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)
Its not my first time to go to see this web site, i am
browsing this web page dailly and get good information from here
all the time.
It’s an amazing piece of writing designed for
all the web users; they will obtain benefit from it I am sure.
Greetings, I think your site could be having web browser compatibility issues.
Whenever I look at your web site in Safari, it
looks fine however, if opening in I.E., it’s got some overlapping
issues. I just wanted to provide you with a quick heads up!
Besides that, fantastic site!
Very nice post. I just stumbled upon your weblog and wished to say that I have truly enjoyed browsing your blog posts.
In any case I will be subscribing to your rss feed and I hope you write again soon!
Admiring the persistence you put into your blog and in depth information you offer.
It’s good to come across a blog every once in a while that
isn’t the same unwanted rehashed material.
Great read! I’ve bookmarked your site and I’m adding your RSS
feeds to my Google account.
Thank you for sharing your thoughts. I really appreciate
your efforts and I will be waiting for your next post thanks once again.
I got this website from my pal who told me on the topic
of this website and now this time I am browsing this site and reading very
informative articles or reviews at this place.
Very good information. Lucky me I discovered your website
by chance (stumbleupon). I’ve saved it for later!
Wow, fantastic blog structure! How lengthy have you been blogging for?
you make running a blog look easy. The entire look of your web site is magnificent, let alone the content!
I’m not sure why but this blog is loading incredibly slow for
me. Is anyone else having this problem or is it a issue on my end?
I’ll check back later and see if the problem still exists.
Very good post. I will be facing a few of these issues as well..
Saved as a favorite, I really like your
site!
Hi there mates, good article and good urging commented here,
I am genuinely enjoying by these.
Hurrah, that’s what I was seeking for, what a material! existing here at this blog, thanks
admin of this web page.
What i don’t realize is in fact how you are now not really a lot more well-favored than you may be now.
You’re so intelligent. You recognize therefore considerably in the case of this topic, made me for my part imagine it from numerous varied angles.
Its like women and men aren’t fascinated unless it’s one thing to
accomplish with Lady gaga! Your personal stuffs excellent.
Always take care of it up!
Very nice article, exactly what I needed.
Hi, I think your website might be having browser compatibility issues.
When I look at your blog in Opera, it looks fine but when opening in Internet Explorer,
it has some overlapping. I just wanted to give you a quick heads up!
Other then that, wonderful blog!
Hello just wanted to give you a quick heads up. The words in your
article seem to be running off the screen in Opera.
I’m not sure if this is a format issue or something to do with web browser compatibility but I figured I’d post to let you know.
The layout look great though! Hope you get the issue solved soon. Thanks
Hi this is kinda of off topic but I was wanting to
know if blogs use WYSIWYG editors or if you have to manually code with HTML.
I’m starting a blog soon but have no coding knowledge so I wanted to get guidance
from someone with experience. Any help would be enormously appreciated!
Very soon this site will be famous among all blogging and site-building users, due to it’s nice
content
Howdy I am so happy I found your webpage, I really found you
by mistake, while I was looking on Askjeeve for something else, Anyhow I
am here now and would just like to say many thanks for a fantastic post and a all round
exciting blog (I also love the theme/design), I don’t have time to read through it all
at the moment but I have saved it and also added in your RSS feeds, so when I have time I will be back to read much more, Please do keep up the great job.
I really like your blog.. very nice colors & theme. Did
you create this website yourself or did you hire someone to
do it for you? Plz respond as I’m looking to design my own blog and would like to know where u
got this from. thanks a lot
Aw, this was a really nice post. Finding the time and actual effort to generate a great article… but what can I say… I put things off a whole lot and don’t seem to get nearly anything done.
Hey there, You’ve done a great job. I’ll certainly digg it and
personally suggest to my friends. I am sure they will be benefited from this
website.
Thank you for the auspicious writeup. It in fact was once a entertainment account
it. Look advanced to far added agreeable from you! However, how could we keep up a correspondence?
I visit each day a few websites and blogs to read posts, however this weblog presents feature based writing.
Hey this is kind of of off topic but I was wanting to know if blogs use WYSIWYG editors or if you have
to manually code with HTML. I’m starting a blog soon but
have no coding expertise so I wanted to get advice from
someone with experience. Any help would be greatly appreciated!
This is the perfect website for anybody who wants to find out about this topic.
You realize so much its almost hard to argue with you (not that I personally will need
to…HaHa). You certainly put a new spin on a subject which has been discussed for ages.
Excellent stuff, just excellent!
Pretty portion of content. I just stumbled upon your website and in accession capital to assert that I get in fact
loved account your blog posts. Any way I’ll be subscribing for your augment and even I success you get admission to persistently rapidly.
Pretty! This has been a really wonderful post.
Many thanks for supplying these details.
Greetings from Carolina! I’m bored at work so
I decided to check out your blog on my iphone during lunch break.
I enjoy the info you provide here and can’t wait to take a look when I get home.
I’m amazed at how quick your blog loaded on my phone ..
I’m not even using WIFI, just 3G .. Anyways, great blog!
You’ve made some decent points there. I looked on the internet for more
info about the issue and found most individuals will go along with
your views on this web site.
What i don’t realize is in fact how you’re not really much
more neatly-favored than you might be now. You’re so intelligent.
You know thus significantly in relation to this subject,
made me in my opinion believe it from so many various angles.
Its like men and women are not involved except it’s something to accomplish with Lady gaga!
Your individual stuffs great. All the time handle it up!
Hi there, I wish for to subscribe for this blog to get latest
updates, so where can i do it please assist.
I’m amazed, I have to admit. Rarely do I encounter a blog that’s equally
educative and entertaining, and let me tell you, you’ve hit the nail
on the head. The issue is something which too few folks are speaking intelligently about.
Now i’m very happy I found this during my search for something concerning this.
Thanks very interesting blog!
If yoou scroll down the homepage, you will uncover some games for each and every game
kind.
my blog: 카지노 가입쿠폰
Heya i’m for the primary time here. I found this board
and I find It really helpful & it helped me out a lot.
I am hoping to provide one thing back and help others like you helped me.
We are a group of volunteers and starting a new scheme in our community.
Your site offered us with helpful information to work on. You have done a formidable task and our whole community will probably be thankful
to you.
My webpage … bandar sabung ayam online
I am really impressed with your writing skills and also with the layout on your
weblog. Is this a paid theme or did you modify it yourself?
Either way keep up the nice quality writing, it’s rare to see a great
blog like this one these days.
Hello there, I found your website by way of Google whilst searching
for a comparable matter, your web site came up, it appears great.
I have bookmarked it in my google bookmarks.
Hello there, just became alert to your blog thru Google, and found that
it’s truly informative. I am gonna watch out for brussels.
I will be grateful should you continue this in future.
Many other people will probably be benefited from your writing.
Cheers!
I blog quite often and I truly appreciate your information.
This article has really peaked my interest. I am going
to take a note of your website and keep checking for
new details about once a week. I opted in for your Feed as well.
I just couldn’t go away your site before suggesting that I actually loved the usual info a person supply for your guests?
Is gonna be again steadily in order to investigate cross-check
new posts
My site; agen s128 sabung ayam
Can I simply say what a relief to uncover someone that really understands what they are discussing online.
You definitely realize how to bring an issue to light and make it important.
More and more people ought to read this and understand this side of the story.
I was surprised you aren’t more popular since you definitely have the gift.
you are in reality a excellent webmaster. The site loading velocity is amazing.
It sort of feels that you are doing any unique trick.
Also, The contents are masterwork. you have performed a excellent activity on this matter!
Fantastic post but I was wondering if you could
write a litte more on this subject? I’d be very grateful if you could elaborate
a little bit more. Appreciate it!
Post writing is also a fun, if you be familiar with then you can write or else it is difficult to write.
I always used to read piece of writing in news papers but now as I am a user of internet
therefore from now I am using net for posts, thanks to web.
Heya i am for the first time here. I found this board and I
in finding It truly useful & it helped me out a lot.
I hope to offer one thing again and help others like you
aided me.
This design is steller! You certainly 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!