Search Funds: Super-Charged Career Builders
SANDRO MINA & MARTIN STEBER
Co-Founding Managing Directors
Image via Freepik.
This post, originally published in 2015, has been updated with relevant and current content.
Entrepreneurs are different. The risk/reward calculations, the pain/joy sensors, the success/failure analyses are all different in entrepreneurs than they are in the general public. This is not necessarily to say that entrepreneurship is a superior characteristic, but it has been proved time and time again that the person who excels in the highly-structured regimen of a Fortune 500 management training program is probably not the same person as the one who thrives on their wits at the head of a smaller, fast moving company in a dynamic market.
While entrepreneurs may march to the beat of their own drummer, there is a consistent motivation that drives them all: the desire to see their vision actually put into action. Successfully launching a Search Fund and completing an acquisition makes this happen. For the ones who have the discipline and the talent and the drive, Search Funds put entrepreneurs at the helm of a small but profitable vessel, and open up the entire sea of commerce for exploration.
Record numbers of young entrepreneurs are launching their careers, and living out their dreams, via the Search Fund model. Since 2007, entrepreneurs have raised at least 10 new funds each year, reaching record levels of fund activity in 2014 and 2015 (latest years available) with 38 and 43 new funds, respectively. Similarly, growing numbers of these entrepreneurs are succeeding in their search phase. In 2014 and 2015, Search Fund entrepreneurs had made deals on 14 and 16 companies, respectively, versus previous highs of 10 acquisitions each year from 2010 through 2012.
(Source: Stanford Graduate School of Business, 2016 Search Fund Study, Selected Observations. All data as of December 2015. Past performance is no guarantee of future results.)
Are You Learning to Lead or to Follow?
There are many important lessons that are learned in a large, structured organization, and there is generally a clearly marked ladder to be climbed, but so often the process rewards the young executives who are best at making their boss look good, rather than the young executive who is delivering vale for the company. While this is good career management, the question that can be validly asked: is whether that young executive is developing the skills to be an effective Deputy-, Assistant-, Vice-Something, or is that young executive developing leadership and judgment, they keys to being an effective CEO.
“For the ones who have the discipline and the talent and the drive, Search Funds put entrepreneurs at the helm of a small, but profitable vessel, and open up the entire sea of commerce for exploration.”
By slotting into the senior management roles after the acquisition, Search Fund managers begin developing those leadership and judgment skills from the first day. Supported and guided by the Search Fund investors, the new executives begin the long process of developing consequential management skills that their peers in management training programs won’t have the opportunity to begin developing for many more years.
Creating Future Options
Every successful entrepreneur gets exposure to all aspects of corporate management, but the successful Search Fund manager gets an additional set of experiences that will help open doors in the future. As CEO of a small company, every day is filled with issues ranging from operations to sales to accounting to human resources. This well-rounded, comprehensive interaction with every department is an enormously valuable learning experience in and of itself.
Successful Search Funders, however, also get exposure to the private equity and investment banking roles, not from an observer capacity, but from a principal’s seat. During the initial phase, the Search Fund manager acts as a private equity investor, first raising capital from investors, then finding an attractive investment, and finally participating in the closing of the acquisition. During the exit from the company, the Search Fund manager then switches hats and acts in an investment banking role, first preparing the company for the sales process, then sourcing potential acquirors, and then finally participating in the negotiation of the enterprise value.
The resulting skill sets and hands-on experience from this collection of roles and responsibilities opens up more avenues for future career opportunities than his business school colleagues will enjoy at that same point in their career.
A Brass Ring – A Lot Closer
Ultimately, no discussion of the unique benefits of the Search Fund path would be complete without briefly discussing the financial incentives. The salary will be lower, but the reward for success much higher. If successful, Search Fund managers will earn their way to approximately 20% of the equity of the company, meaning that at the point of sale, the Search Fund manager receives a substantial portion of the proceeds. Put crassly, successfully managing a Search Fund through to the profitable liquidity event of an acquired company will likely result in a 7-figure capital gain for the Search Fund manager, thus establishing a healthy basis of wealth at a young age.
Graduates of strong MBA programs have many options to work for the largest and most well-known companies in the world, but there will be some whose nature and talent call for a more entrepreneurial career. Search Funds provide those unique persons with a dramatically different experience and carry the potential of lifting the young entrepreneur/ new CEO to a much higher level in a shorter period of time.