Topicus: The Incubator Culture
“Growing large by staying small”
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Topicus (TOI) is a Dutch software company. Better yet, it’s a decentralized incubator of software businesses. Their incubator culture created niche software companies, craft beer and pizza ovens.
Why am I writing about a Dutch software business? Because it’s owned by Constellation Software (CSU), a utopian companies I’ve invested in since 2016. Mark Leonard, CSU’s founder, is one of the best CEOs I’ve learned about. Anything he touches, it’s worth a look.
In May of 2020, TSS — one of CSU’s six operating groups (OG) — acquired Topicus BV for €217m. CSU had been following Topicus’s development since 2001 before committing. After the acquisition, the entity was spun off into its own public entity on the stock market. TOI is listed on the TSX Venture exchange as $TOI.V and I’m long the stock in my portfolio.
Prior to being acquired, Topicus BV had ~1,100 employees and its software products had 75% market share in mortgages, 85% market shares in primary education and healthcare in the Netherlands.
TOI Structure
TSS is CSU’s acquirer of vertical market software companies (VMS) in Europe. Like all other OGs, TSS is made up of individual business units (BU) that operate independently. It’s a decentralized business model that allows TSS’s 85 BUs to flourish. Studying CSU’s culture is recommended to truly understand what decentralization looks like.
TSS was founded in 1984 by Rinse Strikwerda. It was called the TAS Group when it IPO’d in 1998 in the Netherlands. CSU acquired TSS in 2013 from the Strikwerda family, giving them 33% minority interest via a holding company — Joday Group.
After acquiring Topicus BV, the combined entity (TOI) looked like this:
Allow me to simplify the graph above.
Of all the shares that will be available on the stock market — I’m accounting for the converting of preferred shares into common stock — CSU will own 30.35%, Joday Group will own 30.3%, IJssel will own 9% and public shareholders (I’m in this bucket) will own 30.35%. IJssel is the controlling entity of Topicus BV that appears to hold the equity of its three founders.
CSU will control TOI with one super voting share worth 50.1% of votes. A quick nod of respect to Mark Leonard for a ’no-shenanigans’ approach to maintaining voting control. A Buffett-esque all-or-nothing with the one share.
I interpret the structure as 70% of the outstanding shares owned by CSU insiders with Mark Leonard controlling the entity. That’s an alignment of interest I can get behind. It means I’m putting a lot of faith into Leonard and the organization he has built. But that is how I invest.
Insider ownership is my proxy for trusting what management says. The value of what management says is tied to the blood, sweat and tears of the founding team and their wallets.
Today’s TOI
Pre-merger TSS, an operating group in CSU, had two of its own OGs: TSS Public and TSS Blue. TSS Public handled VMS for public sector clients and Blue took care of the rest. The acquired Topicus BV was added on as the third OG to the combined entity which was renamed Topicus dot com (TOI).
Robin van Poelje, TSS’s CEO since 2010, became the Chairman of the Board of TOI. Operating Group CEOs of TSS, Han Knooren (Public) and Ramon Zanders (Blue) will continue to lead their respective groups. Daan Dijkhuizen took on the role of CEO of TOI, the combined entity. Daan was the CEO of Topicus BV since 2017.
In the 2020 annual shareholder’s meeting, Robin called TOI a company with two different horses. This was in reference to their difference in strategy. TSS follows the “traditional” CSU formula of acquiring VMS companies. Topicus BV builds companies internally — the focus of this essay.
TSS’s strategy can easily be summed up below:
Topicus BV’s strategy, per Daan:
"Topicus B.V. as it is today, was founded in 2001. And it kicked off with a cell philosophy, putting technological talent at the core of those cells, put some entrepreneurism into that cell and create actually new product in little market niches, and by means of cell division, Topicus has had double-digit growth in the first 10 years of its existence.”
What the hell is a “cell”? I’ll explain later in the essay. But first, let’s dig into a little history.
Topicus BV History
I will refer to Topicus BV, the acquired entity, as just Topicus going forward.
Topicus was founded by Harry Romkema, Leo Essink and Henk Jan Knol. The founding years seem to encompass between 1998 to 2001 per various sources. Romkema and Knol were former students of Essink. Before Topicus, the trio started Utopics in 1992 to build software for the financial services industry.
They sold the software business to Ordina in 1995 and left after finding the conglomerate too bureaucratic. Topicus was born as the entrepreneurs sought to build a company that would let them continue to tinker in a flat heirarchy.
Topicus focused on building an entrepreneurial culture for smart engineers. A culture where the employees started their own beer label (Gifkikker). They also built their own pizza oven. The reputation of their unique culture became a case study for university students in 2007 and 2013.
Topicus Business Model
Topicus's slogan is “Growing large by staying small”. Its mission is "to become 'the largest' IT player being constructed of 'small cells/organizational entities’”. Small is a constant focus.
It led to a strategy of entering an industry by building software for a specific customer, then building out all the applications for everyone in the industry. A strategy of growing by conquering multiple niches in an industry.
Though Topicus does make acquisitions like CSU, it’s uniqueness is in how they are able to continuously produce software businesses inside the organization by attracting and developing talent.
Incubator Culture
It starts with acquiring highly educated IT professionals (i.e. engineers). Topicus wants people with "IQ of 130+" with an “entrepreneurial flair". They also focus on young professionals as they believe experienced professionals have bad habits that can’t be molded to the Topicus DNA.
But how does Topicus incentivize their employees to become entrepreneurs?Entrepreneurship is hard work. If I was a smart engineer at a company, I would need more than some company mission of a few basis points in stock option for me to apply 100% of myself in building something for my employer.
What pushes employees to build companies like ParnaSys (pupil tracking system with 85% market share) and FinDesk (mortgage advisor software with 75% market share)?This is where Topicus spins out companies started by the entrepreneurs.
Not only do they create a decentralized culture to give employees the independence to pursue projects, they give ownership by spinning out the projects into independent companies.
Topicus’s organization chart will look something like this:
A project often begins with a client who brings Topicus a problem. This almost guarantees the existence of one customer for the new venture. The client will even help fund the venture to lessen the financial cost for Topicus.
A venture will go through three phases before it spins off.
Phase 1 is the pioneer phase where 5-7 employees tackle the problem. The philosophy is that there is one pioneer willing to challenge the status quo and recruit a team around himself.
This is similar to how venture capitalists say there always is an "origin founder" in a hypothetical co-founding threesome. The one person with a vision and drive to push the team through the hard times. The pioneer is the key.
Phase 1 happens organically through the employees’s own time. They build their own team and tackle the problem any way they like.
Phase 2 sees the formation of a viable business. It will encompass ~15 employees and a layer of management as the solution proves out.
Phase 3 is when the business reaches 25 employees and spins-off. This is referred to as a ‘cell’. The cell will be considered mature at this point and will take on its own management structure and policies.
The pioneer may be replaced by a managerial leader in Phase 3. It can be seen as the pioneer being given an opportunity to start a new project or the now independent cell needing a leader versed in scaling a business.
I thought this was cruel. But starting a business and scaling it require different skillsets. It probably requires a different personality as well. I think only a few entrepreneurs have the ability to do both. Something we only see via survivorship bias in the public markets.
Topicus seems to be well versed in the dichotomy. They’ve also found past cell leaders tend to have a habit of producing more cells. Serial entrepreneurship might be a personality trait.
Once spun-off, the cell will get basic accounting support from the parent. But it will branch off into its own office building — leaving the proverbial nest.
With a team of 25, it will focus on owning its market niche. This is similar to most CSU business units having ~30 employees. Empirically, it appears to be the optimal size. Particularly for niche-dominating, cash-gushing software companies. Daan noted the majority of spin-offs had substantial profitability.
Risk-Averse System.
Topicus hires smart people, gives them the autonomy to build something of their own, and breaks off the entity to let it live independently. It’s a decentralized model that empowers their best employees.
Their system lowers career risk for their entrepreneurial employees. Companies aren’t forced to focus on unsustainably rapid growth. Most companies — I think 90% — shouldn’t take venture funding because they aren’t going to be world dominating businesses. For every Facebook, there are ~3m small businesses advertising on it — all started by entrepreneurs.
Topicus has created an environment for those who want to build a cashflow positive business. An environment for entrepreneurs to build companies that have customers, dominate its market and do it while having the perks of being an employee.
Many great entrepreneurs are risk-averse. They might appear to bet the farm but they make many small bets until something hits. Topicus made this possible with a flat system where young engineers get a salary to take care of the basics but are brought problems to solve. If they are successful, their company is spun off.
Therein lies another important element of Topicus’s culture: safety. Not just safety in trying something and failing, like Silicon Valley became famous for, but safety in life.
Bryce Roberts of Indie VC highlighted most entrepreneurs just want to know they can have enough money to put food on the table and a roof over their heads so they can tinker on. So when he invests in bootstrapped founders, that’s the funding he is providing. To give them a buffer to build something for the long term.
Most founders can’t get this buffer unless they go out to get funding. Most funds don’t want entrepreneurs to take their time and build a niche business either. Typical venture funding is a contract the entrepreneur enters to use every dollar he gets to push growth to the max, for the company to die trying. Topicus becomes a place for entrepreneurs who don’t want to walk that path.
For employees who no longer wish to work in a cell, they can also work for the mature parts of the parent. This is called the “bus” model.
This gives an alternative to the fast-paced lifestyle and career trajectory an employee might have in a cell. Topicus is accounting for the change in their employees ambitions and life circumstances through a flexible program. A program that will allow them to retain the experienced talent they’ve nurtured to possibly guide the next generation of young talent.
TOI’s Future
Topicus appears to have spun off at least eight cells through their culture of “professional freedom”. A reputation that even helped in acquiring the fintech company, Able, in 2017:
"About 10 companies were interested in acquiring Able. Alex Timmermans, General Manager of Able, writes in a blog that it chose Topicus because of 'a similar culture of expertise, ambition, solution orientation and no-nonsense.’”
As of 2015, Topicus evolved to form four industry divisions: healthcare, financial service, education and social service. It’s their way of creating a vertical market platform for the VMS cells as they build a network with each other. This can add more services to clients and push organic growth.
They’ve historically entered industries through back office software, such as financial software in education. Their plan is to build out services that move up to the front office like student tracking and learning software in the education segment.
Not only are they focused on organically moving up an industry but their international expansion strategy appeared quite seamless:
“...we follow our clientele to another country. For example, in financial services, a large financial institution is using our product in the Netherlands, and is deploying our product now in Belgium, for example, and we’ll do the same most probably in Spain or Germany, in the near future.” - Daan Dijkhuizen
When asked about TOI’s future, Daan responded they were the size CSU was about ten years ago. There’s a lot of optimism to consider in that statement — I saw how an investment in CSU in ’08 would’ve returned 80x today.
TOI's OGs are united in their decentralized culture but the manifestation of their growth has been different. It’s fair to say their next ten years won’t be like CSUs last 10 years. They are playing in a completely new geography that has its own set of challenges.
CSU’s home market of North America was bounded by a handful of countries, languages and cultures. TOI’s European market is a 10x multiplier on the complexity CSU had and I imagine Topicus's entrepreneurial foundation will play a pivotal role in how the business grows.
It’s apparent to me that TOI is constantly changing and learning as its business grows. CSU acquisition is another step in their journey to share best practices for the next evolution of the business. Whatever the financials come out to be, the systems they’ve built into their culture gives me faith for the future.