My Guest
Constellation Software is one of the world’s most admired, well-followed, and well-respected software acquirors. Since their founding in 1995, they have acquired over 500 individual software companies, and have grown to achieve $8.4B in revenue and a $77B market capitalization. They have achieved these staggering metrics through their exclusive focus on the lower middle-market: That is, software companies that typically generate $3 – $10M in revenue, which often employ ~50-200 people.
The Shareholder letters written by Constellation’s founder & CEO, Mark Leonard, are seen as must-reads, and have grown to achieve Buffet- or Bezos-like status among those in the software investing community.
Joining me today is Mike Dufton, CEO of the Volaris Group, which is one of the 6 major operating units underneath the Constellation Software umbrella. Under Volaris alone, as CEO Mike oversees over 200 individual operating companies spanning 50 countries and 40 vertical markets.
Prior to joining Constellation over a decade ago, Mike was the CEO or President of four different enterprise software companies, again spanning multiple verticals.
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The Constellation Software Playbook for Acquiring and Growing Software Companies – In The Trenches
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Questions Asked
Constellation Software Introduction
- Tell us a bit more about yourself, your career, and what has led you to what you are doing today
- How does Constellation Software organize its business units? How many individual software companies reside under the Volaris umbrella?
- What does the typical acquisition look like for you (revenue, EBITDA, number of employees, etc.)?
- What differentiates Constellation from, say, a software focused private equity firm who is also in the business of acquiring software businesses?
Acquiring a Software Company
- How do you understand the level of technical debt that may reside within a target company’s code base?
- How important is the technical debt discussion to the overall investment thesis?
- In a theoretical world, if I only allowed you to see 3 metrics to help you evaluate whether you should make an investment, what would those 3 metrics be and why?
- Which retention metric do you weight most heavily: Logo retention or revenue retention? Why?
- How important is it for you to acquire “rule of 40” companies? Do you think other acquirors overvalue, under-value, or properly value rule of 40 companies?
- How do you weigh revenue growth versus profitability within the rule of 40 framework? Which one is more important to you and why?
- How common is the on-premise to SaaS investment thesis for you? Are there still enough targets available for this to be a meaningful investment thesis for you?
- How do you think about target companies that have a relatively high percentage of total revenue coming from professional services?
- Is the “venture capital orphan” thesis one that Constellation is looking into in any meaningful way? Why or why not?
- Does the practice of capitalizing vs. expensing R&D costs have any bearing at all on the valuation that you place on software companies?
- Is there a valuation difference between vertical market software companies and horizontal market software companies? Why or why not?
Sellers & Portfolio Company Leadership
- Sellers are notorious for understating their degree of involvement in day-to-day operations. How do you evaluate the extent of the key person risk that resides with a seller?
- What have you learned about the success rates of placing technical CEOs versus non-technical CEOs at the helm of your recently acquired companies?
Post-Close Considerations
- What are some recurring changes or areas for improvement that you tend to see over and over again? Where does the low hanging operational fruit typically reside?
- What role does Product Management tend to play post-close?
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