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April 11, 2021

Constellation: Software's Superorganism

The conglomerate with +500 software companies is a unique compounder.

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If ants could speak, they would do so in the first-person plural. 

We will carry this leaf.

We will eat this crumb.

We will burrow this hole. 

Life in the order Hymenoptera is a social one, with identity and endeavor consolidated at the collective rather than individual level. The ant as a solitary being effectively doesn't exist. Instead, it's part of a larger entity, a cell in a vast superorganism. 

Coined by Darwin contemporary Herbert Spencer (author of the expression "survival of the fittest"), the term "superorganism" has progressed from a hazy term referring to the emergent behavior of groups to an increasingly concrete classifier of creatures composed of a plurality. 

The coral reef is a superorganism; so too, the cloud of bees or swarm of ants. These miniature cultures' efficacy is remarkable — groupings with as many as 20 million members coordinate to undertake projects in pursuit of the collective good, creating dwellings, finding food, or warding off predators. Divisions of labor are encoded biologically and communicated chemically. While there's undoubtedly a hierarchy — with queens at the apex — there's considerable distribution, with divisions undertaking different campaigns. 

In its sprawl, unique take on decentralization, and talent for making the chaotic look concerted, Constellation (CSI) is truly software's superorganism. Even more of an "anti-conglomerate" than IAC, CSI has perfected the art of acquisition. In the process, CEO Mark Leonard has created a generational compounder that may yet have room to run. 

In today's briefing, we'll discuss: 

  1. Mark Leonard and CSI's origins
  2. How Constellation acquires growth
  3. The company's laissez-faire approach to management
  4. A rare form of defensibility
  5. An evolving organism
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The maverick capitalist

If you dropped a venture capitalist into a vat of nuclear waste, you might end up with someone like Mark Leonard. 

An imposing 6" 5, Leonard sports a beard somewhere between Gandalf and ZZ Top's Billy Gibbons with a stern, owl-like brow that would have made Brezhnev blush. Behind the formidable exterior is one of the most articulate investing minds of his generation. 

The paucity of biographical information about Leonard only adds to the shabby mystique of a man colleagues described as "probably the most intensely private individual in IT." 

With an accent alternatingly attributed to England and South Africa, no one seems quite sure when (or from where) Leonard emigrated to Canada.

What is known is that Leonard received a BSc from the University of Guelph and an MBA from Western University in Ontario. Before founding Constellation, Leonard reportedly spent 11 years in traditional venture capital, though only after stints working "a banker, valuator, mason, gravedigger, dog handler, bouncer, sapper, and wind energy researcher."


These tidbits bolster the image of early Leonard as a budding capitalistic iconoclast: knowledgeable enough to understand the game but eclectic enough to pervert it. As the story goes, Leonard found the morays of traditional venture capital frustrating, particularly irritated by the industry's unflinching focus on companies operating in large addressable markets.

He had seen plenty of great businesses operating in niche spaces — while they didn't have the upside potential of a traditional venture investment, these were still solid companies. Notably, these enterprises often faced minimal competition because they were tackling a smaller space; big horizontal platforms like Microsoft weren't about to fritter resources building bespoke solutions for marina operators or golf course owners. 

Leonard found vertical market software (VMS) — software attacking specific markets like marina management — especially interesting. Businesses in the space were typically high gross margin and sticky, selling mission-critical software imbricated in a buyer's operations. 

Leonard decided it was time to create a different kind of investment firm. With $25 million from OMERS and his old venture colleagues, Leonard started Constellation Software in 1995. The goal was simple to articulate but difficult to execute: become the best buyer of VMS businesses in the world. 

Buying scale

Eleven years after its founding, Constellation listed on the Toronto Stock Exchange. (Somewhat confusingly, its ticker is $CSU, not CSI.) At the time, the budding conglomerate was valued at roughly $70 million. In the years since, CSI's stock price has appreciated over 7,000%, with the company's fundamental metrics (EBITDA, for example) reliably compounding 30% per year. 

That surge has been achieved in unorthodox fashion, at least compared to most.

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Oops! Something went wrong while submitting the form.

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If ants could speak, they would do so in the first-person plural. 

We will carry this leaf.

We will eat this crumb.

We will burrow this hole. 

Life in the order Hymenoptera is a social one, with identity and endeavor consolidated at the collective rather than individual level. The ant as a solitary being effectively doesn't exist. Instead, it's part of a larger entity, a cell in a vast superorganism. 

Coined by Darwin contemporary Herbert Spencer (author of the expression "survival of the fittest"), the term "superorganism" has progressed from a hazy term referring to the emergent behavior of groups to an increasingly concrete classifier of creatures composed of a plurality. 

The coral reef is a superorganism; so too, the cloud of bees or swarm of ants. These miniature cultures' efficacy is remarkable — groupings with as many as 20 million members coordinate to undertake projects in pursuit of the collective good, creating dwellings, finding food, or warding off predators. Divisions of labor are encoded biologically and communicated chemically. While there's undoubtedly a hierarchy — with queens at the apex — there's considerable distribution, with divisions undertaking different campaigns. 

In its sprawl, unique take on decentralization, and talent for making the chaotic look concerted, Constellation (CSI) is truly software's superorganism. Even more of an "anti-conglomerate" than IAC, CSI has perfected the art of acquisition. In the process, CEO Mark Leonard has created a generational compounder that may yet have room to run. 

In today's briefing, we'll discuss: 

  1. Mark Leonard and CSI's origins
  2. How Constellation acquires growth
  3. The company's laissez-faire approach to management
  4. A rare form of defensibility
  5. An evolving organism

The maverick capitalist

If you dropped a venture capitalist into a vat of nuclear waste, you might end up with someone like Mark Leonard. 

An imposing 6" 5, Leonard sports a beard somewhere between Gandalf and ZZ Top's Billy Gibbons with a stern, owl-like brow that would have made Brezhnev blush. Behind the formidable exterior is one of the most articulate investing minds of his generation. 

The paucity of biographical information about Leonard only adds to the shabby mystique of a man colleagues described as "probably the most intensely private individual in IT." 

With an accent alternatingly attributed to England and South Africa, no one seems quite sure when (or from where) Leonard emigrated to Canada.

What is known is that Leonard received a BSc from the University of Guelph and an MBA from Western University in Ontario. Before founding Constellation, Leonard reportedly spent 11 years in traditional venture capital, though only after stints working "a banker, valuator, mason, gravedigger, dog handler, bouncer, sapper, and wind energy researcher."


These tidbits bolster the image of early Leonard as a budding capitalistic iconoclast: knowledgeable enough to understand the game but eclectic enough to pervert it. As the story goes, Leonard found the morays of traditional venture capital frustrating, particularly irritated by the industry's unflinching focus on companies operating in large addressable markets.

He had seen plenty of great businesses operating in niche spaces — while they didn't have the upside potential of a traditional venture investment, these were still solid companies. Notably, these enterprises often faced minimal competition because they were tackling a smaller space; big horizontal platforms like Microsoft weren't about to fritter resources building bespoke solutions for marina operators or golf course owners. 

Leonard found vertical market software (VMS) — software attacking specific markets like marina management — especially interesting. Businesses in the space were typically high gross margin and sticky, selling mission-critical software imbricated in a buyer's operations. 

Leonard decided it was time to create a different kind of investment firm. With $25 million from OMERS and his old venture colleagues, Leonard started Constellation Software in 1995. The goal was simple to articulate but difficult to execute: become the best buyer of VMS businesses in the world. 

Buying scale

Eleven years after its founding, Constellation listed on the Toronto Stock Exchange. (Somewhat confusingly, its ticker is $CSU, not CSI.) At the time, the budding conglomerate was valued at roughly $70 million. In the years since, CSI's stock price has appreciated over 7,000%, with the company's fundamental metrics (EBITDA, for example) reliably compounding 30% per year. 

That surge has been achieved in unorthodox fashion, at least compared to most.

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