Business Lessons from Mark Leonard

Leonard is an investor who uses “value as an analytical style” to buy businesses that sell software to vertical markets.- Mark Leonard

Like Buffett, Leonard think about moats, uses return on invested capital as a touchstone, prefers concentrated investments to diversification and likes it when assets he wants to own for a long time “go on sale.” Of course, he is not exactly like Buffett, but they do share certain attributes and approaches.

“We are the anti-economies of scale company. We believe in small teams outperforming large teams, and so given the choice of taking a 200-person business and buffing it up into two smaller ones, we would much prefer to do that and believe that the benefits are there as opposed to ramming businesses together, firing a bunch of people and moving a bunch of work offshore.” “There are a couple of hundred business units and every one of those managers has their own competitive environment in which they are competing. And they are making decisions around investments and whether they be rewrites or add-ons or things of that ilk and or improving coverage or allocating between farming and hunting, those role decisions that they are making individually and what you’re seeing is the sum total of those decisions. If marketing and R&D are going down as a percentage of the revenues or expenses, then I guess they aren’t seeing the returns on those investments.”

“There are two components to Constellation’s growth, organic and acquired.  Organic growth is, to my mind, the toughest management challenge in a software company, but potentially the most rewarding.  The feedback cycle is very long, so experience and wisdom accrete at painfully slow rates.” “Growing organically while generating a high ROIC is, to my mind, the toughest task in the software business.”


“Models are only as good as the assumptions that go into them, and there’s no substitute for thinking through scenarios on your own, with your own underlying assumptions.” “The more interesting part … was using the [model] to do some sensitivity analysis and to look at alternative strategies.  In all of the following examples, we assume that only one variable changes. In reality, our businesses are dynamic and changing one variable has an impact throughout the business.” “We use a multi-scenario approach to forecasting and I’m struck by how frequently, even outside of our outlier forecast, we end up with actual performance, both at the low and the high end of the outliers. And so you do get a real spread on these things, and this happened to be a spread on the upside.” “Just to give you some color on that impossibility of prediction. We have a sort of funnel of acquisition prospects and we can add that up, we’ve figured out how to use that function in Excel. And we do so periodically, and I went back and looked at those totals that we had over time, and the amount of acquisitions we actually closed during those periods, and I found the correlation between our funnel and the actual acquisitions closed was zero. And not just zero it was so close to zero that I’m thinking of commercializing our sales funnel as a random number generator.”

Full article here : Business Lessons from Mark Leonard

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