From Bottom Up to Top Down: A New VC Model for MSP SaaS Founders & Investors

The last decade has witnessed an extraordinary surge in managed services, catapulting the industry to an astonishing value of $500 billion. This explosion has resulted in a vast and dynamic ecosystem encompassing software solutions, service providers, marketplaces, consultants, and influencers that span the globe and continue to grow at an unprecedented pace. Within the capital markets — from venture capital and private equity to public entities — various players have engaged with the Managed Service Provider (MSP) market, each experiencing different levels of success. Despite MSPs commanding a significant share of the technology market for small and medium-sized businesses, the Software-as-a-Service (SaaS) domain, especially within consumer and enterprise segments, often captures investors' attention with more relatable and compelling narratives.

At Top Down Ventures (Top Down), our mission is laser-focused on bridging a critical gap — the scarcity of savvy capital and specialized industry know-how for early-stage SaaS startups focused on the MSP sector.

A Brief History

Top Down, envisioned by MSP SaaS entrepreneur and investor Chris Day, has rapidly become a beacon in the MSP start-up ecosystem. Chris, known for founding Fully Managed, IT Glue, ScalePad, Produce8, and leading investments in Quoter, Backup Radar, and ControlMap, launched Top Down after selling IT Glue in 2018. Initially conceived as an MSP SaaS incubator, it swiftly evolved into an accelerator, fostering growth across multiple startups.

In 2020, Top Down expanded to include a family office division, Top Down Capital, managed by Joel Abramson, Chris's seasoned business partner, dealmaker, and technology strategist. Within just five years, the outcomes have been noteworthy, marked by numerous investments, acquisitions, and exits.

Today, Top Down is focused on two MSP SaaS portfolio companies: ScalePad, recognized as a top 5 MSP platform, and Produce8, a digital work analytics platform. Additionally, Top Down Capital is invested in the tech-enabled, direct-to-consumer sector, with investments in Rove Concepts and Magic Scoop.

Introducing Top Down Vision

In 2024, Top Down is set to redefine the MSP industry landscape once more by launching the first institutional venture capital fund dedicated to early-stage SaaS ventures in the MSP sector. Another industry pioneer, Mark Scott, joined in January 2024 as the third General Partner (GP) for this evolutionary fund.

Our mission with Top Down Fund is to meet the unique needs of early-stage SaaS founders who develop innovative and compelling products for the MSP market. By leveraging our tried-and-tested MSP SaaS playbook, we aim to establish a reliable and predictable model for value creation. This approach, combined with a strategic focus on exit strategies and viable off-ramps, is designed to maximize success for all stakeholders involved.

Our team of General Partners (GPs) brings together an impressive 70 years of experience within the MSP industry, directly addressing the challenges often faced by generalist VCs: securing access to premium MSP SaaS assets for robust deal flow and ensuring a perfect fit for successful outcomes. Moreover, leveraging our MSP industry network for exit planning, connecting ventures with qualified strategic and private equity buyers who are in search of mature 'Rule of 40' targets that promise predictable integration outcomes.

What's the opportunity at hand? An astounding $13B in private equity "dry powder" is currently available for investment in MSP SaaS vendors and consolidators. This landscape presents a ripe environment for our strategic approach, positioning us to make a significant impact in the sector.

Top Down MSP SaaS Playbook

Our foundational belief is that real value creation in the MSP SaaS sector is driven by seasoned industry experts with a deep history of starting, funding, and elevating businesses to successful exits, thereby creating substantial enterprise value. Our General Partners' journey through the realms of Fully Managed, IT Glue, N-able (NYSE:NABL), and ScalePad, among others, has culminated in the creation of over $2B in enterprise value. Our focused strategy propels startups from under $1M in annual recurring revenue (ARR), transitioning their valuation from modest single-digit multiples to a robust 10-20x upon reaching the $50M-100M+ ARR landmark. This process not only highlights our strategic and operational expertise in the MSP SaaS domain but also our unwavering dedication to nurturing businesses that are set to leave a lasting mark on the industry.

Introducing the Top Down MSP SaaS Playbook, a strategic framework that delineates the pathway to success through five distinct phases: Build, Grow, Innovate, Scale, and Exit. This playbook encapsulates the essence of our proven methodology, designed to guide MSP SaaS businesses from their foundational stages to successful market exits.

Build - This foundational stage is pivotal, setting the trajectory for your startup’s success. Over a typical two-year period, bootstrapping with friends and family funding helps build your product. Securing early adopter customers is crucial for assessing product-market fit, laying the groundwork for future growth.

Grow - Top Down steps in during the growth phase. Here, factors like leadership quality, product viability, team dynamics, and the total addressable market (TAM) play a critical role in determining your valuation and capital needs. Identifying gaps and crafting an initial go-to-market (GTM) strategy are essential to pushing the business towards $2M in ARR.

Innovate - Leveraging our Innovation Hub, you gain access to virtual CSO/CPO functions, tapping into a deep bench of SaaS experts. This phase is where significant value creation occurs, focusing on product enhancements, roadmap development, and refining your GTM strategy to surge towards $10M ARR.

Scale - Ready for the spotlight, it’s time to scale from $10M to $50M ARR. This journey involves securing additional capital (Series B), bolstering your leadership team, expanding your product, and growing TAM through market adjacencies.

Exit - Transitioning from success to a legacy of impact, we at Top Down view the culmination of your entrepreneurial journey not just as a financial milestone but as the ultimate achievement of lasting significance. Building a business with the end in mind, we encourage founders to continuously strategize and refine their exit plans, ensuring when the time comes, you’re ready to move from the success of your venture to leaving a meaningful mark on the industry and beyond.

Top Down Fund Thesis

In a landscape abundant with investment opportunities, discerning the truly compelling from the merely appealing is paramount. Many opportunities promise much but deliver little, especially when it comes to deal flow and liquidity. The Top Down Fund introduces a distinctive avenue to a high-growth asset class that combines low risk with high reward, a rarity in today’s market, particularly given the limited number of public companies in this sector for direct investment.

The Top Down team aspires to offer strategic investors an exclusive gateway to the burgeoning field of SaaS enterprises at the forefront of the Digital MSP revolution. Our focus is on identifying and nurturing those companies that not only lead but also define the evolution of MSPs, presenting our investors with an unmatched opportunity to participate in a sector poised for exponential growth.

Mission

Our mission is to accelerate the MSP industry’s march towards a trillion dollars in this decade by providing SaaS start-ups with access to smarter capital, while giving investors access to an untapped high-growth market and delivering stability and liquidity for both.

Our vision is to be the market-defining MSP SaaS venture capital firm.

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Note: Open to accredited investors (as defined in National Instrument 45-106 – Prospectus Exemptions) or pursuant to another applicable prospectus exemptions. For information purposes only and does not constitute an offering of any security, product, service or fund, including interests in any investment opportunity or fund described herein. Only for use in connection with exploratory preliminary confidential discussions relating to the business of Top Down Fund Management Ltd. (“Top Down”), and in particular may not be used in making any investment decision. This document contains only summary information and no representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of the information contained by Top Down.