Search Funds have been well established in the United States for years and they are now growing in popularity in other parts of the world, including Europe. IESE’s International Search Funds 2020 report shows that a record number of Search Funds were raised between 2013 and 2019.
Search Funds have become one of the fastest-growing niches in the alternative investment space and we believe they are one of the most exciting asset classes in private equity today. In this blog, we will discuss what it takes to become a Search Fund entrepreneur.
What is a Search Fund?
A Search Fund is an investment vehicle for entrepreneurs which provides them with the means to acquire and grow an established SME, rather than build a start-up business from scratch. The term “Search Fund” was introduced by Irve Grousbeck, a professor at the Stanford Graduate School of Business, back in 1984.
What does it take to become a Search Fund entrepreneur?
Well-educated
The Search Fund model is open to relatively inexperienced entrepreneurs, but they must be well-educated and have strong business skills to succeed. Statistics show that 82% of searchers have MBAs and come from a variety of backgrounds including private equity, general management and investment banking.
Desire to build a company
Search Fund entrepreneurs need to be driven by the desire to build a company. Entrepreneurs that love the thrill of a startup and are passionate about creating new and innovative products would be better suited to the startup route.
Work well under pressure
Search Fund entrepreneurs do not have the same risks as startup founders, but they are still under a lot of pressure. They are responsible for searching, finding, acquiring, and then scaling a business to generate positive returns for themselves and for their Search Fund investors.
Running a company is also time-consuming and can be extremely stressful at times. Search Fund entrepreneurs must be prepared for the business management pressures that come with running an SME.
Comfortable with uncertainty
Search Fund entrepreneurs must be comfortable with uncertainty since the company they end up acquiring could be anything from a packaging business to an IT provider. The main purpose of a Search Fund is to acquire and grow a company, so the entrepreneur may not have the opportunity to take over a company they are particularly passionate about.
Adaptable
Search Fund entrepreneurs must search for a company that meets specific criteria and shows good growth potential. This means they may not necessarily acquire a business in an industry they are knowledgeable about.
The searcher will have to adapt their leadership style and approach to the company culture and the industry they are acquiring in. Adaptability is a key skill that Search Fund entrepreneurs must have to be successful.
Able to handle rejection
According to the Stanford Graduate School of Business: “The Search Funds model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position.”
This is one of the biggest benefits of Search Funds for entrepreneurs, but acquiring a company through a Search Fund is not easy. Search Fund entrepreneurs may have to contact hundreds of companies and might be rejected or ignored the majority of the time. Convincing a business owner to sell his or her company to them can be a monumental challenge.
Good listening skills
Good listening skills are one of the most important traits of a Search Fund entrepreneur. The new CEO is surrounded by experienced investors with the skills and knowledge to improve their chances of success. The entrepreneur must be willing to listen and accept advice and guidance from their team of investors in order to avoid common mistakes.
The searcher must also listen carefully to the SME owners to build trust and credibility. Most SME owners are willing to share valuable advice and searchers should show their interest in the company by listening intently and asking the right questions.
In our recent interview with two searchers, Marc Desmond said: “Business owners are very proud of what they have built so be respectful, listen carefully, and focus on making them like you.” You can read the full interview here.
Patient
The average Search Fund takes approximately 19 months to find and acquire a company, although it can take longer than this due to various reasons.
Building a company also takes time and a Search Fund entrepreneur must be patient and fully committed to finding and growing a suitable company. Most Search Fund entrepreneurs have to run an acquired company for several years before they can consider starting an exit strategy.
Bottom line
Search Funds are an attractive option for entrepreneurs as taking over an established company has lower risks than starting a business from scratch. However, acquiring a business through a Search Fund is not easy and this route to becoming a CEO will not suit every entrepreneur.
If you think you have what it takes to become a Search Fund entrepreneur, get in touch with Moonbase Capital. The Moonbase Capital partners share over 50 years of experience leading small and medium-sized businesses. We form partnerships with entrepreneurs and support them at every step of their Search Fund journey.
