Search Funds are a misunderstood, and little known asset class that gives young, entrepreneurial, and hungry people the ability to accelerate their careers, ditch working for large corporations, and potentially shape an industry. I have some experience helping out one of these such investment vehicles, and thought it would be interesting to the masses to shed some light on this relatively unknown asset class.
Definition of a Search Fund
The clinical definition of a search fund is a small group of individuals who have secured a pool of capital in order to buy a company, and then become the senior management team of that company. For example, two guys out of Harvard Business School decide to forgo their offers at McKinsey, raise $10 million, and go find a services business in New Jersey that they acquire, and then run. This is the 10 second spiel on search funds, but there is so much more to it than that.
Essence of a Search Fund
To understand a search fund, it’s important to understand the type of people who get caught up in this type of venture. The typical searcher, if there is one, has a few years of investing experience (PE/VC), and most likely some sort of operational experience either as a consultant or as an actual manager in a corporation. They probably went to either Harvard of Stanford to get their MBA, and have made the decision to go out on their own instead of joining most of their classmates at Goldman/McKinsey/etc.
They have found a group of investors, typically 10-30 high net worth individuals who were former entrepreneurs, private equity investors, or searchers themselves, to give them a commitment. The investors commit to investing in a deal, if they like it, and also provide some operating capital for office space, internet, etc while the two entrepreneurs search for a suitable target.
Searchers usually work in groups of 2 as the job takes a lot of resilience and discipline – and going it alone can be, well, lonely. Between the two searchers, you’re looking at a few hundred thousand dollars in forfeited yearly income while they try to find a company that they could grow into an enterprise that would return considerably more than that.
In exchange for giving up the relatively cushy life at a larger firm, the searchers typically rent out a small room in a shared workspace in New York, Boston, or San Francisco.
Most of the time their day to day consists of hustling to find interesting investment opportunities. They cold call family businesses in Iowa, talk to business brokers, and try to find industry experts through LinkedIn that will give them free advice on tackling a “niche.”
The Niche Philosophy
Searches are industry driven. The goal is to find a nascent, but growing industry “niche” that is also target rich. If your radiologist tells you that he just started outsourcing his billing to a company with a call center in Florida, you might want to look into outsourced billing for radiologists. Say the industry is growing at 30% and is populated by unprofessionalized, small and sleepy companies. Well, you just found a great niche.
In practice, searchers go through niches quite quickly. Time is their most scarce resource and so if something isn’t growing fast, is dominated by a large player, or there just don’t seem to be any companies looking to sell, it’s killed. Sometimes niches are killed after a few days, sometimes after a few weeks. The typical searcher is looking at ~3 niches at any given time, while also evaluating more opportunistic targets as they come in through brokers, lawyers, and other networks.
Why Give Up My Job At McKinsey?
Earlier in the post I mentioned that searchers give up a lot of income they could have gotten at another job. Why would any rational human do such a thing?
For starters, most searchers are entrepreneurial at heart and like working for themselves, so that comes at a premium. Another key component is that searchers get a decent equity stake in the business that they buy, with their investor base getting the rest (unless current owners are rolling equity, but that is a more advanced topic and a discussion for another day). The portion of the equity can also be stepped up considerably if IRR targets are hit – these targets are typically around 30%.
Acquisition Profile
Searchers look for many things traditional investors look for in a company: recurring revenue streams, high margins, large markets, etc. But, there are a few things that are MOST relevant.
- Growth: Searchers get paid on the growth of the company they buy. Industry tailwinds are a huge plus.
- A platform: Search fund investors don’t want their searchers to start companies. They want them to find “platforms” – defined as firms with all of the infrastructure necessary to scale a business – and then grow said platform.
- Services/Operationally focused businesses: Most searchers do not have any sort of technology/biotech/other special skill set. Searchers are hard core operations guys who think about efficiency/hiring/sales/marketing/IT all day long and who can take a family owned, unprofessionalized business, and squeeze out margins while growing the company like crazy.
- Buying right: Searchers need to find a company they can buy at a rational multiple, and maybe even with the help of some debt and/or seller financing (again, a topic for another day). They are putting all of their eggs in one investment, and need to make sure they are protected!
- Management: This is the most important and most misunderstood of the criteria. Searchers are going to become the CEO/COO/CFO/Whatever and so the current owner either needs to be a manager looking to step down and work on a specific part of the business (sales and marketing, research, etc), or retire/move on altogether. Of course, finding a high growth company where management wants to walk away at a conservative price is a huge challenge!
The Outcomes
Several very successful companies have sprung out of searchers. Service Source, Asurion, and other, lesser known companies were all searches to begin with. Of course, there are also many search funds that don’t make it due to the challenges of finding the right company, at the right price, at the right time.
Please be on the lookout for a follow up post with some of the more advanced and specific details around search funds! Also, below there is a link to a nice research paper on search funds written by folks at Stanford University. Enjoy!
Search Funds-2009 Selected Observations FINAL – revised 7.21.10(2)
If you would like to obtain a great deal from this paragraph
then you have to apply these methods to your won webpage.
It’s appropriate time to make some plans for the future and it’s time to be happy.
I’ve read this post and if I could I want to suggest you some interesting things or suggestions.
Perhaps you can write next articles referring to this article.
I desire to read even more things about it!
Tremendous things here. I’m very glad to look your article.
Thank you so much and I’m having a look ahead to
contact you. Will you please drop me a mail?
Hello there! I could have sworn I’ve been to this site before but after going through some
of the articles I realized it’s new to me. Regardless,
I’m definitely happy I stumbled upon it and I’ll be book-marking
it and checking back regularly!
I am extremely impressed with your writing skills as well as with
the layout on your blog. Is this a paid theme or did you customize it yourself?
Either way keep up the nice quality writing, it’s rare to
see a great blog like this one today.
antodarr 89fccdb993 https://www.guilded.gg/lonbestmoles-Lightning/overview/news/QlLd9Xdl
Hi there! Someone in my Myspace group shared this site with us so I came to look it over.
I’m definitely enjoying the information. I’m bookmarking
and will be tweeting this to my followers! Wonderful blog and brilliant design and style.
Thanks for the good writeup. It in reality used to be a enjoyment account it.
Glance complex to far added agreeable from you!
By the way, how can we be in contact?
Hey there are using WordPress for your site platform?
I’m new to the blog world but I’m trying to get started and set up my own. Do you require any html
coding knowledge to make your own blog? Any help would be really appreciated!
My spouse and I stumbled over here coming
from a different page and thought I might as well check things out.
I like what I see so now i’m following you. Look forward to exploring your web page yet again.
If some one desires to be updated with newest technologies afterward he must be pay
a visit this site and be up to date all the
time.
I am really grateful to the owner of this web site who has shared this enormous post at
at this place.
fantastic issues altogether, you simply gained a new reader.
What may you recommend about your submit that you made some
days in the past? Any sure?
This is a good tip particularly to those fresh to the blogosphere.
Brief but very precise info… Many thanks for sharing this one.
A must read post!
yamgib 89fccdb993 https://www.guilded.gg/dumblogxihas-Bulls/overview/news/2lMMdqZl
naturally like your web site however you need to take a look at the
spelling on several of your posts. A number of them are rife with spelling problems and I find it very bothersome to inform the reality then again I’ll certainly come back again.
I am not sure where you are getting your information, but great topic.
I needs to spend some time learning more or understanding more.
Thanks for magnificent info I was looking for this information for my mission.
It’s an awesome piece of writing in favor of all the web people; they
will obtain advantage from it I am sure.
If some one desires expert view regarding blogging after that i suggest him/her
to visit this webpage, Keep up the nice job.
Very rapidly this web page will be famous among all blogging and site-building people,
due to it’s pleasant articles
Hmm is anyone else experiencing problems with the images on this blog loading?
I’m trying to find out if its a problem on my end or if it’s the blog.
Any responses would be greatly appreciated.
I visited various sites however the audio feature for audio songs existing at this website is really excellent.
Keep this going please, great job!
What a information of un-ambiguity and preserveness of precious know-how on the topic of unpredicted feelings.
Nice post. I learn something totally new and challenging on websites I stumbleupon everyday.
It will always be interesting to read articles from other writers and use a little something from other websites.
I don’t even know how I ended up here, but I thought
this post was good. I do not know who you are but certainly you are going to a famous blogger if you aren’t
already 😉 Cheers!
Quality posts is the crucial to interest the visitors to pay a visit the web page,
that’s what this web site is providing.
bookmarked!!, I like your site!
of course like your web-site however you need to test
the spelling on several of your posts. Many of them are rife with spelling problems
and I in finding it very troublesome to inform the
reality then again I will surely come again again.
I think that is one of the such a lot vital info for
me. And i’m glad reading your article. However should statement on few
common issues, The site taste is ideal, the articles is in point of fact excellent :
D. Excellent task, cheers
I loved as much as you will receive carried out right
here. The sketch is attractive, your authored material stylish.
nonetheless, you command get got an impatience over that you wish be delivering the following.
unwell unquestionably come more formerly again as exactly the same nearly very often inside
case you shield this increase.
This is really interesting, You’re a very skilled blogger.
I have joined your feed and look forward
to seeking more of your great post. Also, I have shared your web site in my social networks!
marmbia 89fccdb993 https://www.guilded.gg/hokbicathes-Saloon/overview/news/D6KdJGMy
Attractive section of content. I just stumbled upon your blog and in accession capital to
assert that I acquire actually enjoyed account your blog posts.
Any way I’ll be subscribing to your feeds and
even I achievement you access consistently rapidly.
Hi there i am kavin, its my first occasion to commenting
anywhere, when i read this article i thought i could
also create comment due to this sensible piece of writing.
My web site; buy
Great beat ! I wish to apprentice while you amend your web
site, how can i subscribe for a blog web site? The account
helped me a acceptable deal. I had been a little
bit acquainted of this your broadcast provided bright clear
concept
On the net casinos accept ririculous bet limits, beginning from a single cent.
my blog 카지노 꽁머니
This design is incredible! You definitely know how to keep a
reader entertained. Between your wit and your videos, I was almost
moved to start my own blog (well, almost…HaHa!)
Wonderful job. I really enjoyed what you had to say,
and more than that, how you presented it. Too cool!
Great post. I was checking continuously this blog and I’m impressed!
Extremely helpful information specifically the closing phase 🙂 I take care
of such info a lot. I used to be seeking this certain info for a long time.
Thanks and best of luck.
excellent put up, very informative. I’m wondering
why the opposite specialists of this sector do not notice this.
You must proceed your writing. I am sure, you’ve a huge readers’ base already!
It’s going to be finish of mine day, but before finish I am reading this enormous piece of writing to increase my know-how.
It is truly a nice and useful piece of info. I’m glad that you just shared this useful info with us.
Please keep us informed like this. Thank you for sharing.
Hi, its nice paragraph regarding media print, we all understand
media is a great source of facts.
I seriously love your blog.. Excellent colors & theme.
Did you build this web site yourself? Please reply back as I’m trying to create my
very own blog and want to find out where you got this from or
just what the theme is called. Thank you!
Thanks for any other great post. The place else may just anybody get that kind of info in such an ideal way of writing?
I’ve a presentation next week, and I’m on the look for such information.
Hello this is kind of of off topic but I was
wondering if blogs use WYSIWYG editors or if you have to manually code with HTML.
I’m starting a blog soon but have no coding experience so I wanted to get guidance from someone with
experience. Any help would be enormously appreciated!
I think that what you said was very logical. But, think about this, what if you
were to create a awesome headline? I ain’t saying your information isn’t good, however what if you added a post title that
makes people desire more? I mean The Search Fund Model – Phil Strazzulla's Blog is a little
vanilla. You ought to look at Yahoo’s front page and watch how they create post headlines to grab viewers to click.
You might add a video or a picture or two to grab readers excited about what you’ve got to say.
In my opinion, it could bring your website a little bit more interesting.
Greetings! Very helpful advice in this particular article!
It is the little changes that will make the greatest changes.
Thanks for sharing!
This is a topic that is near to my heart… Thank you! Exactly where are your contact details though?
My programmer is trying to persuade me to move to .net from PHP.
I have always disliked the idea because of the expenses.
But he’s tryiong none the less. I’ve been using Movable-type on various websites
for about a year and am worried about switching to another
platform. I have heard excellent things about blogengine.net.
Is there a way I can import all my wordpress posts into it?
Any help would be really appreciated!