Presentation by Mark Leonard (President and founder Constellation Software)

Mark Leonard founded Constellation Software, a serial acquirer of niche software companies, in 1995. Today it has revenue of more than 4 billion Canadian dollars and thanks to high revenue growth, strong margins and predictable growth by acquisitions is valued very highly.

Mark Leonard has kept a reasonably low profile, which makes his presentation at University of Toronto about business heroes and his learnings a rare and interesting read.

Financial gravity is back

Jamin Ball writes Clouded Judgement, and is anything but, about SaaS and valuations and the last issue of 2022 included a wrap-up for the year. A chart of enterprise value divided with expected revenue for the next twelve month shows just how high valuations got in 2020 and 2021.

Inflation and higher interest rates have been two major triggers, but another factor why valuations of great tech companies are down 60-90 % in 2022 is that their valuations doubled to tripled from multiple expansion in 2020 and 2021 to very high levels.

Financial gravity exists, so what goes up will come down to more normal levels.

Have enough cash

Have enough cash on the balance sheet to either get to profitability or to get to a compelling set of milestones that makes raising additional financing a “no brainer” — even in a poor market environment.

Roger Ehrenberg highlights one of the eternal truths, regardless of the market environment, for founders and CEOs building a startup: At any given point, make sure you have enough cash to take the company to profitability or build things that will allow you to raise capital before the cash runs out. This regardless of if you are six months from running out of cash or if you just raised $20 million and have 36 months of runway.

Roger’s longer post The Prepared Mind in the New Year is a good read.

Sometimes widely adopted technology die slowly

Sometimes old technology die over a couple of years when new technology comes along, sometimes it takes a much longer time. If technology is embedded into core systems that works, even if not perfectly, there’s a bunch of reasons to “if it is not broken, don’t fix it”. Which is good for legacy sellers like IBM, but also open up for companies like Constellation Software and private equity shops like ThomaBravo and Vista Equity Partners to acquire smaller companies with the same dynamics as IBM’s mainframe business.