Dive Brief:
- MSP software-focused venture capital firm Top Down Ventures closed its Founders Fund I, landing $28 million in commitments slightly above its $25 million goal, the company said in a Tuesday announcement.
- The VC firm has secured more than 100 limited partners — predominantly operators in the MSP ecosystem — who will fund and support Top Down’s dozen portfolio companies.
- Top Down saw its first exit in Zofiq, which ConnectWise acquired in January, and finished series B funding for an unnamed company. “We're celebrating the fact that it was possible to raise a fund focused on early-stage MSP software companies. It's just never been done before,” Top Down Ventures Managing Partner Joel Abramson told Channel Dive.
Dive Insight:
Top Down surpassing its funding target signals bullishness for the MSP industry, considering the difficulties of luring limited partners. Many investors put money into 10-year funds during the COVID boom, and others are being courted by frontier firms, Abramson said.
“It requires a tremendous amount of commitment from each individual that came in, because they're locking their capital up for 10 years and saying, 'We're going to put that capital towards innovation in the MSP ecosystem,' which is a really, really cool thing,’” he said.
MSPs have become known entities in the broader business world, as IT teams increasingly turn to them. SMBs, where MSPs are most deeply embedded, are poised to spend more on IT than enterprises for the first time ever, according to Microsoft projections and IDC data cited by Top Down.
“They're teaching MSP case study at Wharton Business School. Y Combinator has had three MSP-focused companies in the last couple of cohorts to come out,” he said. “These are all really, really good things for innovation in the ecosystem.”
Unlike the PE firms that built the MSP rollup machine, Top Down is a VC backing software companies.
Institutional capital has been active in the MSP market for the better part of two decades in the form of private equity. Top Down estimates that PE firms helped create about 150 MSP rollup platforms between 2010 and 2024. A 2020 William Blair study estimated that PE firms had put $13 billion into the sector. Consolidation at the partner level has continued, with OpenAI notably backing its own MSP horse with forward-deployed engineers.
Top Down is betting on nimble AI-focused software firms that use industry knowledge to automate key MSP processes.
“We still think there's an opportunity to educate that market on this layer, on the early stage, on the innovation, on the supply chain, and how important that is, because capital needs to go to both sides. It needs to go to the MSPs themselves, and it needs to go to the supply chain layer,” Abramson said.
Top Down also believes it’s on track to drive higher valuations with its portfolio companies than the average MSP rollup. Top Down estimated that investors are paying a four-times EBITDA for MSP rollups on average, valuing the MSPs and their managed service contracts as “utility-like cash flows.” The new generation of what Pax8 calls managed intelligence providers could earn higher valuations by designing and managing AI agents, ensuring compliance and even optimizing AI-related energy efficiency.
“The next vintage of PE returns in managed services will come from margin expansion via automation, not multiple arbitrage,” Top Down wrote in a January white paper. “Funds that fail to digitize operations risk holding depreciating assets, despite stable top-line growth.”
Abramson said the ecosystem has embraced Top Down’s stable of software providers. PSA providers are forming licensing agreements to integrate the point vendors into their platforms while mulling potential acquisitions.
“[The PSAs] are all in such a great place to continue to grow, and that's phenomenal. But if you're talking about a doubling of the ecosystem, these are already scaled companies,” he said. “That means that there's a huge middle to be created.”
