Constellation VMS Ventures: An overview
In November 2021, Constellation Software (TSX: CSU.TO) announced the launch of a new initiative called the VMS Ventures fund. The fund is managed by Mark Leonard (who presumably needs no introduction), Karl Schabas (former Director of Corporate Strategy at Volaris Group), and Daan Dijkhuizen (CEO of Topicus). VMS Ventures (VMSV) is a $200 million experiment in which Constellation Software business units will sponsor vertical market software startups, writing checks in the $500k to $1 million range to fund up to 40 different companies over the next few years. The startups will be standalone entities with founders, VMSV, and the sponsoring business unit as equity holders. Employees will hold material amounts of equity and work with little to no managerial oversight, and they’ll be moving fast. “High upside and no safety net” as Mark Leonard describes it.
The goal of the initiative is to learn how to create profitable organic growth at scale, then push knowledge to the operating groups. Constellation is arguably the best at identifying, purchasing, and operating vertical market software, and they see this as an opportunity to do the same for VMS startups. There are a few factors they believe will tilt the odds in their favor:
They have intimate knowledge of the markets they’re going after and the employees doing the work
They have a huge network that can be leveraged to identify investment opportunities
They’ve learned from hundreds of previous initiatives over the years, many of which were failures
They’re offering favorable terms for founders, which should result in better investment opportunities
The criteria for investment is summarized as follows:
A clear path to at least $10 million in annual revenues within a decade
A target vertical market (or close adjacency to a vertical market) where CSI already operates
A sponsoring CSI business unit, meaning a business unit in one of Constellation’s operating groups believes the idea and the team behind the idea are worthy of an investment from the fund. Ideally, the business unit provides some of the capital and holds the equity stake long-term
A backable team, defined as “at least one experienced person who knows the vertical, plus a strong technical lead, and a handful of talented developers.” Team members are expected to dedicate significant time to their business. “People who wish to lead balanced lives, with a multitude of social and family obligations, are unlikely to flourish doing startup work with the venture fund.”
An earned secret, defined as “unique insight into a particular customer problem through deep knowledge and experience in a vertical, and this insight is not obvious to agile and deep pocketed competitors”
Constellation has strict terms for the startups they’ll invest in. The VMS Venture fund seeks to be the lead investor with majority control of the board. The fund intends to never sell its stake in a startup, meaning founders have few exit paths: sell to a CSI operating group, receive dividends, or (least likely) sell shares to the public via IPO.
For a deeper dive into the VMS Ventures fund, review the extended Q&A notes.