Mark Leonard: Venture Capital to Holding Company

I listened to Mark Leonard, founder of Constellation Software, share his thoughts. His company buys small software companies—it has acquired hundreds since it was founded in 1995. The software companies it targets are profitable and growing.

Mark spent over a decade as a venture capital investor before founding Constellation. He compared the venture model to Constellation’s model, and here’s what jumped out to me:

  • Venture capital – The goal is to create companies you can sell either through an IPO or outright sale. The focus is on preparing the company to be sold to someone else, not necessarily building a business that can last a lifetime. He didn’t say this, but most funds have a ten-year life cycle—they’re liquidated at the end of the cycle and proceeds are returned to investors.
  • Holding company – Holding companies like Constellation are built using permanent capital. The goal is to keep the capital invested in portfolio companies long-term. There’s a buy-to-hold mentality. This changes decision-making. You build relationships with founders and managers that will last a lifetime. You’re building a business with the intent that it will be around for decades, generating cash.

I love hearing origin stories, and Mark’s makes it clear that he wanted to build companies he could hold forever, not a decade. Given the current interest-rate environment, I wonder if we’ll start seeing more investors embrace the holding-company approach to investing in smaller technology companies.