Sunday, December 1, 2013

The Searchfund—Another Investment Innovation

Entrepreneurs typically come up with their own ideas and invest time in building a basic business at which point they seek funding to grow it.  There’s a method called the Searchfund in which an entrepreneur raises funding to find a business which can then be funded for acquisition and growth.  The concept comes from Stanford. you can see more at this link about the basics.  

The search fund concept originated in 1984 and has become increasingly well known among business schools and private investors. A search fund is an investment vehicle to allow an aspiring entrepreneur the opportunity to search for, acquire, manage, and grow a company.  They raise an initial seed amount of funding to support the search effort which typically takes two to three years.  Once they have identified the acquisition target, they raise a round of funding to acquire and grow the company. The follow on funding can be in the form of debt, seller equity rollover, earnouts, traditional senior and subordinated loans, and equity financing from new investors.

One can find opportunities from retired CEOs or trade association presidents, brokers, or other personal contacts.  Skills needed for a  Searchfund program are the same as for an entrepreneur --  a wider view of the world, attention to detail, perseverance, ability to build relationships, and strategic thinking.

Benefits of running a Searchfund include expanding one’s view to a wide range of industries in a short amount of time. One can find a target company to acquire and then lead that company to success with the potential for a high financial gain.  About one in five Searchfund ends without finding a target acquisition

The returns match those of venture funds and angel deals.  The Search Funds 2011 study shows the asset class at 34.4 percent IRR and 11.1x multiple of investment.  Results from the Stanford experiment with search funds provided the following results:
“As of December 2011, 26 principals or partnerships were either looking for a company to buy or raising funds for acquisition; 50 had acquired companies that were still in operation; 3 had deviated from the search fund model; and 71 were classified as “terminal.” Of the 71 terminal search funds, 23 acquired and exited a business, 17 acquired then shut down a company, and 31 concluded without an acquisition.”

I know several investors interested in pursuing a Searchfund. If you are interested in being a part of Searchfund, please contact me.

Best regards,
Hall T.