Through Toronto’s Define Capital, OMERS Ventures and RIV Capital alum Narbe Alexandrian plans to buy profitable vertical software-as-a-service (SaaS) and business-to-business (B2B) software firms and grow them over the long haul.
Define recently raised $20 million CAD ($15 million USD) to do that. With Define—not to be confused with Vancouver’s Defined Capital—Alexandrian sees room to follow in the footsteps of fellow Toronto firm Constellation Software and consolidate the fragmented software market at a time when many Baby Boomers are gearing up to sell.
“The supply is high and the supply is getting higher, and there’s an M&A boom that’s taking shape as well with Baby Boomers [retiring].”
Narbe Alexandrian, Define Capital
“The idea is to create long-term value by acquiring these sticky SaaS and [B2B] software companies, optimizing them, and then just holding onto them forever, similar to a Constellation-type model,” Alexandrian told BetaKit in an exclusive interview.
Launched in early 2023, Define is an open-ended private equity (PE) fund with a “multi-decade horizon” and a general partner-limited partner (LP) structure. “What we’re building is a permanent capital corporation,” said Alexandrian, Define’s founder, CEO, and sole employee.
He declined to disclose the identities of Define’s LPs, noting only that they consist of a mix of predominantly local high-net-worth individuals, family offices, and strategic investors with backgrounds in tech, entrepreneurship, and finance.
Alexandrian started at Deloitte working in consulting and mergers and acquisitions (M&A). Following stints at Firmex as manager of corporate strategy and business development, MaRS Innovation as a University of Toronto Early Stage Technology program advisor, and Telus as senior strategy manager, he joined the venture arm of the Ontario Municipal Employees’ Retirement System pension fund (OMERS Ventures), where he spent nearly four years.
At OMERS Ventures, Alexandrian began as an associate and rose to principal before leaving to run the PE and venture capital (VC) arm of Ontario cannabis firm Canopy Growth, which was later spun off as RIV Capital. There, he served as president and then president and CEO for nearly three-and-a-half years until his departure in 2022.
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He said that he bumped into lots of niche software companies during his OMERS and MaRS days that did not quite fit the traditional VC profile. “They’re profitable, their customers are sticky, they’re answering a real clear problem within a niche industry, the market size isn’t that big, but it was a great business,” he said.
Alexandrian expects a sizeable number of companies fitting this description—established and new alike—to change hands over the coming years as Baby Boomers age out and artificial intelligence and low or no-code advances have made creating new software easier than ever.
“The supply is high and the supply is getting higher, and there’s an M&A boom that’s taking shape as well with Baby Boomers [retiring],” added Alexandrian, who sees room to snap up some of these companies and optimize them for long-term growth amid what has become an investor and “acquirer-friendly” market environment.
To start, Define plans to buy one to two companies based in Canada or the United States per year. As it achieves scale, Alexandrian said it may make more deals. Define prefers full control but is open to majority-stake acquisitions across a wide variety of niches. Some verticals Alexandrian has explored to date include software for churches, funeral homes, construction, bakeries, and pharmacies.
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Alexandrian described Constellation as an inspiration, noting that it has grown into a giant with a $77 billion market capitalization using a similar strategy to the one Define now plans to deploy, as it joins a list of Canadian software consolidators that includes established players like Kitchener-Waterloo’s OpenText and younger upstarts like Montréal-based Valsoft.
He sees an opportunity for Define to grab a slice of the North American software market with the help of a more human touch, noting many older founders he has encountered are looking to sell to someone who will take care of their business as they did.
“My differentiating point is … when you talk to me, initially, when you want to sell your business, I’m the guy, I’m gonna do the diligence, I’ll build the model, I’ll negotiate, I’ll close it, and I’ll run it, and you’re not going to be passed over to someone else,” Alexandrian added, noting that he has found this to be a selling point, especially for folks who have built and run their own businesses for decades.
“This is not a very cash, capital-intensive business. You can take $20 million very, very far.”
Define is targeting profitable, growing, SaaS and B2B software companies that cater to a niche market, have $1 million to $30 million in recurring revenue, limited churn, a “mission-critical use case,” over three years of operating history, and a strong team. Its “sweet spot” is firms with $400,000 to $5 million in earnings before income, taxes, depreciation, and amortization.
The fund has already made its first two acquisitions. In March, Define bought a pair of municipal government software firms specializing in property tax arrears: Realtax and Ontario Tax Sales. Alexandrian, who previously declined to share details about these transactions citing strategic reasons, announced the news nearly two months after the publication of this story in a recent LinkedIn post. He noted Define has since merged the pair into Realtax, but did not share any of the financial terms of the deals.
Among other things, Define intends to help portfolio companies improve their operational efficiency, optimize their pricing and go-to-market strategies, and continue to invest in their software infrastructure. In some cases, should Define acquire direct competitors, there may be opportunities to roll these firms up. In others, the fund intends to leave them to run separately.
According to the Define CEO, many of the companies it has considered buying have loyal clients, modest growth, and “untapped potential” that could be unlocked by bringing their solutions to the cloud. The real challenge, he said, will come in the execution.
Alexandrian believes that $20 million will be more than enough to make good on this strategy. “This is all the capital we need,” he said, noting that Define can “lever” its deals because there is cash flow in the firms it is targeting, securing debt to support acquisitions. “This is not a very cash, capital-intensive business. You can take $20 million very, very far.”
UPDATE (05/29/24): This story has been updated to include new information concerning Define Capital’s first two acquisitions.
Feature image courtesy Define Capital.