Why is Vertical Market Software so appealing?

Among aggregators of enterprise software, Constellation Software is held up as a source of inspiration. A number of Constellation alumni lead well-funded aggregators, such as Everfield and Expedition Holdings. The Constellation diaspora is equally well represented among M&A teams across Europe and America. This begs a question: what is it about vertical market software, or VMS, that is so captivating? 

Constellation’s stated strategy is to acquire, manage, and build VMS businesses. These businesses offer mission-critical software solutions tailored to address the specific needs of customers in particular markets. By focusing on acquiring businesses with growth potential, effectively managing them, and nurturing their development, Constellation has achieved significant revenue growth and cash flows in recent years.

Based on our conversations with a number of people from the VMS rollup community, we have identified 5 key characteristics that contribute to the high investability of VMS:

1. Mission criticality

2. Niche, easily identifiable market

3. High replacement costs

4. Remarkably low churn

5. Regulatory requirements

Read on!