Venture-backed Sparxent is trying to fill a void by building a large, global IT firm that will target smaller clients
There's no doubt that even the smallest companies have IT needs. But because of the difficulty of selling relatively small projects in tremendous volume in order to build scale, few large consultancies have successfully penetrated the small firm market. Venture-backed Sparxent is trying to fill that void by building a large, global IT firm that will target small clients (companies with a few hundred to a few thousand employees).
Since establishing the firm in August 2008, Sparxent has made three acquisitions, building a firm with a current run-rate of approximately $75 million. In the next few months, assuming deals in the works close, co-founder Dave Taylor expects his firm will grow to about $100 million. By the end of his buying spree, he intends to acquire a few dozen IT firms, growing the consolidated entity to between $300 million and $500 million in annual revenues.
Sparxent's typical acquisition target is about $10 to $20 million in annual revenues, with a track record of at least eight to ten years of solid growth. However, the economic downturn has changed Taylor's growth expectations. "We were looking for firms growing at 15 percent to 20 percent on a compounded rate. Now, we're looking at firms that may have historically grown faster but are now growing at maybe five percent and are maintaining their profitability levels. We know that once the economy improves, they will grow faster again."
Generally, Sparxent is looking to generate about 60 percent of its revenue from IT product sales and the remaining 40% from professional services, including consulting. Taylor says the firms he is targeting "have already turned the corner from pure product sales to offering a more consultative approach."
Despite the existing consulting capabilities within some of the (soon-to-be) acquired VARs and technology companies, Taylor plans to purchase consulting firms by mid to late June. Future acquisitions will answer the "where will consulting capabilities come from" questions, he says.
To make the combined firm worth more than the sum of its parts, adding a consulting piece will be crucial. No matter how good the VAR companies are, unless a client needs their specific product the VAR does not have something to sell. By combining forces, and going to market with a larger consultancy offering, Taylor hopes the combined firm will be able to cross-sell and up-sell to new clients.
While this business model is relatively new to the consulting profession, similar roll-ups models have worked successfully in other professional service industries, such as the accounting profession. H&R Block-owned RSM McGladrey consolidated many small, local accounting firms (including the 2005 acquisition of American Express Tax & Business Services, which itself was a roll-up of the non-attest assets of many small accounting firms).
Thus far, Sparxent has made three acquisitions. Most recently, in early May, it acquired XAware, an open source data integration technology company. It will be used to help integrate the various technology offerings being sold across Sparxent's expanding portfolio.
Last year, Sparxent made two acquisitions:
• NetworkD, a Platinum LANDesk Software Solution Provider and the largest global reseller of LANDesk solutions.
• Arbyte Group, an IT service provider based in Moscow, with a large customer base throughout the Russian Federation and Ukraine. It is a leading Microsoft partner delivering professional services based on Microsoft Dynamics AX for the Russian mid-market. Since its founding in 1994, it has grown its annual revenue by approximately 30 percent.
Sparxent's acquisitions are being funded by venture capitalist vSpring. Taylor describes his firm as a "non-traditional investment" for the company, which has historically invested in enterprise software, networking and communications, security software, Internet, mobile computing, drug discovery, drug delivery, as well as diagnostics and medical devices.
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