From Classroom to Boardroom - Search Funds as a Strategic Launchpad for Future Entrepreneurs

As the entrepreneurial landscape continues to evolve, search funds have emerged as a distinctive avenue for MBA graduates aiming to transition into business ownership. Unlike traditional pathways of launching startups or entering established corporate roles, search funds offer a structured framework for acquiring and managing existing businesses with growth potential. This model not only leverages the skills and insights gained through an MBA but also aligns the ambitions of young executives with investment opportunities that prioritize sustainable growth over short-term profits.

What is a Search Fund?

A search fund is an investment vehicle specifically designed to enable its promoter—typically an MBA graduate—to identify and acquire an established business. Investors in a search fund place their bets not only on the target company but also on the talent and potential of the entrepreneur leading the endeavor. Initially, promoters receive a salary to dedicate their efforts to finding the right acquisition, a process that usually lasts around 15 months.

The Lifecycle of a Search Fund

Search funds generally follow a structured life cycle comprising four key stages:

• Capital Acquisition: The fund's first step is to raise sufficient capital to cover the entrepreneur's salary and related costs during the search phase, typically ranging from $100,000 to $300,000.
• Search and Acquisition: The entrepreneur identifies a promising company and makes a buyout offer, guided by various factors such as geographic location, industry, and financial performance indicators. On average, a search fund evaluates around 300 potential targets before finalizing an acquisition.
• Operational Management: Once the acquisition is complete, the fund promoter often assumes the role of CEO, focusing on operational improvements and value creation.
• Exit Strategy: The final stage involves providing investors with a significant return, either through a sale to a strategic buyer or an IPO. The overall lifecycle of a search fund typically spans over eight years, requiring a strong commitment from the entrepreneur.

Opportunities and Challenges

Search funds present unique opportunities for professional growth. Entrepreneurs can lead a company early in their careers and gain invaluable experience in identifying market potential and negotiating deals. Notably, search fund entrepreneurs don't need groundbreaking ideas; they concentrate on businesses with established market models that are primed for development.

However, this path isn't without its challenges. It demands considerable courage, commitment, and accountability, as the entrepreneur bears full responsibility for the fund's financial performance. A failed search can negatively impact one’s reputation at the outset of their career.

From the investors' perspective, search funds attract attention due to their potential returns. Some funds report internal rates of return (IRR) as high as 30% in their early years. Investors also appreciate the transparency and direct involvement in monitoring the promoter’s performance throughout the acquisition process. Nonetheless, risks remain; studies indicate that only 38% of search funds have been profitable for investors, with an average IRR of 37%.

Recent Trends in International Search Fund Activity

According to IESE’s 2024 International Search Fund Report, international search-fund activity reached new heights, with 59 new funds formed and 31 acquisitions made last year alone. The report examined 320 funds from 40 countries, highlighting the model's growth and diversification beyond the United States and Canada. Notably, 71% of searchers graduated from MBA programs, with technology being the most sought-after industry for acquisitions, followed by services and healthcare.

This growing trend is characterized by:

• Geographic Diversity: The model is maturing in regions such as Europe and Latin America, while also gaining traction in Africa and Asia-Pacific.
• Professional Backgrounds: Searchers come from various backgrounds, with 26% having management consulting experience and 20% in financial services.
• Acquisition Metrics: The median purchase price for international acquisitions was $11.7 million, with revenues of $7.8 million and an EBITDA margin of 24%.

Key Takeaways for Search Fund Entrepreneurs

• Pursue Personal Interest: Focus on businesses that genuinely excite you, rather than merely those that meet investor criteria. Passion can be a crucial driver of success.
• Choose the Right Funding Model: Evaluate the pros and cons of traditional versus self-funded search models based on your unique situation and market opportunities.
• Emphasize Company Legacy: Position yourself as a long-term steward of the company, in contrast to private equity firms that often prioritize short-term gains.
• Understand the Challenges of Searching: Acknowledge the inherent difficulties in the search process, as many searchers fail to find suitable targets. Persistence and open-mindedness are critical.
• Document Observations: As a new CEO, maintain a record of initial observations to help identify areas for improvement over time.
• Communicate Effectively: Open communication with employees and investors is essential during the transition period after an acquisition to build trust.
• Leverage Investor Relationships: Cultivate transparent, honest relationships with your investors, recognizing them as valuable allies rather than just sources of capital.

Conclusion

Search funds represent a transformative opportunity for aspiring entrepreneurs, particularly those equipped with an MBA. By embracing the unique advantages of this model while remaining aware of its challenges, entrepreneurs can carve a successful path in the business world, ultimately contributing to the growth and vitality of small companies. As search funds continue to gain traction, they offer a promising route for the next generation of business leaders to make their mark.

About Taghash

Taghash provides an end-to-end platform for venture funds, private equity, fund of funds, and other alternative investment funds. Over the last seven years, we have served as a tech arm for top VCs, helping them manage their operations across deal flow, portfolio, fund, and LP management.

Trusted by leading fund managers like Blume Ventures , Kalaari Capital and A91 Partners , we empower our clients to better manage their funds and achieve greater success.

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