customers, partners and employees.

You can feel it in leaders who still helm the companies they founded: Jeff Bezos’ obsession with customer-centricity, Marc Benioff’s dedication to making Salesforce a platform for change, or Reed Hastings’ quest to reinvent entertainment. It’s not just the big guys either. Smaller technology players like Twilio, Okta, Slack, HashiCorp, who still have an active founder continue to outperform their peers and see huge valuations.

It’s this mix of passion and mission that keeps a company going even when there are only a few wins to celebrate — a situation every company goes through no matter how great it is. It’s what inspires other people to work hard, stick around, and treat every customer like the business depends on it. In professional services, where hundreds or thousands of consultants might be customer facing, and where recruiting and retention is a KPI, this mix is even more important.

Don’t get us wrong, the 1s and 0s are still important, and you still need to find great technologists, but people aren’t loyal to bits and bytes. They’re loyal to people. And founders — the exceptional ones — care about the people and the culture that binds the company together.

 

Freedom for Founders to Build and Lead

We don’t just look for exceptional founders, we also give them the freedom to do what they do best – build and lead. This is one of the reasons we typically choose to take a minority rather than majority stake in our investments.

As former operators and founders ourselves, we take more of an entrepreneurial mindset, not a strictly economic one. We’ve been there. We know the challenges and opportunities that come with scaling a professional services business. What it takes to grab market share and break through those plateaus of growth – getting beyond $10M or $50M to $100M and beyond. Breaking through those first few plateaus can be tough and many people do it, but the decisions and sequenced investments needed to navigate beyond $50M are considerably more challenging. We know what it takes to scale a services business, and how to sustain profitable growth over time. Part of that is capital, but that’s only a fraction of the equation.

Our role as invested operators isn’t to take over that journey for our portfolio founders, it’s to give them the guidance, capital and connections they need to navigate the journey for themselves.

Tercera balances the world of private equity in that we provide guidance to operationalize and scale a business, and the world of venture capitalism in that we come in early and help founders and ideas flourish.

If it sounds like the kind of partnership you’re looking for in your journey, hit us up here.

Prepare for a flood in 2021…of capital and M&A in professional services

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In a year that started out like this one, with a global pandemic increasing in strength and riots at the U.S. Capitol (and we’re only on Day 12), it seems only natural to start my first blog of the year with a reference to a flood. Luckily, what I’m talking about is a surge of a different kind.

We believe 2021 may finally be the year professional services (especially in the cloud space) gets its due from the investment community and strategic acquirers. Professional services firms in the cloud space are being acquired at a rate we haven’t seen since the early days, despite the efforts of many companies to conserve their cash reserves in a down economy. We believe this is just the beginning of a flood of capital investment in people and people-based businesses, especially those that have the expertise for what’s to come.

Here’s why.

 

The Cloud Just Got More Important

The year 2020 highlighted many things for business leaders — the value of empathetic leadership, the importance of diversity, the delicate balance of real-time inventory, and that remote work is possible and even preferable. It also proved to business leaders the real value of their cloud computing investments.

When COVID-19 reached pandemic status in March and the world closed up shop, nearly everything moved online — meetings, commerce, learning, entertainment, banking, events, dining “out”, socializing, even tourism. With little to no notice, millions of employees were sent home with just their laptops. More than 9 months later, most of these employees remain working from home (possibly for good), yet work continues to get done. Cloud-powered tools and systems like Zoom, Slack, Okta, Box, Twilio, Google Docs, Microsoft Teams, Salesforce, ServiceNow (and hundreds of other apps) have kept employees productive, customers engaged and the economy running.

 

2020 proved to business leaders the real value of their cloud computing investments.

 

COVID flipped a switch when it comes to how work and business gets done, and that light is going to stay on and increase in intensity over the next few years. The term digital transformation is so overused I hate to even put it here, but 2020 highlighted that fact that businesses needed to rethink and redesign a good number of their processes and do it fast. Some businesses adapted quickly and some didn’t, but even those who reacted quickly need to sustain, fortify and expand those efforts. To systematize and optimize the new processes they put in place. And that takes more than technology. It takes people.

 

Cloud Success = Professional Services

Redesigning systems and processes, especially in complex enterprise environments, doesn’t happen overnight and it’s not easy. Companies need strategic thinking, specialized skills and domain expertise, and unfortunately the people who have this expertise are becoming harder and nearly impossible to keep.

The IT skills gap isn’t a new problem but COVID has exacerbated it. The cloud providers get this. It’s why Amazon recently announced an ambitious plan to train 29 million people to work in cloud computing by 2025. It’s the reason Salesforce invests millions in its Trailhead learning platform every year, and continues to introduce workforce development programs as a big part of its corporate strategy.

 

The IT skills gap isn’t a new problem but COVID has exacerbated it…It’s also why major professional services firms continue to grow in a down economy.

 

It’s also why major professional services firms continue to grow in a down economy. Accenture’s Q1 FY21 results were up 4%, with “strong double digit” growth in cloud services. Annual FY2020 revenue for Deloitte’s Consulting Division increased more than 7%. Even the small and mid-sized professional services firms that we spend a lot of time with are growing in double, and in many cases triple, digits.

This demand for cloud and digital talent is also driving a significant amount of M&A volume in cloud services.

 

The M&A Race for Talent

Dozens of acquisitions in the cloud professional services space have gone down over the last few months, including three yesterday alone — IBM’s acquisition of Salesforce consultancy 7Summits and Cognizant’s acquisitions of Australian analytics firm,Servian, and ServiceNow consultancy, Linium. In the last 12 months, Cognizant has made 11 acquisitions and invested what many estimate to be a $1.4B in cloud, data, AI and digital services.

 

In the last 12 months, Cognizant has made 11 acquisitions and invested what some estimate to be $1.4B in cloud, data, AI and digital services.

 

IBM has also been extremely acquisitive lately as its new leadership looks to refocus on hybrid cloud computing and AI, and build up its iX business unit to compete with Deloitte Digital, Avanade and Accenture. The acquisition of 7Summits, which is estimated to be ~$175M, approaching a 3.5x multiple on revenue, is just the latest. In late 2020, IBM announced plans to acquire SAP consulting partner TruQua for its hybrid cloud and financial workflow expertise, Instana for its AI-powered automation capabilities, and Nordcloud for its cloud-native tools, methodologies and talent.

And then there is all the activity in the Salesforce space, including Salesforce’s own $570M acquisition of Acumen.

But it’s important to note these acquisitions aren’t just about adding more consultants to the roster, it’s about gaining a competitive advantage from the specialized expertise, approach and assets these next-generation firms bring. All of which are needed to meet the evolving needs and escalating demands of customers.

 

These acquisitions aren’t just about adding more consultants to the roster, it’s about gaining a competitive advantage from the specialized expertise, approach and assets these next-generation firms bring.

 

Here are four attributes that we believe will become even more in-demand in PS firms over the coming year — by customers, software providers looking to build their ecosystem, and by other firms looking to acquire.

 

Hybrid & Multi-Cloud Expertise: Whereas earlier cloud waves required firms to specialize and go deep on certain platforms, next generation firms have to work across clouds and in hybrid enterprise environments. This is an imperative for inter-enterprise business requirements like multi-modal e-commerce and real time supply chains. DevOps expertise is a must and full stack knowledge is essential. Talent within teams that can support infrastructure and data layer providers like AWS, Hashi, Twilio, Snowflake and Datadog, will be as important as the application layer skill sets.

 

Integrated Offerings for Accelerated Transformation. Note, accelerated transformation not digital transformation. Digital transformation might be as overused as unprecedented and the new-normal these days. Customers want partners who can help them in ways beyond just implementation and integration. True transformation requires a blend of strategy, design, delivery, ongoing change management, optimization and maintenance, and it doesn’t (or shouldn’t) happen all at once. It’s an iterative process. The firms that offer an integrated portfolio that crosses these different disciplines, that can deliver those services seamlessly and quickly, are a lot more attractive to customers who want a long-term partner. COVID forced everyone to move much faster and proved transformation can happen in months not years. Customers need partners who understand that and continue to meet that standard going forward.

 

A Globally Diverse and Enabled Virtualized Workforce. The workforce looks and operates very differently than it did a decade ago (or even a year ago). Customers are much more open to remote work and now expect, and can have access, to diversity in their consulting partner teams. The partners who have built effective workforce models in these areas will have a leg up in recruiting and retaining top talent. Firms built from the ground up that embrace remote working and truly invest in collaboration technologies, policies and processes will outrun and outperform those saddled with significant commercial real estate and old school collaboration approaches.

 

IP Driven Industry Solutions. The verticalization of the cloud continues, and customers are looking to partners who have proven expertise in their industry and who can bring reusable, productized IP to hit the ground running. This is especially important when it comes to AI/Machine Learning, automation, data and integrated commerce.

 

As the next wave of cloud adoption takes hold, we believe these are the characteristics of the services firms who will lead this wave. Because 2021 is shaping up to be the year for cloud talent to scale to new heights and move in new directions.

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