2 minute read / Dec 27, 2022 /
A $30B Software Company from a $15m Investment
Constellation Software is a $30b+ publicly-traded software holding company employing more than 25,000.
A former venture capitalist, Mark Leonard started Constellation in 1995 with $15m of outside investment & a goal of buying vertical software companies with a moat & good unit economics.
Vertical software companies pursue a particular market segment like car dealership management or hotel management software.
From 2003 to 2014, Constellation’s revenues compounded from $80m to more than $5b, an average of 25% annually.
In 2014, Constellation grew revenues 40%, which today would place the company in the top quartile. But Constellation arrives at that growth in a very different way : they acquire to grow.
Leonard’s letters reveal a different mentality to building a software behemoth.
| Growth Source | Value |
|---|---|
| Acquisition | 33% |
| New Bookings | 10% |
| Price Increases | 5% |
| Contraction | -3% |
| Customer Churn | -5% |
| Net Growth | 40% |
Acquisitions increased revenue 33%. New bookings added 10% ; price increases 5%. Contraction & churn reduced growth by 8%. The net : 40% growth rate.
Constellation acquires tens of businesses each year. These acquisitions tend to be small (around $5m) & the company operates most businesses with a team of 30-40 people across 5 operating segments by theme.
| BU Size | # of BUs | % |
|---|---|---|
| > 200 | 6 | 3% |
| 100-200 | 29 | 15% |
| < 100 | 158 | 82% |
The Constellation model differs from the venture-backed software companies. But at scale, software holding companies can grow at similar rates & trade at similar multiples to their venture-backed peers.
In one of Leonard’s letters, he mentions that his management team reviews a business they admire in detail to understand it each quarter. In that vein, I’m highlighting a different path to the same end goal : creating a generational software business.