Uncovering Search Funds: From Types to Key Players in History
An Introduction to Search Funds
What is a Search Fund?
Definition and Basic Concept
A search fund is an investment vehicle through which investors financially support an entrepreneur's efforts to locate, acquire, manage, and grow a privately held company. The concept enables individuals or small teams, referred to as "Searchers," to become owners and operators of a business, typically without having prior experience in the target industry.
A search fund generally involves two phases:
Search Phase: During this phase, searchers raise initial capital from investors to cover their living expenses and the costs associated with identifying a suitable acquisition target.
Acquisition Phase: Once a target company is identified, additional capital is raised to finance the acquisition and provide working capital for the business's initial operations.
Types of Search Funds
Search funds can be categorized into four primary types, each with its unique structure, benefits, and challenges:
Traditional Search Funds: These involve raising capital from a group of investors who provide initial funding for the search phase and additional capital for the acquisition.
Self-Funded Search Funds: Searchers use their own savings or personal resources to finance the search phase, maintaining greater control over the process and equity.
Accelerator-Backed Search Funds: These funds are supported by accelerator programs that provide funding, training, and resources to searchers, typically in exchange for equity.
Solo-Sponsored Search Funds: A single investor or a small group of investors sponsor the searcher, offering financial support and mentorship throughout the process.
History of Search Funds
Early Examples
The first search fund was created in 1984 by H. Irving Grousbeck at Stanford Graduate School of Business. It has since evolved, with hundreds of search funds formed worldwide, primarily in North America and Europe.
Evolution Over Time
Over the decades, search funds have grown in popularity, with various models emerging to support different types of searchers. The increase in educational resources, online communities, and professional networks has contributed to this growth.
Key Players in the Search Fund Ecosystem
Searchers
Searchers are entrepreneurs who seek to acquire and manage a company. They typically have a background in business or management and a strong desire to become business owners.
Investors
Investors provide the capital needed for searchers to find and acquire a company. They play a crucial role in guiding and supporting searchers through the acquisition process.
Advisors
Advisors offer expertise and mentorship to searchers, helping them navigate the complexities of acquiring and running a business. These advisors are often experienced professionals in the fields of finance, law, and business operations.
A Brief History of Search Funds
The Origins
The concept of search funds began in 1984, introduced by H. Irving Grousbeck, a professor at Stanford Graduate School of Business. Grousbeck's idea was to create a path for MBA graduates to acquire and manage small businesses as a means of gaining hands-on business management experience.
Early Growth
The early years of search funds were marked by slow growth, with only a handful of searchers each year. However, those who succeeded in acquiring companies often saw significant returns, which helped build credibility and interest in the model.
The 2000s: Expansion and Formalization
The 2000s saw a significant increase in the number of search funds, particularly in North America. Business schools, such as Stanford and Harvard, began to formally recognize and support the model, offering courses and resources to aspiring searchers. The publication of the Stanford Search Fund Study provided empirical data supporting the viability of search funds, further boosting their popularity.
The Structure of Search Funds
Traditional Search Funds
In a traditional search fund, searchers raise capital from a group of investors to fund their search for a suitable acquisition target. Investors receive equity in the acquired company in exchange for their investment. The process typically involves:
Raising Initial Capital: Searchers raise an initial fund to cover their search expenses, including living costs, travel, and due diligence.
Searching for a Target: Searchers spend 18-24 months identifying and evaluating potential acquisition targets.
Acquisition and Operation: Once a target is identified, additional capital is raised for the acquisition, and the searcher takes on the role of CEO to manage and grow the business.
Self-Funded Search Funds
In a self-funded search fund, searchers use their own resources to finance the search phase. This model offers greater autonomy and potentially higher returns, as searchers do not need to dilute their equity by raising initial capital from investors. The process includes:
Self-Funding the Search: Searchers use personal savings or loans to cover their search expenses.
Acquisition and Funding: Once a target is identified, searchers raise the necessary capital for acquisition from investors or lenders, often retaining a larger equity stake in the business.
Accelerator-Backed Search Funds
Accelerator-backed search funds involve searchers participating in accelerator programs that provide funding, training, and resources. These programs typically offer a structured environment, mentorship, and a cohort of peers. The process includes:
Joining an Accelerator Program: Searchers apply and are accepted into an accelerator program that provides initial funding and resources.
Structured Search Process: The accelerator offers training, mentorship, and tools to assist searchers in identifying and evaluating acquisition targets.
Acquisition and Support: The accelerator continues to provide support during the acquisition and early operational phases, often in exchange for equity in the acquired business.
Solo-Sponsored Search Funds
In a solo-sponsored search fund, a single investor or a small group of investors sponsor the searcher, providing financial support and mentorship. This model allows for a more personalized and flexible approach. The process includes:
Securing a Sponsor: Searchers find a sponsor willing to provide funding and support for their search.
Tailored Search Process: The sponsor works closely with the searcher, offering guidance and resources tailored to their needs.
Acquisition and Mentorship: The sponsor continues to mentor the searcher during the acquisition and operational phases, often taking a significant equity stake in the business.
Benefits and Challenges of Search Funds
Benefits
Pathway to Entrepreneurship: Search funds provide a structured pathway for individuals to become business owners and operators.
Mentorship and Support: Searchers receive guidance and support from experienced investors and advisors.
Potential for High Returns: Successful search funds can yield significant financial returns for both searchers and investors.
Challenges
High Risk: The process of searching for and acquiring a business is inherently risky, with no guarantee of success.
Time-Consuming: The search phase can take up to 24 months, requiring significant dedication and persistence.
Operational Demands: Managing and growing an acquired business involves substantial effort and expertise.
Conclusion
Search funds offer a unique and compelling pathway to entrepreneurship, providing aspiring business owners with the resources, support, and capital needed to acquire and manage a company. While the journey is fraught with challenges, the potential rewards—both financial and professional—make search funds an attractive option for those willing to take on the risk and commitment required.
