The Role of Partnerships in Search Fund Success

The 2020 Search Fund Study by Stanford Graduate School of Business highlights the significant impact of partnerships on the success of search funds. This article explores the role of partnerships, comparing their performance to solo searchers, and discusses the advantages and challenges of partnering in a search fund venture.

Partnerships vs. Solo Searchers

The study reveals that search funds can be formed either by solo entrepreneurs or by partners. Each approach has distinct dynamics and implications for the success of the search fund.

Key Findings:

• Percentage of Partnerships: In the 2020 study, only 20% of searches were formed by partners, a decrease from 45% in 2016-2017. Despite the lower percentage, partnerships have demonstrated higher success rates.

• Acquisition Success: Partnerships accounted for 68% of companies with an ROI greater than 5x, while only representing 37% of investments with a negative return. This indicates that partnerships tend to achieve higher returns and lower risks compared to solo searchers.

• Distribution of Returns: Among all funds that made an acquisition, partnerships achieved higher median ROI and IRR compared to solo searchers. Partnerships had a median ROI of 9.6x and an IRR of 39.9%, whereas solo searchers had a median ROI of 2.8x and an IRR of 27.3%.

Advantages of Partnerships

1. Complementary Skills and Experience:

   • Partners can bring diverse skill sets and experiences to the table, enhancing the overall capabilities of the search fund. This diversity can lead to better decision-making and problem-solving.

2. Shared Responsibilities:

   • Partnerships allow for the distribution of responsibilities, reducing the individual burden on each searcher. This can lead to more efficient management and execution of the search and acquisition process.

3. Enhanced Networks:

   • Partners often have different networks and connections, broadening the pool of potential investors, advisors, and acquisition targets. This can increase the likelihood of finding and closing high-quality deals.

4. Emotional and Moral Support:

   • The search fund journey can be challenging and stressful. Having a partner provides emotional and moral support, which can be crucial for maintaining motivation and resilience.

Challenges of Partnerships

1. Conflict Resolution:

   • Differences in opinions, strategies, and working styles can lead to conflicts between partners. Effective communication and conflict resolution mechanisms are essential to navigate these challenges.

2. Decision-Making Processes:

   • Decision-making in partnerships can be more complex and time-consuming compared to solo searchers. Establishing clear decision-making processes and roles can help mitigate this challenge.

3. Equity Distribution:

   • Equity distribution between partners needs to be carefully negotiated and agreed upon to ensure fairness and alignment of interests.

Implications for Search Fund Entrepreneurs

For aspiring search fund entrepreneurs, deciding whether to go solo or form a partnership is a critical choice. Here are some considerations:

1. Evaluate Complementarity:

   • Assess whether potential partners bring complementary skills and experiences that can enhance the search fund's capabilities.

2. Align Values and Goals:

   • Ensure that partners share similar values, goals, and visions for the search fund to avoid fundamental disagreements down the road.

3. Establish Clear Agreements:

   • Create clear agreements regarding roles, responsibilities, decision-making processes, and equity distribution to prevent conflicts and misunderstandings.

4. Leverage Networks:

   • Utilize the expanded network that partnerships offer to increase the chances of finding and acquiring high-quality targets.

Conclusion

The data from the 2020 Search Fund Study underscores the significant role that partnerships play in the success of search funds. Partnerships tend to achieve higher returns and lower risks compared to solo searchers, making them a compelling option for aspiring search fund entrepreneurs. By carefully selecting partners, establishing clear agreements, and leveraging complementary skills and networks, entrepreneurs can enhance their chances of success in the search fund journey.