Mark Leonard’s Personal Journey:
Mark Leonard met his wife, a kind and supportive French-Canadian, in business school. Together, they raised four children who are now in their early to mid-30s and have launched successful careers. Leonard expresses surprise at the openness people share about their families in the digital age, acknowledging that information can be used or misused in various ways. His past experience with the media led him to be cautious about sharing company information and creating comprehensive messages to avoid sensationalism. Leonard emphasizes the importance of protecting his children’s privacy and warns them about the lack of control over information once it’s shared publicly.

Relatability and Storytelling:
Jeff Bender finds using real-life stories, often involving his children, as an effective tool for relatability when communicating with customers and employees. He acknowledges the challenge of ensuring everyone can relate to these stories but believes they help convey messages more effectively. Bender appreciates Leonard’s caution regarding the potential misuse of personal information shared online and agrees that it can be used against individuals at someone else’s discretion.

Discovering the Fulfillment of Masonry Work:
Mark Leonard reflects on his rewarding experience as a mason’s helper, appreciating the tangible accomplishments, sense of accomplishment, and legacy of his work. He describes the idyllic lifestyle of combining work as a mason with pursuing education on a part-time basis.

The Allure of Literature and the Serenity of Masonry:
During his time as a mason, Leonard found solace in reading literature, immersing himself in the works of John Fowles and John Barth. He paints a picturesque image of taking breaks while working on scaffolds to read literature, creating a harmonious blend of physical labor and intellectual stimulation.

Adjusting to the Changes Brought by COVID-19:
Leonard acknowledges the significant change in his routine due to COVID-19, particularly the absence of air travel. He highlights the positive aspects, such as the opportunity to establish healthier habits, including regular exercise, adequate sleep, and improved diet.

Finding Time for Reflection and Thoughtfulness:
Leonard emphasizes the importance of carving out time for reflection and deep thinking in the absence of frequent travel. He describes his efforts to dedicate Wednesdays as a day with fewer meetings to facilitate this reflective process.

A Consistent Morning Routine:
Leonard maintains a consistent morning routine, waking between 4 and 5 am to have breakfast, read multiple newspapers, and stay informed. He mentions the Globe and Mail, the Financial Times, and the Wall Street Journal as his preferred newspapers.

Scientific Learning and Memory:
Mark Leonard’s science degree and experiences taught him that knowledge has a half-life. Constantly replacing old knowledge with new ideas keeps us relevant.

Bias in Hypothesis Testing:
Jeff Bender reflects on a book that emphasized disproving hypotheses instead of proving them right. Confirmation bias leads people to seek information that confirms their beliefs.

Daniel Kahneman and Amos Tversky’s Research:
Daniel Kahneman received a Nobel Prize for behavioral economics. Their book, “Thinking Fast and Slow,” explains human biases.

MBA Education:
Mark Leonard found the MBA program’s case method lacking in teaching principles. Leonard believes a blend of theory and cases is ideal, with effective teaching. He enjoyed “baiting” professors by getting them off track in class.

Early Work Experiences:
Mark Leonard held various physical jobs, including masonry work, grave digging, and working as a bouncer, to support himself financially.

Shift to Intellectual Pursuit:
After gaining diverse experiences, Leonard pursued an MBA, giving direction to his career. He took a banking job after graduation but found it unfulfilling.

Venture Capital Interest:
During an internship at Barclays, Leonard became intrigued by venture capital. He gravitated towards the exciting stories and history of venture-funded companies.

Tenacity in Joining Venture Capital:
Leonard’s desire for a job he truly wanted and the support of his wife drove his tenacity in pursuing venture capital. He applied for 400 positions and eventually secured a job in the industry.

Reality of Venture Capital:
After joining the industry, Leonard discovered that it didn’t fully align with his expectations. However, the variety of work and the intellectual elitism within the industry still appealed to him.

Finding Success at Ventures West:
Leonard eventually found a fulfilling role at Ventures West, where he worked with remarkable individuals and had access to diverse industries.

Transition to Constellation:
Despite the exciting work at Ventures West, Leonard’s pursuit of mastery and focus led him to transition to Constellation, focusing on vertical market software and creating a permanent capital vehicle.

Path to Vertical Market Software:
Mark Leonard, a venture capitalist with a tech background, recognized the potential of vertical market software (VMS). The high-quality business model associated with VMS drove his interest in creating a permanent capital vehicle focused on the sector.

Steve Scotchmer: A Guiding Mentor:
Mark’s collaboration with Steve Scotchmer, an expert from the advanced materials industry, led to a shift in his perspective. Scotchmer’s high standards for business quality and knowledge of great investors influenced Leonard’s approach to investing.

Quest for Great Business Models:
Reflecting on the portfolio at Ventures West, Leonard recognized the potential of several VMS businesses. Although small in size, these companies showcased superior business models that could support long-term growth.

Genesis of Constellation Software:
Inspired by the idea of owning multiple high-quality businesses, Leonard conceptualized Constellation Software as a holding company. This allowed him to unite small and medium-sized VMS companies under one umbrella, providing a platform for sustained growth.

Ventures West’s Reaction:
Despite their initial focus on large-scale investments, Ventures West partners supported Leonard’s experimentation with Constellation. They recognized the need to explore different approaches given the challenges faced by the venture industry in Canada. Some partners even contributed personal capital to the new venture and later became shareholders in the IPO.

Initial Partnership with OMERS:
Mark Leonard sought capital from OMERS, his largest limited partner at Ventures West. OMERS expressed interest but on unconventional venture capital terms, leaving Leonard with a difficult choice. Leonard opted for the easy route, accepting OMERS’ terms to secure funding and launch the business. A trusted relationship with an individual within OMERS influenced the partnership decision.

Challenges with OMERS Relationship:
The trusted individual at OMERS faced internal problems and left the company. This led to a strained relationship with subsequent OMERS representatives. Leonard emphasized the importance of diversifying capital sources to avoid relying on a single point of contact.

Building a Long-Term Relationship with Bernie:
Bernie was hired as an analyst at Ventures West, demonstrating his technical background and international experience. Leonard and Bernie developed mutual respect and a strong working relationship over time. The partnership has endured for 25 years without major disagreements.

Reasons for Taking Constellation Public:
Capital raised in 1995 had no ticking clock, but funding from Birch Hill had a 10-year timeframe. Leonard aimed to provide an exit for Birch Hill, avoiding a potential forced sale through investment bankers. Going public offered a viable route for an exit and was executed successfully.

Reflections on Going Public:
Leonard recommends selecting shareholders carefully when taking a company public. Building relationships with long-term, like-minded shareholders is beneficial. No regrets about going public, despite the challenges and complexities involved.

Leadership Development and Internal Hiring:
Mark Leonard favors hiring high-quality talent from within Constellation and developing them internally. Leonard emphasizes the company’s unique nature and the challenges of finding suitable external hires for senior roles. He believes in creating rapid development paths to groom internal talent rather than relying on external recruitment.

Challenges with External Hiring:
Jeff Bender highlights the 50-50 success rate of external senior hires, which is a concern given the impact and longevity desired for employees. Bender emphasizes the need to infuse existing thinking with new perspectives to avoid stagnation and complacency.

The Importance of External Perspectives:
Bender presents an example of a company that aims to have 25% of its leaders come from external sources each year. The goal is to drive different thinking and bring fresh momentum to the business. This approach contrasts with the traditional tendency to stick with the same old ways of doing things.

General Electric’s Example:
Leonard draws a parallel to General Electric’s approach, where employees knew their job tenure was limited and focused on achieving short-term objectives. While this led to tremendous success, it also resulted in short-term thinking, over-optimization, and unethical behavior.

Balancing Short-Term and Long-Term Consequences:
Leonard cautions against separating individuals from the long-term implications of their decisions. In the software industry, investments take 7 to 10 years to pay off, requiring a focus on long-term outcomes.

Handling Individuals’ Desire for Growth and Change:
Leonard’s approach involves expanding individuals’ responsibilities within their current roles. He believes that taking people out of their positions can result in a loss of valuable knowledge and expertise.

The Role of New People and Ideas:
Leonard acknowledges that new people can bring fresh ideas and practices. He emphasizes the importance of having natural consumers and adopters of new ideas within the existing team. Leonard prefers to bring in doers and technical specialists rather than general managers.

The company’s decentralization model has its roots in Mark Leonard’s personal preference for autonomy and control. Leonard dislikes being told what to do and prefers convincing through rational arguments. His upbringing and experiences shaped his belief in the importance of individual choice and defending one’s position. Leonard’s vision is to attract like-minded people who value independence and sees this trait among his colleagues.

Application of Decentralization in Practice:
Jeff Bender acknowledges Leonard’s belief in autonomy and decentralization. Bender believes in empowering leaders to make decisions and learn from mistakes. Bender admits that while he generally follows this principle, there may be times when he steps in and requires certain actions.

Leonard’s Response to Bender’s Reflection:
Leonard does not express any disappointment in Bender’s occasional deviations from strict decentralization. He views it as self-serving because he recognizes the practicalities of running a large organization. Leonard acknowledges that maintaining a balance between autonomy and necessary intervention is important.

Sharing Best Practices:
Active sharing of best practices within the Harris group and CSI helps improve overall effectiveness. While competition exists in capital deployment, sharing best practices remains strong. Successfully sharing best practices across different geographies, times, and industries can be challenging. Best practices often take the form of vague and fuzzy recipes that guide, rather than dictate, actions. Sharing best practices through personal connections and networking is often more effective than formal documentation.

Importance of Experimentation:
Different approaches by individuals lead to discoveries of effective solutions. Sharing successful experiments contributes to overall learning and progress. Embracing an experimental approach to life fosters a healthier and more innovative organizational culture.

Challenges with Scale:
As organizations grow larger, sharing best practices and maintaining strong networks becomes more challenging. While connections between units may become weaker, individual units can still maintain robust best practice activities. Filtering through best practices for larger organizations allows for focusing on more significant and impactful issues.

Networking and Connecting People:
Connecting people for advice and sharing experiences is a valuable part of sharing best practices. Connecting individuals fosters collaboration and leads to impactful outcomes.

The High-Performance Conglomerates Study:
Mark Leonard studied several high-performance conglomerates (HPCs) to understand their successes and failures. He discovered that two of the top 12 HPCs were vertical market software companies, suggesting that this industry model has inherent strength. Leonard aimed to understand how Constellation could evolve as a company by examining other successful organizations.

Reversion to the Mean:
Leonard observed that HPCs tend to experience exceptional performance initially but over time revert to average performance. This is a common business phenomenon, where extreme performance levels eventually regress towards the industry average.

Jack Henry: A Remarkable Case:
Jack Henry, one of the studied HPCs, stands out for its sustained growth despite a shrinking customer base. The company has consistently increased revenues, profits, earnings per share, and shareholder value since the early 1980s. Jack Henry effectively cross-sells and leverages its existing customer base to drive growth and expand its product offerings.

Capital Allocation and Synergies:
Leonard believes that Jack Henry has a strategic advantage due to its willingness to pay up for acquisitions and achieve synergies. Constellation, with its focus on opportunistic acquisitions, may be missing out on the benefits of cross-selling and maximizing returns. By optimizing capital allocation and driving synergies, Constellation could become more strategic in its acquisitions and establish a stronger moat within its existing utility software businesses.

Disciplined Capital Allocation:
Although Jack Henry generates lower returns than Constellation, it has created significant value and returned capital to shareholders. Jeff Bender suggests that Constellation has created more value overall but has redeployed more capital rather than returning it to shareholders.

Organic Growth as a Management Challenge:
Leonard considers organic growth the toughest management challenge in software. Drawing from his experience in venture capital, he observed the difficulties in creating new businesses, markets, and products successfully. Organic growth requires consistent innovation, market understanding, and effective execution, making it a demanding task for software companies.

Challenges of Long-Term Investment Forecasting:
Mark Leonard’s research at Constellation revealed difficulties in effectively deploying capital in new initiatives. Philip Tetlock’s findings in “Superforecasters” indicate that even the most skilled forecasters can only reliably predict up to two or three years into the future. Visionaries are often either vague or lucky rather than genuinely capable of long-term foresight.

Co-Development and Customer Involvement:
Co-development with customers can significantly improve product development outcomes by ensuring market demand. Illinois Toolworks’ extreme approach of co-owning patents with clients exemplifies this strategy’s success.

Supporting Long-Term Investment in Organizations:
Jeff Bender highlights the challenge of encouraging businesses to take risks for organic growth. Mark Leonard and Mark Miller suggest rules of thumb to support long-term initiatives: Dedicating full-time champions and teams for initiatives. Separating financials for initiatives from core business.

Minimum Scale for Effective Initiatives:
Small-scale initiatives often face difficulties in implementing dedicated resources. Running initiatives with limited time allocations (e.g., 5% or 10% of time) is generally ineffective.

Effective Focus and Goal Setting:
Leaders should have clear priorities when starting the day, including a focus on long-term initiatives. Avoid uncertainty and aimlessness in daily tasks to enhance productivity.

Topicus Acquisition and Best Practices Sharing:
Topicus, a company acquired by TSS, has grown organically without external capital, primarily through initiatives. Constellation aims to understand Topicus’ best practices and encourage key managers to contribute ideas across the organization. Robin and his team at TSS are praised for their willingness to embrace and share best practices, benefiting Constellation’s MNA business development functions.

Importance of Smaller Business Units:
Jeff Bender and Mark Leonard discuss the advantages of smaller business units compared to larger ones. Smaller units allow for more focused attention, better coordination, and increased intensity and enthusiasm among team members. Mark Leonard draws parallels to his experiences in team sports and the venture business, emphasizing the “all hands on deck” mentality that drives success in smaller teams.

Research on High Output Teams:
Mark Leonard cites scholarly research on high output teams, indicating diminishing output per person as team size increases. Social slacking and communication overhead are identified as factors that negatively impact output in larger teams. Leonard highlights the importance of coordination between teams, which becomes more challenging as team size grows.

Mark Leonard observed that as team size increases, communication overhead increases geometrically. Technology has not effectively mitigated the challenges of increasing team size. Agile teams in the software industry typically consist of 5 to 10 members. Stacking teams vertically can increase the distance and disconnect between top and bottom levels. Beyond 50 to 100 team members, systems replace knowledge and empathy, leading to a bureaucratic and one-size-fits-all approach. Leonard emphasizes the importance of autonomy and agility in small teams, even if it means trading off some efficiency. Successful initiatives within Topicus often started with small teams that grew over time to capitalize on opportunities.

Trade-offs in Team Size and Market Strategy:
Leonard suggests that trading off efficiency for smaller, autonomous teams can result in higher long-term revenues and a larger market share. With a single business unit (BU) addressing a market, higher margins and revenues per person are possible, but market growth may be limited. Dividing the market among multiple BUs may lead to lower margins but allows for addressing more needs and ultimately generating higher gross revenues. This approach can create a wider moat and ensure more sustainable long-term revenues.