The Rise of Search Funds: A Compelling Post-MBA Career Path

What Are Search Funds?

Search funds are investment vehicles that enable ambitious entrepreneurs, often MBA graduates, to raise capital from investors with the aim to acquire and operate an existing small or medium-sized business. This model empowers entrepreneurs to embrace leadership roles, seeking to scale the business while mitigating risks compared to starting from scratch.

The Entrepreneurship Renaissance

The concept of search funds was first introduced in the early 1980s, and since then, it has gained substantial momentum. The Stanford Graduate School of Business has reported an ascending trend in search funds since the 1980s. By 2021, over 300 search funds had been formed in the U.S., and investors enjoyed a handsome 17.1% annual rate of return. The allure of combining operational leadership with investment acumen has catapulted the popularity of search funds among budding entrepreneurs. As an MBA graduate, this path offers a unique opportunity to leverage your skills and knowledge to create value in an established business.

The Appeal of Search Funds

Why MBAs Are Drawn to Search Funds

Search funds are particularly appealing to MBA graduates for several reasons:

1. Ownership and Leadership: Unlike traditional corporate roles, search funds offer the chance to be the principal owner and CEO of a company. This is a unique opportunity to apply MBA-acquired skills in leadership, strategy, and operations.
2. Lower Risk Compared to Startups: While startups carry a high risk of failure, acquiring an existing business often involves less risk. These businesses typically have established revenue streams, customer bases, and operational processes, allowing for a more stable platform for growth.
3. Significant Financial Upside: The financial rewards from a successful search fund can be substantial. Upon exit, entrepreneurs can achieve significant returns, with potential earnings from equity ownership and profit-sharing.

The Unstoppable Uptrend

The growth of search funds is evidenced by data and success stories. According to the Stanford Graduate School of Business, search funds have consistently delivered strong returns for investors, with an average IRR of over 30% for top-performing funds. The success of search fund entrepreneurs such as Nick Bradley of Pendleton Street Advisors and Mark Agnew of Lou Malnati's Pizzeria further underscores the potential of this path.

Types of Search Funds

Dissecting Search Fund Models

Search funds can be broadly classified into three main types, each offering distinct advantages and challenges:

Traditional Search Fund

In a traditional search fund, entrepreneurs raise an initial capital of around $400,000 to $800,000 from investors to finance the search for a viable business. Once a suitable target is identified, additional capital (often in the range of $5 million to $10 million) is raised for the acquisition. This approach offers the advantage of having dedicated capital and a clear mandate to search for the right business opportunity.

Self-Funded Search

In a self-funded search, the entrepreneur utilizes personal funds for the search phase, often targeting smaller acquisitions in the $1 million to $5 million range. This approach offers more flexibility and autonomy, as entrepreneurs are not beholden to outside investors during the search phase. However, it requires a higher level of financial commitment and risk from the entrepreneur.

Fundless Sponsor

The fundless sponsor model is similar to the self-funded approach, but the entrepreneur has a pre-established network of investors who have committed to financing the right opportunity. This can be a hybrid model, with search capital ranging widely depending on the entrepreneur's network. It offers a balance between autonomy and access to capital, allowing the entrepreneur to leverage investor relationships without having to raise an initial search fund.

Hypothetical Examples and Success Stories

To illustrate the potential of search funds, let's explore some hypothetical examples and real-life success stories:

Jane's Traditional Search Fund Journey

Imagine “Jane,” a Harvard MBA graduate, who raises $600,000 through a traditional search fund. After a meticulous search, she acquires a promising healthcare services company for $6 million. Over seven years, she steers the company to new heights, and it’s valued at $25 million. Jane's share, after paying back investors, could be in the range of $6 million to $10 million. This example highlights the potential for significant financial gains through effective leadership and business growth.

John's Self-Funded Search Adventure

In another scenario, “John” opts for a self-funded search. He invests $200,000 of his own money to identify a niche e-commerce platform, which he acquires for $2 million with investor funds. Within five years, a major player acquires the platform for $10 million. John’s net gain could be around $3 million to $5 million. This example demonstrates how self-funded searches can lead to substantial returns, even with a smaller initial investment.

Earnings and Compensation: The Big Picture

In search funds, initial earnings are often modest. During the search phase, an entrepreneur might draw a salary of $70,000 to $120,000. Post-acquisition, salaries range from $100,000 to $300,000, alongside profit-sharing or bonuses. The golden goose lies in a successful exit, typically 5 to 10 years post-acquisition. Entrepreneurs can earn multiples of the initial investment, often in the tens or even hundreds of millions.

Understanding the Financial Dynamics

The financial structure of search funds is designed to align the interests of entrepreneurs and investors. Entrepreneurs typically receive a salary during the search and operational phases, which helps cover living expenses. However, the real financial rewards come from equity ownership and profit-sharing arrangements, which can result in substantial payouts upon a successful exit.

Navigating the Undercurrents: Challenges Ahead

While lucrative, search funds are fraught with challenges. Identifying the right business, managing investor expectations, and leading a company to prosperity demands resilience, tenacity, and an array of management skills.

Overcoming Common Obstacles

1. Finding the Right Business: The search phase requires careful evaluation and due diligence to identify a business with growth potential and a good fit with the entrepreneur's skills and interests.
2. Building Investor Relationships: Effective communication and relationship management with investors are crucial to securing the necessary funding and support throughout the search and acquisition process.
3. Operational Challenges: Leading a company requires strong management skills, including strategic planning, financial management, and team leadership. Entrepreneurs must be prepared to navigate the complexities of running a business and driving growth.

The Role of an MBA in Search Funds

Tailoring Your MBA: Cultivating the Entrepreneurial Spirit

For aspiring search fund entrepreneurs, an MBA can be the fertile ground to nurture your ambitions. Focus on courses in entrepreneurship, private equity, negotiations, and leadership. Seek internships or part-time roles in private equity, search funds, or entrepreneurial ventures. Engage in networking events, join search fund clubs, and seek mentorships from alumni who have walked this path.

Building a Strong Foundation

1. Course Selection: Choose courses that provide a solid foundation in entrepreneurship, finance, and strategic management. Courses in venture capital, mergers and acquisitions, and business analysis can be particularly valuable.
2. Practical Experience: Gain hands-on experience through internships or consulting projects with search funds or private equity firms. This experience will provide valuable insights into the industry and help build your network.
3. Networking and Mentorship: Connect with alumni and industry professionals who have experience in search funds. Attend conferences, join industry associations, and participate in networking events to expand your contacts and gain valuable insights.

Set Sail on Your Search Fund Journey

Search funds combine the entrepreneurial spirit with a pragmatic approach. This path, though challenging, can reap remarkable rewards and mold both your career and life. As you gear up for this venture, remember that an MBA is a potent tool to cultivate the necessary knowledge, skills, and network. Embark on your search fund journey with zeal and preparedness, and be ready to navigate the intriguing and rich waters of this promising career path.