Define Capital Secures $20 Million to Acquire and Cultivate Profitable Niche Software Companies

Through Define Capital, Narbe Alexandrian, a former member of OMERS Ventures and RIV Capital, aims to acquire profitable vertical software-as-a-service (SaaS) and business-to-business (B2B) software companies and nurture their growth over the long term.Recently, Define secured $20 million CAD ($15 million USD) to pursue this strategy. Alexandrian views Define as an opportunity to emulate the success of Toronto-based Constellation Software by capitalizing on the fragmented nature of the software market, particularly as many Baby Boomers prepare to exit the industry.

Narbe Alexandrian shared with BetaKit in an exclusive interview that Define Capital's objective is to generate long-term value through the acquisition of durable SaaS and B2B software companies. The plan involves acquiring these companies, optimizing their operations, and holding onto them indefinitely, drawing inspiration from Constellation Software's successful model.Define, established in early 2023, operates as an open-ended private equity fund with a "multi-decade horizon" and follows a general partner-limited partner structure.

Alexandrian, serving as Define's founder, CEO, and sole employee, described the fund as a permanent capital corporation.While Alexandrian did not disclose the identities of Define's limited partners (LPs), he mentioned that they primarily comprise local high-net-worth individuals, family offices, and strategic investors with expertise in technology, entrepreneurship, and finance.Narbe Alexandrian's career journey has been marked by diverse experiences across consulting, corporate strategy, and venture capital.He began his professional journey at Deloitte, where he worked in consulting and mergers and acquisitions (M&A).

Following this, Alexandrian held positions at various organizations, including Firmex, MaRS Innovation, and Telus, where he gained valuable insights into corporate strategy and business development.In his nearly four-year tenure at OMERS Ventures, the venture arm of the Ontario Municipal Employees' Retirement System pension fund, Alexandrian progressed from an associate to a principal role. Subsequently, he transitioned to lead the private equity and venture capital arm of Ontario cannabis company Canopy Growth, later spun off as RIV Capital. During his time at RIV Capital, Alexandrian served as president and later as president and CEO for nearly three and a half years until his departure in 2022.Narbe Alexandrian encountered numerous niche software companies during his tenure at OMERS Ventures and MaRS Innovation that didn't align with the traditional venture capital profile.

Despite not having a large market size, these companies were profitable, boasted loyal customer bases, and effectively addressed specific challenges within their niche industries.He anticipates that a significant number of companies fitting this description, both established and new ventures, will undergo ownership changes in the coming years. This trend is driven by the aging out of Baby Boomers, coupled with advancements in artificial intelligence and low or no-code technologies, which have simplified the process of creating new software solutions.

Narbe Alexandrian highlighted the increasing abundance of potential acquisitions in the market, driven by retiring Baby Boomers and a growing M&A boom. He sees an opportunity to capitalize on this trend by acquiring and optimizing niche software companies for long-term growth, especially in the current investor and acquirer-friendly market environment.Define Capital intends to initiate its acquisition strategy by purchasing one to two companies annually, initially focusing on businesses based in Canada or the United States. As the fund gains momentum, Alexandrian envisions expanding its deal pipeline.

Define prefers acquiring full control but is also open to majority-stake acquisitions across various industry verticals. Some sectors that Define has explored include software tailored for churches, funeral homes, construction firms, bakeries, and pharmacies.Narbe Alexandrian draws inspiration from Constellation Software, which has achieved a remarkable $77 billion market capitalization by employing a strategy similar to the one Define Capital intends to implement.

As Define enters the arena of Canadian software consolidators, joining the ranks of established players like OpenText and emerging contenders like Valsoft, Alexandrian sees an opportunity to carve out a niche in the North American software market.He believes Define can differentiate itself by offering a more personal approach to acquisitions. Many older founders, according to Alexandrian, are seeking to sell their businesses to someone who will care for them as they have. By personally handling the entire process—from initial discussions to diligence, negotiation, and ultimately running the acquired business—Alexandrian aims to reassure founders that their companies will be in capable hands.

This hands-on approach, he notes, has resonated with entrepreneurs who have dedicated decades to building and managing their businesses. By providing a level of personal attention and continuity throughout the acquisition process, Alexandrian believes Define can stand out in the competitive landscape of software consolidation.Define Capital's focus lies on acquiring profitable and growing SaaS and B2B software companies catering to niche markets.

The target companies typically exhibit recurring revenues ranging from $1 million to $30 million, minimal churn, and a "mission-critical use case." They should have over three years of operating history and a strong team.Define's ideal candidates are firms generating between $400,000 to $5 million in earnings before income, taxes, depreciation, and amortization (EBITDA).The fund has already completed its first two acquisitions, purchasing undisclosed municipal government software firms. Narbe Alexandrian, Define's CEO, refrained from disclosing their names at present, citing strategic considerations. Define aims to facilitate a smooth transition for these companies over the coming months before announcing the acquisitions publicly.

Define intends to assist its portfolio companies in enhancing operational efficiency, refining pricing and go-to-market strategies, and continuing to invest in their software infrastructure.In certain instances, where Define acquires direct competitors, there may be opportunities for consolidation. However, in other cases, Define plans to maintain separate operations.According to Alexandrian, many of the companies under consideration boast loyal client bases, moderate growth, and untapped potential that could be unlocked by migrating their solutions to the cloud. However, he acknowledges that the true test lies in execution.

Alexandrian is confident that the $20 million raised by Define will suffice to execute its strategy effectively. He notes that the business model is not overly capital-intensive, with the potential to leverage deals using the cash flow generated by the target companies and securing debt to support acquisitions. He believes that $20 million can go a long way in realizing Define's objectives.