Nimsoft Investment Validates Managed Services Model

In the midst of the ongoing global financial troubles, you might not expect to see a software vendor, or any company for that matter, get a multimillion-dollar capital infusion from investment bankers. But that is precisely what Nimsoft did this week.

The systems management software company completed a $12 million round of funding led by investor Goldman Sachs with follow-on investments by JMI Equity and Northzone Ventures, both of which previously had put money into the company. Nimsoft will use the capital to fund its growth strategy.

The funding, at a time when investors are more risk-averse than ever, comes as validation of the managed services model, through which IT service providers charge monthly fees for maintaining and updating their clients’ computing environments remotely.

In business since 1998, Redwood City, Calif.-based Nimsoft recently has been making an aggressive push into the remote monitoring and management space by selling subscription-based services through channel partners.

The Goldman Sachs-led infusion not only validates the model, but also recognizes the company’s strategy and management, says Nimsoft CEO Gary Read.

“There’s always people willing to invest in a company with a really, really strong story,” he says. Investors, Read says, understand that acceptance of the managed services model is growing, and there is potential for more. “It’s absolutely a growing market,” he says.

Nimsoft started seeking funding last summer and encountered a lot of interest from investors, Read says.

“We went and talked to about 10 or 12 different investors. In almost every situation the investor was very, very interested and wanted to proceed with it,” he says.

The Nimsoft investment, considering the timing, seems to put to rest any lingering doubts over whether the managed services model has legs. Dismissed by detractors as little more than hype only two years ago, the model nonetheless has gained popularity and kept in business channel companies that otherwise might be struggling with the hard economic times. According to the Channel Insider 2008 Midyear Outlook survey, managed services and SAAS (software as a service) were ranked just behind security as technologies that will remain profitable during a recession.

“I think we can completely get rid of the notion that managed services is a fad,” says Gerald Blackie, CEO of managed services vendor Kaseya. Blackie says his company has received a number of overtures from potential investors but has opted to go it alone.

Why is the managed services model so attractive to investors at a time of economic uncertainty? It has to do with outsourcing and cost savings. End-user companies can control staffing and overhead costs by transferring the management and maintenance of IT systems to a third party, in this case the MSPs (managed services providers), which use technology from companies such as Nimsoft and Kaseya to deliver the services.

MSPs earn recurring revenues from the services, and that helps their cash flow, which is more important than ever in times of economic crisis. Without recurring revenues, channel companies have to rely on per-project payments to keep operating. When times get tough, projects get postponed or cancelled altogether, and in previous economic slowdowns, that has translated to lean profits for solution providers.

And now that IT systems have become absolutely essential to day-to-day operations and strategic planning in the business world, the clients of MSPs cannot skimp on spending for ongoing maintenance, even if they put some projects on hold.

“To operate modern data centers, it is critical for IT customers to have robust systems management software,” David Campbell, vice president of Goldman Sachs’ Principal Investment Area, said in a statement. “Nimsoft has a proven track record of delivering this functionality to both large and small enterprises and managed service providers around the world.”

As part of the investment, Campbell is joining the Nimsoft board of directors, which already includes Peter Arrowsmith of JMI Equity and Torleif Ahlsand of Northzone Ventures.

Goldman Sachs is one of the Wall Street companies that has managed to escape the ongoing bloodbath in the financial sector, with Lehman Brothers filing for bankruptcy, Merrill Lynch selling to Bank of America and insurance giant American International Group (AIG) getting an $85 million government bailout.

The crisis has led to a drying up of credit, which hinders the ability of businesses large and small to borrow money for day-to-day operations and payroll. In the channel, however, lenders say the credit crisis has not had a noticeable effect.

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Nimsoft’s Read says that even though no one is immune to the effects of a recession, MSPs are in a good position to weather the economic downturn. Through managed services, clients effectively outsource a piece of their IT operations to service providers, and that allows the clients to control staffing costs.

Read says Nimsoft has about 150 MSP partners, which the company has been recruiting at a rate of 20 to 25 per quarter. Business through partners accounts for about 40 percent of the company’s overall sales, and Read says he expects that part of the business to exceed 50 percent within a year.

Nimsoft got its first round of funding in 2007. Read says the company has been growing at 60 percent year over year.