Decoding Searchfunder and Search Funds: Your Dry-Witted Guide to CEO-ing Your Way to Success
So, you want to be a CEO, but starting from scratch sounds awful? Enter search funds and Searchfunder. Search funds are like traditional startups, but less sweaty. Searchfunder is the online space for cool entrepreneurs and their term sheets.
What in the Silicon Valley is Searchfunder?
Imagine a digital Swiss Army knife full of resources for search fund enthusiasts. Searchfunder is that online community and toolkit made for people immersed in search funds. It’s not just about fun memes; it’s a hub for those aiming to acquire and operate small businesses. You avoid the startup grind and go straight to the corner office.
Searchfunder serves as the meeting point for search fund entrepreneurs. They connect, share success stories and seek necessary tools for finding, buying, and managing a business. It’s your backstage pass to entrepreneurial acquisition.
Searchfunder: More Than Just a Fancy Name
Searchfunder exists, but what does it actually do? It’s more than just an online chat room. It serves vital roles for aspiring CEOs through acquisition.
- Networking Nirvana: Skip the awkward parties. Searchfunder connects entrepreneurs, investors, and others in the search fund world. It’s like LinkedIn where everyone knows what “EBITDA multiple” means.
- Resource Powerhouse: Need industry insights? Market research without breaking the bank? Searchfunder offers the insider knowledge often requiring knowing a guy.
- Deal-Finding Dynamo: Staring at spreadsheets hoping for acquisition targets? Searchfunder helps find potential companies ready for acquisition. It’s like a dating app for businesses.
- Investor Matchmaker: Got a great plan but a lack of funds? Searchfunder connects entrepreneurs with investors and debt/equity providers. It’s speed dating for funding but aims for long-term success.
- Education Emporium: Confused about cap tables and due diligence? Searchfunder provides live streams, webinars, and educational content to make your MBA expenses seem less awful.
- DealExchange: The Acquisition Marketplace: Need targets fast? DealExchange helps find business acquisition targets like browsing Zillow, but for companies.
- Live Stream Spectacles: Seller Presentations: Want to see businesses pitch to you? Searchfunder hosts live seller presentations actively seeking search fund leaders. Popcorn is recommended.
- BVR DealStats & Industry Reports: Deal Evaluation Tools: Need to determine if a deal is good or bad? Searchfunder offers DealStats and Industry Reports to help properly assess acquisitions.
- Investor Networking: Connect with the Money People: Need cash? Searchfunder enables direct networking with debt and equity providers. Time to polish your pitch.
- Algorithmically Matched PPM to Investors: Investor Finder 5000: Searchfunder’s algorithms match your Private Placement Memorandum (PPM) with suitable investors based on search criteria.
Search Funds: Not Your Grandma’s Investment Vehicle
What are these buzzworthy search funds? A search fund is a private investment fund where a motivated entrepreneur raises capital aimed at acquiring and operating a small, privately held company. The entrepreneur typically becomes CEO after the acquisition. It’s a way to fast-track to the top office without lengthy ladder climbing.
Unlike large private equity firms that buy many companies, a search fund focuses on acquiring one business. The goal isn’t just to flip it quickly, but also to manage and grow the company over time. It’s more like adopting a business than just renting it.
Search funds exemplify “entrepreneurship through acquisition” (ETA). They offer an alternative path for those wanting to build an empire. Instead of starting from scratch, you lead an existing, established business. It’s like inheriting a racecar instead of constructing one from parts.
The Nitty-Gritty: Key Aspects of Search Funds
Curious about search funds? Let’s explore the main components:
- Capital Raising: The Money Hunt
- Initial Search Capital: Fundraising is essential. Search funds start by raising initial capital of about $400,000 to $500,000. This isn’t for lavish events; it’s to cover salary during business searches, travel expenses, and administrative costs.
- Fundraising Two-Step: Raising capital isn’t quick; it’s a two-stage process. This can take from 2 to 6 months. The first round secures initial search capital, while the second is for larger funds needed to acquire a company.
- Identifying a Target Company: The Business Treasure Hunt: This is where serious work begins: finding the right business. It’s like house hunting but looking at balance sheets instead of open houses.
- Managing and Growing: CEO School (on the Job): If you acquire a company, now the challenging part starts: running and expanding the business. Here is where true leadership shines or fails.
- Exiting the Investment: The Grand Finale: Eventually, you must exit the investment and hopefully cash in. This is how investors see returns and how you, the CEO, can earn money.
Other key, vital aspects include: portfolio construction, fund size, investment size, and the important role of the fund manager (that could be you).
Search Funds vs. The Investment Zoo
Search funds are one kind of investment vehicle among many. How do they compare to venture capital firms and private equity firms? Search funds drive investment based on the entrepreneurial talent of young leaders, often recent MBA grads or ambitious executives. VCs and PE firms focus on different business types and stages. Search funds resemble tailored suits designed for specific entrepreneurial paths.
By the Numbers: Search Fund Stats that Actually Matter
Let’s look at some data from the 2022 Stanford Search Fund Primer:
- Average Fund Size: $53.4 million. A good amount to work with.
- Average Founder Age: 32. Youthful ambition does pop up.
- Average Hold Period: Seven years. Good things often take time.
- Average Initial Search Capital: $400,000 – $500,000. Back to those ramen dinners!
- Average Equity for Exited CEO: $7.6 million. That’s equity that makes ramen dinners feel worthwhile.
- Average IRR: 35.1%. Average ROI: 4.5x. Those returns are impressive. Search funds, on average, hold strong performance.
- IRR on Exited Companies: 42.9%. When they win, they win big.
- Median Search Period Salary: $120,000 per year. It’s decent for a ‘searcher’. However, it’s often lower than top-tier MBA salaries. Sacrifices are essential.
- Post-Acquisition CEO Salary: ~$190,000. An increase after closing the deal. Now, you can afford better ramen.
Legal Stuff: LLCs and LPs and Oh My!
Search funds aren’t informal operations. They require structure. Typically, they are organized as either a limited liability company (LLC) or a limited partnership (LP). The details dive into legal aspects, but know that there’s a legal framework in place.
Key Ingredients of the Search Fund Recipe
What defines a search fund? Typically, it involves a driven entrepreneur or a duo with backing from investors. They seek smaller companies, often where owners plan to retire or move on to new adventures. This can offer a personalized experience for sellers compared to large corporations.
Danger Zones: Risks to Consider
Search funds have risks too.
- Inexperienced Principals: Youth is valuable, yet inexperience can pose risks. There’s a real chance of depleting initial capital without securing a suitable target. It’s like driving a racecar with no destination.
- Limited Operating Experience: Acquiring the firm is just half the battle. Next, you must manage it. Limited experience leads to a steep learning curve after acquiring the business.
- Concentrated Risk: Search funds often revolve around one company. If that company fails, the investment can value drop as well. It’s too many eggs in one vulnerable basket.
Where to Hunt: Attractive Industries
What sectors fit search fund acquisitions? According to the Stanford Study, top industries are healthcare, business services, consumer/retail, technology, and industrials/manufacturing. This mix indicates many opportunities across sectors. Maybe skip Blockbuster Video and dial-up internet providers.
Location, Location, Location (of Search Funds)
The search fund activity hotspot? Axial’s lower middle market Directory names the United States. About 710 Top Search Funds operate here. This is the land of opportunity… and search funds.
The Million Dollar Question: Failure Rates
Let’s face it: not every search fund achieves success. Failure rates offer a sobering reality. A 2017 Harvard Business Review study stated that 90% of search funds failed to generate a return. However, scrutinize the source and methodology of studies – some consider this figure overly negative. Success isn’t guaranteed, yet potential appears significant.
Search Fund vs. Independent Sponsor: Cousins, Not Twins
Search funds and independent sponsors both work towards acquiring companies, but they follow distinct paths. The main difference? Funding model. Search funds raise money before identifying a target, whereas independent sponsors find a target first and then seek funding. Imagine search funds as having a pre-approved mortgage before house hunting; independent sponsors find the house and rush to a bank for a loan.
Independent sponsors often focus on legacy businesses where owners intend to retire. These are classic ‘mom and pop’ operations ready for transition. Investors in these deals usually have a hands-on role, and risk structures can be slightly more favorable than some search fund deals. Note fees: independent sponsors generally charge management fees ranging from 3% – 5% of target adjusted EBITDA.
The Big Question: Is It Worth It?
For aspiring entrepreneurs wishing to run businesses without startup hassles, search funds may be ideal. This role allows for leadership over an existing operation and potential financial rewards.
MBA or Bust? The Education Factor
Need an MBA to thrive in the search fund space? Not necessarily. Some search funds require only MBAs, while others welcome undergraduates, and some mix both. Internship opportunities can open doors regardless of degree. Skills often outweigh diplomas in this realm.
