The Search Fund Model: Origins, Lifecycle, and Benefits
A search fund is an entrepreneurial investment vehicle created by one or two individuals (referred to as "searchers") to find, acquire, and manage a privately held company. The search fund model offers a unique path for entrepreneurs to become CEOs of established businesses, typically with the support of a group of aligned investors who provide capital and mentorship.
Origins and Evolution
The concept of a search fund originated at Harvard Business School in 1984 and gained popularity at Stanford Graduate School of Business over the following decade. It has since spread globally, becoming an increasingly recognized model among business schools and private investors(E726).
The Search Fund Lifecycle
The lifecycle of a search fund typically consists of four stages:
Raising Initial Capital:
Searchers raise initial capital from investors to cover the costs of the search process. This includes a modest salary for the searchers, as well as expenses for travel, legal fees, and other administrative costs. The initial fundraising period usually lasts between two to six months.
Search Phase:
The search phase involves identifying and evaluating potential acquisition targets. This phase can last 12-24 months. Searchers look for companies with stable cash flows, growth potential, and a defensible market position. They perform due diligence and negotiate terms with the target company’s owners.
Acquisition and Operation:
Once a suitable target is found, searchers raise additional capital from their investor base to fund the acquisition. After the acquisition, the searchers typically assume the role of CEO, managing and growing the business. This operational phase can last four to seven years or more, focusing on creating value through strategic improvements and operational efficiencies.
Exit:
The final stage involves exiting the investment, usually through a sale, recapitalization, or public offering. The goal is to realize returns for both the searchers and their investors. The timeline for exiting can vary widely, depending on market conditions and the company’s performance.
Benefits of Search Funds
Fast Track to CEO Role:
Search funds provide entrepreneurs with a relatively quick path to becoming the CEO of an established company, often within a few years of starting their search.
Attractive Financial Returns:
Historically, search funds have delivered attractive financial returns for both searchers and investors. According to the 2020 Stanford Search Fund Study, the aggregate pre-tax internal rate of return (IRR) for investors was 32.6% through the end of 2019(E726).
Mentorship and Support:
Investors in search funds often serve as mentors, offering valuable guidance and support throughout the search, acquisition, and operation phases.
Challenges of Search Funds
Time-Consuming Search Process:
The search phase can be lengthy and uncertain, with some searches ending without an acquisition. According to the Stanford study, 33% of searches ended without making an acquisition(E726).
High Responsibility:
Searchers take on significant responsibility, often stepping into leadership roles in industries they may not be deeply familiar with. This requires a steep learning curve and strong management skills.
Capital Intensive:
Raising both the initial search capital and the subsequent acquisition capital can be challenging, requiring a compelling pitch and strong investor relationships.
Ideal Candidates for Search Funds
Search funds are typically pursued by individuals with strong educational backgrounds (often MBAs), experience in consulting, investment banking, or management, and a desire to lead and grow a company. The median age of searchers is around 32, and they often launch their search funds within a few years of graduating from business school(E726).
Conclusion
Search funds represent a unique and compelling path for aspiring entrepreneurs to acquire and lead established businesses. By raising capital from investors, conducting a diligent search for acquisition targets, and ultimately managing the acquired company, search fund entrepreneurs can achieve significant financial and professional success. However, the journey requires dedication, resilience, and a strong support network of investors and mentors.
For more detailed information on the search fund model, including comprehensive data and analysis, you can refer to the 2020 Stanford Search Fund Study(E726).
