Constellation Software: Skin in the Game

„Our favorite and most frequent acquisitions are the businesses that we buy from founders“

– Mark Leonard

VMS.

Vertical Market Software.

Ever heard of it? Vertical market software or VMS is industry-specific software. That is, it deals with only a few and specific areas in the market. It is about developing applications for a niche industry. Beyond that, there is almost no or limited use in any other market.

An example?

Bowling alley software. Or a software system for an amusement park to display waiting lines.

VMS is sticky, mission-critical and very lucrative.

It benefits from the moat “efficient scale” due to a limited vendor pool in niche markets, ensuring low churn rates. It is long-lived because applications are critical to the customer's daily operations. The software requires little reinvestment and produces high and predictable cashflows. Lastly, VMS is often invented by people who put hard work, sacrifice and emotion into their product, not large corporations, due to their small target markets.

This is where the wizard of VMS comes in.

His reputation in this area is impeccable.

Mark Leonard.

Chart 1: Mark Leonard, CEO & Founder of Constellation Software

Founder-led

The story of him and his company, Constellation Software (CSU), should be on every entrepreneur's radar.

The company was founded in 1996. Mark's path to building Constellation Software began with a realization during his 11 years as a venture capitalist: he wanted to build something lasting.

Instead of focusing on the big buck and the next unicorn, he went for the crumbs. What he did was create a company that would acquire small vertical software businesses and hold them forever.

A buy-and-build approach.

His track record?

Since its inception, he has acquired more than 700 vertical software companies in 75 industries. And sold only one, which he regrets to this day.

He is the driving force behind CSU's continued success over the past few decades.

His secret sauce?

Unconditional focus on skin-in-the-game.

Founder-led businesses.

Chart 2: Founder-Led Companies Outperform the Rest (based on S&P 500)

The DNA affects everything

The best companies are run by people who have "skin in the game" and are founder-led.

Expressed in layman's terms: To have "skin in the game" is to have incurred risk (monetary, reputational, or otherwise) by being involved in achieving a goal.

Why are they so successful?

We can trace it back to the way the founder built the company from the inside out.

The DNA.

It affects everything.

It will influence the success of the company on the outside for a long time.

This is exactly how Mark has structured his own business and how he looks for acquisition targets to buy businesses. He wants to invest in companies where management loves what they do.

This begs the question, why would a founder sell his company in the first place?

There is always a moment when the next step in life is imminent, and everyone knows that their legacy will be in good hands if they are acquired by Mark.

In keeping with his philosophy, he believes in taking care of his employees, offering good pay, a powerful stock bonus program (he gives them "skin in the game"), and a clear path to move up the career leader.

Increasing employee engagement by providing clear direction that is transparent to all is a major concern for CSU, which is known for having many employees who have become millionaires simply by owning its stock.

A great place to work.

Chart 3: Fortune 100 Best Companies to Work For

Best Serial Acquirer

For me, Mark and Constellation Software are the epitome of success.

With its buy-and-build investment approach and the intention to own it forever they became the best serial acquirer in the world.

Or in arvy’s terms, they are a hell of a “Good Story”.

While global markets hit roadblocks here and there, CSU has had an incredible run since its listing in 2006.

An incredibly steady run. Like Swiss clockwork.

As seen this week, this is reflected in its stock continuously reaching new highs. New highs are one of the market's most telling signs that something good is afoot.

To put it in the words of arvy, the company also has one heck of a "Good Chart".

The company is one of the best compounders in the world and very much reflects the values, mentality and long-term thinking of a founder-led company.

On top, a big reason is that they care a lot about their employees.

Think about that for a moment.

Yes, we love it too.

Chart 4: Constellation Software since IPO, 2006

arvy's takeaway: Mark Leonard's Constellation Software thrives not in chasing unicorns, but in nurturing small, mission-critical vertical software companies. Founder-led and built with skin in the game, Leonard's DNA permeates the business, promoting employee engagement and long-term thinking. As a serial acquirer, Constellation stands among the world's best. In the relentless pursuit of financial success, Mark Leonard exemplifies how values and people can be a company's greatest assets.