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)
Hello, I check your blog on a regular basis.
Your story-telling style is witty, keep it up!
Hey very cool blog!! Guy .. Beautiful .. Amazing .. I’ll
bookmark your site and take the feeds also? I am satisfied to search out numerous helpful info right here within the put up, we need work out more techniques on this regard, thank you for sharing.
. . . . .
Appreciating the hard work you put into your blog and detailed information you offer.
It’s nice to come across a blog every once in a while that isn’t the same old
rehashed material. Fantastic read! I’ve saved your site
and I’m including your RSS feeds to my Google account.
Fantastic beat ! I wish to apprentice even as you amend your website, how can i subscribe for a weblog
site? The account helped me a applicable deal. I had been tiny
bit acquainted of this your broadcast offered vivid clear idea
An outstanding share! I have just forwarded this onto
a co-worker who was doing a little homework on this. And he
actually ordered me breakfast simply because I discovered it
for him… lol. So let me reword this…. Thank YOU for the meal!!
But yeah, thanks for spending time to discuss this matter
here on your web site.
It is perfect time to make some plans for the future and it is time to be
happy. I have read this post and if I could I desire to suggest you some interesting things or tips.
Maybe you can write next articles referring to this article.
I desire to read more things about it!
Hey There. I found your blog using msn. This is a really well written article.
I’ll be sure to bookmark it and return to read more of your useful
info. Thanks for the post. I’ll certainly comeback.
Thank you for sharing your info. I truly appreciate your efforts and I will be waiting for your further
write ups thanks once again.
Its such as you read my mind! You appear to grasp so much approximately this, such
as you wrote the guide in it or something. I feel that you
just could do with some percent to pressure the message house a little bit, but
other than that, this is magnificent blog. An excellent read.
I will certainly be back.
Very good post! We are linking to this great content on our site.
Keep up the good writing.
Normally I don’t learn article on blogs, however I wish to say that this write-up very compelled
me to try and do it! Your writing style has been amazed me.
Thank you, very great article.
Thank you for the auspicious writeup. It in fact was a amusement account it.
Look advanced to far added agreeable from you!
By the way, how can we communicate?
Great article, just what I needed.
Superb blog! Do you have any helpful hints for aspiring writers?
I’m hoping to start my own blog soon but I’m a little lost on everything.
Would you propose starting with a free platform like WordPress or go for a paid option? There are
so many choices out there that I’m completely confused ..
Any ideas? Cheers!
These are really enormous ideas in regarding blogging. You
have touched some pleasant points here. Any way keep up wrinting.
What’s up, I check your blogs regularly. Your writing
style is awesome, keep it up!
whoah this weblog is magnificent i like reading your articles.
Keep up the great work! You know, a lot of persons are hunting
round for this info, you can aid them greatly.
Now I am going away to do my breakfast, after having my breakfast coming yet again to read other
news.
Heya i’m for the primary time here. I found this board and I to find It really helpful &
it helped me out much. I hope to present something again and aid others like you aided me.
I think this is among the most important information for me.
And i am satisfied studying your article. But should observation on some basic things, The web site taste is
ideal, the articles is really nice : D. Just right activity, cheers
Sweet blog! I found it while browsing on Yahoo News. Do
you have any tips on how to get listed in Yahoo News? I’ve been trying for a while
but I never seem to get there! Many thanks
I will right away grab your rss as I can not to find your email subscription link or e-newsletter service.
Do you’ve any? Please permit me recognize in order that I may just subscribe.
Thanks.
I got this website from my buddy who told me concerning this web page and at the moment this time I am browsing this website and reading very informative content here.
Fabulous, what a website it is! This web site provides valuable information to us, keep it up.
My spouse and I stumbled over here from a different web address and thought I should check things out.
I like what I see so now i’m following you. Look forward
to checking out your web page yet again.
Very good post. I certainly appreciate this website.
Keep it up!
I’m not that much of a internet reader to be honest but your blogs really nice, keep it up!
I’ll go ahead and bookmark your website to come back
down the road. Cheers
Very quickly this web site will be famous amid all blog visitors, due to it’s good posts
Good day! Do you use Twitter? I’d like to follow you if that would be okay.
I’m undoubtedly enjoying your blog and look forward to new updates.
Good way of telling, and nice article to get data on the
topic of my presentation subject, which i am going to present in school.
This is the right site for anyone who hopes to find out about this topic.
You understand so much its almost hard to argue with you (not that I
actually will need to…HaHa). You certainly put a brand new spin on a subject that’s been written about for decades.
Great stuff, just wonderful!
This is the perfect web site for anybody who wishes to find out about this topic.
You know a whole lot its almost tough to argue with you (not that
I actually would want to…HaHa). You certainly put a brand new spin on a subject that’s been written about for ages.
Wonderful stuff, just great!
I am sure this article has touched all the internet users, its really really good paragraph on building up new web
site.
Have you ever thought about publishing an ebook or guest authoring on other blogs?
I have a blog based upon on the same subjects you discuss and would really like to have
you share some stories/information. I know my subscribers would
appreciate your work. If you are even remotely interested, feel free
to send me an e-mail.
Hey there! I understand this is sort of off-topic but I had to ask.
Does operating a well-established website like yours
take a massive amount work? I am completely new
to writing a blog however I do write in my diary every day.
I’d like to start a blog so I can share my personal experience and thoughts online.
Please let me know if you have any ideas or tips for brand new aspiring blog owners.
Thankyou!
important review. In the similar vogue visit my favorite site to use slot online pulsa.
The following web site has received popularity out of slot pulsa online playing opponents
in Dalam negeri. Right now there are generally a great deal of eye catching promos once you join at that point.
There’s certainly a great deal to learn about this subject.
I love all of the points you have made.
I am sure this post has touched all the internet visitors,
its really really nice post on building up new blog.
I’ve been surfing online more than 4 hours today, yet I
never found any interesting article like yours. It is pretty
worth enough for me. In my opinion, if all site owners and bloggers made good content as you did, the internet will be much more useful than ever before.
Hey there just wanted to give you a quick heads up.
The words in your post seem to be running off the screen in Safari.
I’m not sure if this is a format issue or something to do with web browser compatibility but I thought I’d post to let you know.
The design and style look great though! Hope you get
the issue solved soon. Kudos
I’ll immediately clutch your rss feed as I can’t to find your e-mail
subscription hyperlink or e-newsletter service. Do you have any?
Kindly let me recognize so that I may subscribe.
Thanks.
It’s awesome in support of me to have a web page,
which is useful in support of my know-how.
thanks admin
Heya 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
know-how so I wanted to get advice from someone with experience.
Any help would be greatly appreciated!
Fantastic goods from you, man. I’ve be aware your stuff previous
to and you are simply extremely fantastic.
I really like what you’ve acquired here,
certainly like what you’re saying and the best way through which you are saying it.
You make it entertaining and you still take
care of to stay it wise. I cant wait to learn far more from you.
That is really a terrific web site.
I’m not that much of a online reader to be honest but
your blogs really nice, keep it up! I’ll go ahead
and bookmark your website to come back in the future. Cheers
excellent issues altogether, you simply received a new reader.
What might you suggest about your post that you made some days in the
past? Any positive?
important review. Quite as visit the next site to learn judi slot.
This great web page has received prognosis coming
from slot deposit pulsa tanpa potongan playing cricket fanatics in Indonesia.
Presently there are usually many fascinating promos when you join now.
Wow! In the end I got a webpage from where I be able to genuinely
take useful data regarding my study and knowledge.
Hey I know this is off topic but I was wondering
if you knew of any widgets I could add to my blog that automatically
tweet my newest twitter updates. I’ve been looking for a plug-in like this
for quite some time and was hoping maybe you
would have some experience with something like this.
Please let me know if you run into anything. I truly
enjoy reading your blog and I look forward to your new updates.
I don’t even understand how I ended up right here, however I believed this publish was
good. I don’t recognise who you might be but certainly
you’re going to a famous blogger should you are not already.
Cheers!