YouSaid · the spoken record

Mark Leonard

lines on the record: 51
first: 2022-05-13
most recent: 2022-05-13
sittings or episodes: 1
sources: podcast

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“And one of the last things I want to share with you from the letters this is too good not to include. It is the advice that he would give his 35 or 40-year-old self so the perspective of somebody who's in their mid-60s, multi-billionaire that's developed an amazing, wonderful business, and he's still, what's remarkable is he still thinks that VMS is the business to be in today, right? So he says, if I were advising my 35 or 40-year-old self on where to go from here, I would tell him to stay put become a master craftsman in the art of managing your VMS business. It is the most satisfying job and will generate more than enough wealth for you to live very comfortably and provide for your family. And I'll close with these four quotes that he leaves at the very end of this letter. We should no more trust executives who rely solely on their experience than we should trust doctors.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“HR, etc. Because the accountants never get the allocations right and the business units always treat the allocated costs as outside their control. And number two and the most important, when you get big, you lose entrepreneurship.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“ITW had 365 separate operating units by 1996 when Nichols retired. And then he talks about the process of studying the company. I'm sorry I did not reach out to some of the ITW employees and ex-employees until 2015. So he was on his radar, starting in 2005, took him 10 years to realize, hey, I need to talk to some of these people. When I did talk with one of the senior managers, he said, there's some quotes from these discussions that they're having. Number one, something wonderful happens when you spin off a new business unit with a clean sheet of paper, the leader only takes those he needs. They set up an office with good communication and no overhead. They cover for each other. They leave all the bureaucracy and all the crap behind. And then there's two other pieces of advice that from this conversation he wrote down and he wanted to remember number one, don't share sales.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Not unknown. One of the high performing conglomerates that we studied was Illinois Tool Works, which is ITW. I don't think I've heard of this before. It has hundreds of businesses. We began following the company from afar in 2005. The most relevant period in ITW's history for CSI was the tenure of John Nichols. Nichols began consulting for ITW in nineteen seventy nine, and it appears he was the primary author of its decentralization strategy. He was CO of the company as it went from three hundred sixty nine million in revenue to four point two billion, and he did that in about 14 years prior to Nichols' tenure.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And then he talks about why these gigantic organizations are actually incompatible with human nature. No one wants to admit that they've hit their limit. Some business managers lack the humility, some lack the courage, and most lack the time for reflection to notice that their task is getting too large and the sacrifices are going to be too great. And so his solution is going to echo what Henry Singleton discovered. If a business, if a large business is not generating the organic growth that we think it should, the business manager needs to be asked why employees and customers wouldn't be better served by splitting that business into smaller units. Our favorite outcome in this sort of situation is that the original business manager runs a large piece of the original business and spins off a new business unit run by one of his or her proteges. This dividing of larger business units into smaller units is rare, but it is not.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“He continues on the Steam describing why small is beautiful. The larger a business gets, the more difficult it becomes to manage and the more policies, procedures, systems, rules, and regulations are generated to handle that growing complexity. Talented people get frustrated. Innovation suffers, and the focus shifts from customers and markets to internal communication, cost control, and rule enforcement. The quirky people, the quirky but talented people rarely survive in this environment. A huge body of academic research confirms that complexity and coordination effort increases at a much faster rate than headcount in a growing organization.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And then he goes into the benefits that human scale as opposed to gigantic centralized companies have, right? At human scale companies, all the employees know each other. And if a team member isn't trusted and pulling their weight, they tend to get weeded out. If employees are talented, they can be kirk quirky as long as they are working for the greater good of the business. Priorities are clear. Systems have not had time to metastasize. Rules are few. Trust and communication are high, and focus tends to be on how to increase the size of the pie, not how the pie gets divided. That is how I remember my favorite venture investments when I was a venture capitalist his job before this, and is how I remember many of the early CSI acquis acquisitions.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“That is our game, right? What we offer our business managers is autonomy, an environment that supports them in mastering vertical market software management skills, and the chance to build an enduring and competent team in a quote unquote human scale business.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And then we get to my absolute favorite part of all the letters. This is where he just lays out his philosophy about why he's doing what he's doing. Our strategy is to be a good owner of hundreds and perhaps someday thousands of growing, autonomous, small businesses that generate high returns on capital. Our strategy is unusual. Most CEOs of public companies would rather run a single big business, perhaps two or three big businesses, but rarely two hundred businesses. We recognize that economies of scale, centralized management, and world class talent competing in large and growing markets can be a great business building formula, but it isn't what we do. So essentially he's saying, like, this is the note I left myself here, is this is great. We understand that game, but we want to play a different one. We seek out vertical market software businesses where motivated small teams composed a good people can produce superior results in tiny markets.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Fascinating reason I'm bringing this to your attention is because he draws the principles from the book and realizes he sees the same behavior in business. Archie's observations regarding medical practice and doctors struck me as applying equally to business practices and managers. The asymmetric effectiveness of most medical treatments rarely influence positive outcomes while frequently contributing to negative ones made me think critically about what I and most other managers do. Very smart that he drew this parallel. And so he says at CSI, we spend time on non-randomized observational studies trying to spot business practices that actually add value rather than just adding overhead.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Net purchase price below zero, meaning we got all the money back, and hence the return on investment capital, it's pushed, the return on investment capital to infinity. That's such a bizarre sentence. These sorts of businesses defy conventional financial statement measurement. Then he gives us two more book recommendations to end this letter. The first one is one man's medicine, an autobiography by Professor Archie Cochrane, and another book that Archie wrote called Effectiveness and Efficiency, which is random reflection on health services. But he says the first book is a moving, idiosyncratic, and amusing autobiography of a brilliant and a rootite outsider that makes you wish you had known the man firsthand. Makes you want to read that book, and I might if I read it, obviously turning to an episode for Founders. The second is a stinging critique of a well meaning but entrenched medical establishment for their ineffective and dangerous medical practices.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“If short term results are paramount as opposed to our long-term focus, the siren song of consolidation synergies are powerful. We continue to believe, however, that autonomy and responsibility attract and motivate the best managers and employees. And then he also talks about most of these high-performing conglomerates are not in software, and that software is a very strange business. And that's an example of that. One of the problems with growing asset-like businesses, software businesses, is that historical invested capital required to purchase the business becomes increasingly irrelevant over time. These are good problems to have, by the way, what he's about to describe to us. We have a number of businesses where current earnings now exceed their original purchase price. If these businesses have achieved that growth organically, they have also likely reduced working capital significantly, perhaps driving the”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“All the way from the founding company all the way up to 2007. It provides many firsthand accounts by employees, customers, competitors, and partners about the business practices, strategy, and culture of the company. Then he goes back to what he's learning from sitting on all these different companies. He's realizing, okay, not only what do they do smart, like what's some of the intelligence decisions they make, but what are the mistakes they made that we can avoid? And so he's saying, like, how do we avoid the pressure for us to centralize? And so he says, only one other high-performing conglomerate has followed a strategy of buying hundreds of small businesses and managing them autonomously. That's exactly what he's doing. They eventually caved to centralization. My hunch is that it takes an unusually trusting culture and a long-term investment horizon to support a multitude of small businesses and their entrepreneurial leaders. If trust falters across our businesses, they can be choked. So we have to have a high trust culture.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, where we might improve and what alternatives we could pursue. And he says we set a high bar on purpose keep in mind that we are comparing CSI to a group of wonderful companies. Over the last decade, if you had an equally weighted portfolio of the shares of these high performance conglomerates, you would have more than doubled the performance of the SP five hundred. So I'm not going to go over every single one. I do want to pull out one of these. I'm going to read this book that he recommends too. We have reviewed one of our perennial favorite high performance conglomerates this quarter. It's called Jack Henry and Associates. The company's values are those to which we aspire and their multi-decade performance is remarkable. I encourage you to familiarize yourself with JKHY, which is Jack Henry and Associates. There's also a lovely company history. You don't know Jack or Jerry is the name of the book that was written by a retired executive. The book covers the founding of the company through the end of”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Another book recommendation. I'll leave the link down below. He says the evolution of cooperation by Robert Axelrod has provided me with models for thinking about a number of business problems. Okay, so let's move on to 2015. This is another smart idea. And so what Mark's going to do is they say each quarter, we study an admirable company and we discuss it with our operating group managers and board members. So this is the entire, I think this year, if I'm not mistaken, this 2015 shareholder letter is he goes through all the high performance conglomerates. I think there's about a dozen. I think he said he studied. I can't remember the exact number, but basically saying, hey, let's look at the cream of the crop. Let's analyze what they're doing and why they're doing it and see if we can use any other ideas. That's essentially what's happening. We focus on high performance conglomerates that have demonstrated at least a decade of superior returns. And why is he doing that? We study the high performance conglomerates because they help us understand what CSI does.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“With the other stores, right? But I'm not going to make them do it. And he was asked by one of his employees, why aren't you making them do it? He's like, because if I make them do it, that was the best it will ever be. And so he kind of did that, what Mark is talking about here, doing it across a bunch of different businesses and different industries. You could also do that within your own company. Let's say you had stores or divisions or whatever case in Kikos, you know, probably 500 different stores, whatever the number was. And so Paul's traveling around getting all the ideas. And said, there's a line in that book that's fantastic because I think it's descriptive of what I'm trying to do with founders. Instead of going around different Kiko stores, I'm going around to the greatest entrepreneurs to ever live. And he says you had to remember he's been picking up the best ideas from all around the country. So it's Paul doing, was doing a kinko's. That is what Mark is doing now across. He's picking up all the best ideas across all the hundreds of businesses he owns. And then I'm trying to do the same thing for you across whatever. I'll get to 1,000, 2,000, 3,000 different entrepreneurs throughout history. And finally, he ends this year with...”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Separate notes as I'm reading this about hey, really like try to reword this and more people would read them. And again, maybe he doesn't want more people reading them. I don't know. And so even though the wording is a little difficult there, I think the idea is pretty simple to understand. We're going to test, we're going to experiment, all the stuff that we have, all these experiments that we're running across these hundreds of businesses that we own, the good one, the good ideas that we find through experimentation. They're most likely counterintuitive. So other people, unless they're running experiments, aren't going to arrive at the same conclusions. And then we're just going to spread them around. It's very similar to why did the founder of Kinkos, Paul or Fallow? That's founders number 181 if you haven't listened to it. He had this weird decentralized structure for all the different Kinko stores. He spent no time in the office. All he would do is travel around to different stores and he wouldn't rule by edict. So he had a lot of leeway as a manager of an individual Kinkos and he was asked like, why aren't you saying like they found the best way to do something? And Paul's like, that's a fantastic idea. I'm going to spread around the other company. I'm going to share the idea.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“We have found a few other examples of high performance conglomerates, which he refers to as HPCs, but always, I hate acronyms and stuff like that, so I'll always say it out. We have found a few other examples of high-performance conglomerates built around the idea of continuously refining their business processes and then driving ever more acquired businesses up their business process learning curve as quickly as possible. So sometimes, listen, I liked reading his letters. Sometimes I thought they'd be more valuable if he kind of dumbed it down. I understand that's not his goal, but if you think about what kind of customer acquisition channel and distribution channel that buffets your holder letters have been because he can talk to you like you're in like fifth grade, Mark is obviously very brilliant, very smart, but sometimes it's like, whoa, I gotta, I'm trying to translate exactly what you're saying here. I've had to reread certain sections a bunch of times. I don't think he really necessarily cares about that or who knows. Actually, I don't know if he cares about that or not, but there's a couple.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Of a new dogma to the unreceptive. It requires curious managers at a few dozen business units and a couple of clever analysts to plausibly test if a process works. Once a new best practice starts working within CSI, wide access to benchmarking information tends to rapidly breed emulation, so we can, we have 199 business units, we can run a test in 5, 10, 6, 24, whatever it is. We find it works, we can spread it throughout the entire company. And spreading best business practices makes those businesses better. The longer it goes, the more businesses we have, the stronger they get over the time. That's nice. You have a checkbook. It's nice you have a phone call, but I'm way too far ahead. You'll never catch me. It's essentially what he's saying.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And tons of people can raise money to buy businesses, right? Okay. So it says there's terrific motives around individual business units, but the actual barrier to jumping in and trying to copy what we're doing is kind of low. So we got to find a way to maintain our long-term competitive advantage. Nevertheless, CSI does have a compelling asset that is difficult to both replicate and maintain. We have 199 separately tracked business units and an open collegial and analytical culture. This provides us with a large group of businesses on which to test hypothesis, a ready source of ideas to test, and a receptive audience who can benefit from their application. More quickly and cheaply than any company that I know, we can figure out if a new business process works. This sort of ad hoc experimentation doesn't require enormous systems or the pedagogical”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And number three drive down cost at the head office and operating group level. And then this next part is going to be several sentences I want you to bear with me because I really do think this is a very clear description of what he's building, the advantages the strategy provides, and why he's going to be hard to compete with over the long term. Keep in mind we are now we're in 2014, so this is still quite old, or several years ago, not quite old. It's not the right way to put it several years ago. So let me just read this to you. I find that some of our shareholders confuse our strategy with that of our business unit, so constellation software overall with some of our business units, okay? While there are terrific moats around our individual business units, the barrier to starting a conglomerate of VMS, which is what he's doing, is pretty much a checkbook and a telephone, right? So low barriers to entry. Tons of people have phones, tons of people call businesses saying they want to buy them.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“who exhibit little correlation between their profitability and scale. So he brings that up again just because you're getting bigger, just because you have more headcount does not mean you're actually improving your business's performance. So again, trust in small groups of small people. And then he goes into what you should do if you also hold this belief. There's a number of implications if you share my view. We should, number one, divide our largest business unit, largest business units into smaller, more focused business units unless there's an overwhelmingly obvious reason to keep them whole. Number two, operate the majority of the businesses that we acquire as separate units.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And then he goes back into this idea we're growing bigger and bigger, so we have more pressure to centralize. And just like Henry Singleton, he wants the businesses to be as small as possible. And so he says, shareholders sometimes ask, why don't we pursue economies of scale by centralizing functions, like research and development or sales and marketing? My personal preference is to instead focus on keeping our businesses small and the majority of the decision making down at the business level, partly this is a function of my experience with small, high performance teams when I was a venture capitalist, so that was his job as a venture capitalist before he founded CSI. Really, what he's saying here is something that you and I have discussed over and over again, that it's just a lot better to trust in small groups of smart people. That's where all the magic happens. So says partly this is a function of my experience with small high performance teams when I was a venture capitalist, and partly it is a function of seeing that most vertical markets have several viable competitors”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“That can actually outlive and will outlive him. Keep in mind that CSI has an unconventional organizational structure, and we seem to have prospered to date without a lot of centralized command and control. While I may not be traveling as much as I did before nor putting in as many hours, CSI has lots of seasoned and accomplished managers at the operating group level who have become far better coaches, culture bearers, and hypothesis generators than I ever was. And then he goes into another benefit of this arrangement, not taking a salary. And he says one of the reasons of this compensation change is that I get to sidestep the agent principal problem. My compensation for being president is now tied solely to my current ownership of CSI shares. In essence, I'm your partner, not your employee. I feel like I like the feel of the partner relationship a whole lot better.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“CSI shareholders, and I wanted to set a good example for the thousands of CSI employees who travel every month. I'm getting older and wealthier and I find that I'm willing to trade more of my own cash for comfort, convenience and speed, so I'm afraid you'll mostly see me in the front of the plane from here on out. I love what I'm doing and don't want to stop unless my health deteriorates or the board figures it's time for me to go. I recognize that some of our directors, shareholders, and employees have, or are going to have misgivings about this arrangement. I'm still planning to do the work that I've always done, acquisitions, monitoring, best practice development, investor relations, and financing. I'm just not going to do the weekends all nighters and a constant grind of sixty hour plus weeks that have characterized my earlier career. And part of his ability to cut back is the fact that he has actually built an organization to last.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“2014. This was interesting. Last year, I asked the board to reduce my salary to zero. CSI had a great year, so despite these modifications, my total compensation actually increased. This year I'll take no salary, no incentive compensation, and I am no longer charging any expenses to the company. I have been president of CSI for its first twenty years. I have waived all compensation because I don't want to work as hard in the future as I did during the last twenty years. I was totally not expecting this when I got to this part too, but it makes sense when he explains his thinking here. So it says cutting my composition will allow me to lead a more balanced life with a less oppressive sense of personal obligation. I'm paying my own expenses for a different reason. I've traditionally traveled on economy tickets and stayed at modest hotels for a large part of his job as travel. I've traditionally traveled on economy tickets to stay to modest hotels because I wasn't happy freeloading on”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“So then we fast forward one year. He has found a way to get about $500 million in debt. Really, the way to think about this is the opportunities were there, so he wants to act right now. So he's like, our cash flow is growing really fast, but it was still insufficient to finance the acquisitions that we made. So we resorted to using increasing amounts of bank debt. But what's interesting he's talking about is like, this isn't a perfect strategy. We had $485 million outstanding on our debt. We continue to seek longer-term capital to defuse the fundamental mismatch inherent in buying permanent assets with short-term debt. So he's like, we're doing it now, but this is not something that I want to do forever. And then towards the end of this letter, he has one line that really speaks to the benefit of conglomerates. And this is going to remind me of something that Warren writes about in his shareholder letters. And so he says, it is clear that acquisitions have added tremendous shareholder”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“that the advantages of being agile and tight far outweigh economies of scale. I am not a proponent of handling our quote unquote complexity problem by creating a bunch of four hundred employee businesses to replace our forty employee businesses. I'm looking for ways of achieving scale elsewhere. Then he goes back to this idea. It's like, how can I increase the amount of acquisitions we have? And he says, debt is cheap right now, so it's pretty tempting to use it. Unfortunately, it has a nasty habit of going away when you need it most. Personally, I would use significant amounts of debt to finance our growth if it were long term non callable and the interest payments could be deferred for short periods. We have demonstrated the ability to generate good returns on incremental capital over the long haul. Unfortunately, investment bankers tell me that this sort of debt doesn't exist.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“So then this is where he gets into this, I would call it like a small, beautiful philosophy. Because at this point, the board, his board is worried about the growing complexity of constellation. And at this point, they own 125 businesses. And so this is Mark's analysis. Like, is this concern valid or not? And he says, one early observation is that our business units rarely get large. The biggest is 307 employees, and the average business we own currently only has 44 employees. Two-thirds of our employees are working in businesses with less than 100 employees. When we did a linear regression analysis of performance, the data suggested that the size and performance of our business units are almost totally unrelated. This suggests that the size and performance of our business units, the size and performance of our business units are almost totally unrelated. I believe that these business units are small for a reason.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“My sense is that we would be better owners of these assets and would generate better long term performance for them than the PE private equity companies that are trying to buy them. Up until this point, he wanted to do these acquisitions from cash flow. And he's saying, well, these things are too big. Usually we're sub 3 million right around there. These are big, but there's still opportunities. And so he's like, maybe in the case I would take on debt or some kind of other financial instrument or more leverage, essentially, to do this. Our current bank facilities do not allow us to make acquisitions, which incorporate standalone financing. And hence this opportunity to make substantial acquisitions on attractive assets that are close to our core competence is moot but intriguing.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And he says there's a time that this usually occurs. Most of our most attractive acquisitions from corporate, large corporations have happened during recessions. And towards the end of this letter, this is the first time I realized, oh, okay, he's completely open to new information and willing to change his mind to know that myself on this section is this is remarkable. Usually you only get this type of insight into a founder's perspective on their business in private. Usually you're not going to write about this in public. He says from time to time, we flirt with a fundamental change. I was recently in the UK where a couple of very large public sector vertical market software conglomerates are for sale, though whisper prices, so it's not, there's not a price on them yet, but people are telling them on the low, you could probably get it for this. The whisper prices are ones we could just about stomach if we were financing the acquisitions on a standalone basis like PE firms that are like PE firms that compete for these assets.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“These acquisitions. Most of these businesses came into being with the advent of mini and microcomputers and many of their founders are baby boomers who are now thinking about retirement. So that's one distribution channel for Mark. Now he's going to talk about this other distribution channel for him. The most lucrative acquisitions for us have been distressed assets. Sometimes large corporations convinced themselves that software businesses on the periphery of their industry will be good acquisitions. Rarely do the anticipated synergies accrue. And frequently the cultural clashes are fierce, so the corporate parent may eventually choose to sell the acquired software business. So founder sold a software business to a larger company, larger company had its own weird desires and reasons and rationales for doing that. There's no synergy. So now that asset's still valuable, but now it's been distressed, that large company is just like, all right, I just want to get rid of it. Mark's like, okay, cool. I'll take it off your hands and I'll opt.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“The better part of a lifetime building a business, a long term orientation tends to permeate all aspects of the enterprise. Employee selection and development, establishing and building symbiotic customer relationships, and involving sophisticated products. Founder businesses tend to be a very good cultural fit with constellation, and most of the ones that we buy operate as standalone business units managed by their existing managers under our umbrella. So that's again very, very buffet-like, right? We track many thousands of these acquisition prospects and try to regularly let their owners know that we'd love the chance to become the permanent owners of their business when the time is right for them. And he's saying he's also about to ride this gigantic demographic wave. This is something that now he's just talking about this we're in until 2012. This is talked about. I'm hearing this a lot more top of mind. I hear a lot of other people bring this up now is my point. There is a demographic element to the supply.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And then he talks about how they figured this out. We did not get to this point with Central Edicts or Grand Plans. We just had a hunch that our internal ventures could be managed better, and we started measuring them. The people involved in the initiatives generated the data, and with measurement came adjustment and adaptation. It took six years, but we have fundamentally changed the mental models of a generation of our managers and employees. So then he continues talking about other ways to grow a company, other ways to scale a company, talks about, hey, the other way we grow is via acquisitions. And so he talks about who he buys these companies from. This is exactly what Warren Buffett does in shareholder letters where he says, hey, I buy businesses. There's a ton of other people that buy businesses. This is why all money is not created equal. This is why you'd want to sell me your company as opposed to my competitor. So Mark's going to do something very similar here. Our favorite and most frequent acquisitions are the businesses that we buy from founders. When a founder invests,”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Didn't feel ultimately responsible. And then he talks about what happened. The most surprising adaptation was that the number of new initiatives proposed plummeted. So before, not one person was in charge. We weren't very specific on what we were hoping to actually.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the first thing they did is they had to develop a system because we're embarking on initiative. We don't know if it's going to happen. So what is the assumption, right? So if you have your assumption, then you can test if you have your hypothesis, you have your assumption, you can test to see if that assumption is wrong. And if you don't clearly define what that is, you might keep going way past and then you forget why you started this to begin with. So I'm going to skip over that part because that's really the summary. You have to find a way to, what is the assumption of this new initiative that you're doing and how can you tell like what is the test you're going to do to know if that assumption is true or false. And the second, in my opinion, more important part is that they put one person in charge. He repeats this over and over again. You can't have a team. You can't disperse responsibilities. Put one person in charge. We created dedicated initiative champion positions. So an initiative was less likely to drag on with a low but perpetual burn rate, meaning we're just burning money, we're being inefficient with our capital, right? Under a part-time leader who didn't”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Humans constantly wanting to do more, whether that doing more is actually beneficial or not is uncertain, right? Initiatives grew to account for over half of our combined expenditures by 2005, which not coincidentally was the peak of our spending. So he's bringing this up because he's like, we're not going to be able to scale if we're not efficient with our money. And as we added more and more companies, they all happen to do very similar things. This got out of control. So now he's going to explain how he wind up solving this problem. Remember, it is about improving the financial performance of your company by understanding human nature and its likely pitfalls. Even the best initiatives take more time and more investment than anticipated. As the data came in, two things happened at the business level. We started doing a better job of managing initiatives and this spending, so research development, sales and marketing spending, decreased.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Initiatives are significant long-term investments required to create new products or enter new markets. They usually take five to ten years to reach cash flow break-evens. So these are large investments. It's a lot of money we're putting out. And hopefully if they work out, we're not going to see that money back in five to ten years. And a lot of these don't work out. So this is something you have to be very careful of. We felt that they should be both measured and treated differently than other expenditures. And a lot of the growth in initiatives comes from just human nature. We want to overcomplicate things. We want to say, okay, we need to add new features, new software, like new parts of our software. We need to go into new markets, which without actually knowing if that's going to work or not. And he says, the ethos of software companies requires the regular launching of quote-unquote visionary new products by steely-eyed, tenacious developers, product managers, or founders. So this constant outgrowth of”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“To my mind, the toughest management challenge in a software company, but it's potentially the most rewarding. The feedback cycle is long, so experience and wisdom accrete at painfully slow rates. And so before I go any further, I'm going to read the note that I left myself after I read the section because I think if I put this note at the beginning, it'll make sense what he's about to talk to here. And I said, this part is incredible. It's about improving the financial performance of his company by understanding human nature and its likely pitfalls. Something as simple as tracking data and then holding one personal accountable. He's just writing about it in a nerdy, hard to parse way. So that's the note I left myself to try to explain to myself what it is I'm reading. And so an engine for growth in normal companies, he's saying, listen, it's a research and development and sales and marketing. So what we did is we separated our research and development and sales and marketing spending into two buckets, what he's going to call initiatives and then everything else. And so this is how he defines initiatives.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Our board and our analysts all seem concerned about our ability to scale. I haven't spent a lot of time worrying about the issue except in response to their inquiries. We've evolved gradually over 18 years and I don't feel like we are facing an impending paradigm shift. Nevertheless, when a number of smart, engaged constituents, consistently harp on the same issue, it is worth investigating both their concerns and the mindset of those asking the questions. So this is what I meant about he's very open to changing his perspective. If you have better information, you have a better argument. He's not married to any of these ideas and he wants to make sure that he's always improving and getting the most optimal path forward. And so he's going to get into how to do his businesses grow because the issue is how can we scale? We can't have, we have 100 something software companies at this point. Can't get much bigger than this, right? What are we going to do? So he says there's two components of our growth, organic and acquired. Organic growth is”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Letters. He's like, as a rule, I use these letters to write about our business, not our stock. Something else that he talks about quite a deal, just like Warren and Charlie Munger talk about as well, is the need to only work with people you like, admire, and trust, how a lot of people are out there rat poison, you have to be very careful. So Mark talks about it. He's like, I want to, if I can, promote from within, and this is why. We nearly always promote from within because mutual trust and loyalty take years to build. And conversely, newly hired smart and are manipulative mercenaries can take years to identify and root out. Okay, so now we get to the 2012 shareholder letter. This is when I wrote in gigantic capital letters. This is when I knew how to podcast to make. Up until this point, I was like, man, I don't know if there's enough information here. Like, this is going to be worth anybody's time. And then 2012, I'm like, okay. This is incredible. And this is when I just have a ton of highlights and notes. So I'm just going to jump right into it. Our long-term shareholder.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“He's clearly going to have a lot of valuable information. And it's the same way the reason I wanted to read. So I read the very So moving on to 2010 letter, this one was really confusing. I was like, what is up with this letter? The company might be sold by who? What is happening? What is taking place here? There was some kind of shareholder revolt, but it was like light on the details. And he just has a line where he's like, I'm proud of the company that our employees and shareholders have built, and we'd be more than a little sad if it is sold. Interesting enough, that interview I heard, he's like, give anybody advice that wants to run a public company, make sure that you get the shareholders that you deserve. Again, something that Buffett talks about all over and over again. But what's interesting, Constellation obviously wasn't sold, but I went and looked. I was like, what is the difference in stock price between 2010 when he's writing this and now? And the stock is up more than 40 times from here. And so he's going to explain what happened in the next shareholder letter. But at the time I was reading that, I had no idea what was taking place. So I'm going to skip to the next year. And then I'm going to run over my own point. It just said why he talks about why he writes the letter.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“What it ties into exactly why he's like this proponent of extreme decentralization and he hates bureaucracy. We've handled our growth to date by largely abdicating management to the managers of each of our vertical businesses. This is why people say he reminds them of Warren Buffett. We have a very thin overlay of infrastructure at headquarters, just like Buffett. We count on the fact that with each new acquisition comes with general managers who are steeped in their verticals, just like Buffett, having owned more than a hundred vertical market software businesses, we also have some best practices that we can share, just like Buffett. And so that's an important point. Keep in mind, if you read these shareholder letters and you compare it to what I'm going to talk about on the podcast, you're going to see none of, he talks about return on investment capital, compound percentages, all this stuff. That's not why I don't consider myself an investor, right? I read shareholder letters.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Each year. And so, why would the customer stay on? Because for an annual cost that rarely exceeds 1% of a customer's revenues, our products help them run their businesses effectively, adopt their industry's best practices, and adapt to changing times. And then he explicitly talks about why he has such a long-term bias, why he's talking about he uses words like permanent. We're going to keep these businesses forever. We want to buy them and never sell. We have been a serial acquirer of inherently attractive small vertical market software businesses in a large number of different verticals. This is the punchline right here. The longer we have owned a small software business, the larger and better it has become. If we persist in this strategy, we will continue to add new verticals and make many more software acquisitions each year. So you're saying, okay, we've already bought what, 60 or 70, wherever they are at this point. We know that they've done over 500 in the next, let's call it 10 to 12 years. Now here's the problem.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“And he's saying in our businesses, we can nearly always grow revenues organically without incremental capital. And because he's getting up more revenue and more profit without investing, having to invest more money, he takes those cash flows, buys more businesses, and that's how you're able to compound for a long period of time. But this is why he chose VMS businesses, because they typically have really low attrition rates. So it says our attrition rates also illustrate the long-term nature of our client relationships. Attrition due to the loss of customers in 2009 was 4%. This suggests that our average customer will stay with constellation for 26 years. Customer relationships that endure for more than two decades are valuable. We have symbiotic relationships with tens of thousands of customers. We handle thousands of their calls each day and issue scores of new versions of mission, critical software.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Opposite bias, which means they're not worried about growth, they're essentially trying to squeeze that asset for every last dollar. At the Mark is comparing, he's saying, this is what entrepreneurs typically do, and this is their bias. This is the bias that we found for a lot of our private equity competitors. This is how we think about that. At constellation, we try to find an optimum position where incremental investment still generates good incremental long-term returns. We think both approaches can be improved, meaning the approach of both the founder and the private equity. So really the note of myself here, my interpretation of what he's saying here, founders think that the future will be better if we are bigger. Private equity wants to squeeze every last dollar out now. And then once we get to the 2009 shareholder, this is where I wrote. This is the very first time I start to understand what Mark is doing and what he's actually shooting for.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“So it says quite a number of these businesses are for sale at attractive prices. We may not be the successful bidders of these assets, but if we are, we will almost certainly be increasing constellations' financial leverage. And he knows why this is an opportunity, because it's almost a reverse of the problem he had before. For most of the last decade, we struggled to find enough attractive acquisitions to consume our operating cash flow. We believe that this situation has now reversed, and we are sorely tempted to buy as many attractive vertical market software businesses as and while we can. And that's why I would say, hey, I'm against debt, but maybe I should reverse that because now I have an opportunity of a lifetime. And I left myself here to my interpretation as I read this. We avoided debt, but prices are too good, and we will borrow money so we can buy what we feel are underpriced assets. Everyone else is scared the time to act is now. And when I got to this section, one of my favorite, this paragraph that”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Significant amounts of debt. Circumstances, however, may dictate a change in our capital structure. The economy is slow, credit and equity markets are in rough shape, and buyers for vertical market software, which is what we're trying to be, buyers for vertical market software businesses are increasingly scarce. So now later on he's going to talk about this is getting a lot more difficult because people are realizing that the idea that we have and idea that some other conglomerates have that VMS businesses are extremely attractive now as that idea gets spread, I have more and more competition. In 2008, he's like the downturn in the market and in the overall economy has kind of eliminated my competition. This is going to be for a very short amount of time I should act.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“Software businesses. So exactly what Warren says. It's like my preference I want to own the home business. Sometimes I realize, hey, pieces of business can be purchased attractively in public markets, so I will do that as well. So then Mark describes why this strategy is effective and what he's trying to do here. We have the same objective when we buy a piece of a business as when we buy 100%. We want to be a great perpetual owner of an inherently attractive asset. It's very obvious if you reach a shareholder letters that he's receptive to new information. He's going to change his mind. And so we're in 2008 shareholder letter. Obviously, there's a gigantic financial crisis that was occurring at this time. And he's going to say something here that's really interesting because he changed his strategies in the future as well. So before they avoided debt. And now he's like, well, the market is depressed. assets. The assets are going selling for a lot less than we think the value is. Maybe I should take on debt just so I can buy those assets. Until recently, we have avoided using...”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source
“I did things that were not accepted by lots of other people. The ability to choose what I think is right is something I prize highly. Okay, so let me jump into his first shareholder letter, and he says, the software business has significant economies of scale. He says, history suggests that we generally grow our acquired businesses frequently, providing additional products for them to sell into their install base. So we've made money by selling existing customers more products. And then another way he talks about how they make money is occasionally, however, the reduction of an acquired business, so a business we bought, to a profitable core will leave us with a smaller but usually more profitable business. So the way I interpret that, we also make money by making companies more efficient. So this is really made me think of what Rick Rubin said. He's like, it's production by reduction. I enhance.”
2022-05-13 · Founders · #246 Mark Leonard's Shareholder Letters · IDENTIFIED FROM THE TRANSCRIPT · source