Search funds have become an intriguing investment model over the past few decades, providing an alternative avenue for entrepreneurs to acquire and manage companies, without needing to bootstrap or raise VC money. To grasp the full spectrum of search funds, it’s essential to delve into their origins, the pivotal role of Professor H. Irving Grousbeck, and the evolution of search funds as an asset class since its the 1980s.
The Origin of Search Funds
The concept of a search fund first emerged in the early 1980s. At its core, a search fund is a pool of capital raised by aspiring entrepreneurs – known as “searchers” – from investors to finance a structured search for a privately held company to acquire and manage. The premise is relatively straightforward: investors back a small group of motivated and often young professionals who seek to buy a business with growth potential. Once a suitable company is identified, the searchers purchase the business, with the aim to grow and improve it, usually staying on as the company’s management to create value that can eventually be realised, typically through selling the business to new owners.
Conventional Business Acquisition Challenges
Before the introduction of search funds, entrepreneurs faced significant hurdles in traditional acquisition models. The primary challenge was capital: acquiring a business requires substantial financial resources, which many entrepreneurs lacked, especially fresh out of business school. Additionally, the process of searching for a viable business was daunting, time-consuming, and potentially fruitless due to the competitive nature of the market and limited access to networks and opportunities. At the same time, bootstrapping a business from scratch was not easy and also capital intensive, whilst raising VC capital is only really appropriate for certain types of companies that could go on to achieve a much larger scale.
Who invented search funds?
The history of search funds cannot be recounted without mentioning Professor H. Irving Grousbeck, who played a quintessential role in their development and is often references as the ‘inventor’ of the search fund model in the 1980s. A Co-Founder of Continental Cablevision, Grousbeck later transitioned to academia, where he joined Stanford Graduate School of Business (GSB) as a faculty member. It was during his tenure at Stanford that he conceptualised and formalised the search fund model.
This video does a great job of looking at the search fund model’s evolution since Irv Grousbeck:
An Academic Innovation
Grousbeck’s innovation was firmly rooted in addressing the barriers faced by aspiring entrepreneurs. He recognised that while many graduates of top business schools had the skills and leadership qualities needed to run a business, they often lacked the capital and network necessary to identify and acquire a prospective company. The search fund offered a structured pathway to address these hurdles.
His academic approach was methodical. In the early 1980s, Grousbeck began studying the potential of creating a facilitated process where investors could back young and talented MBA graduates. This led to the creation of one of the first search funds at Stanford GSB, setting the stage for what would become a disruptive force in entrepreneurial acquisition.
The First Search Fund
Grousbeck’s pioneering efforts bore fruit in 1984 with the establishment, along with Jim Southern, one of one of the first search funds, funded by Stanford alumni. Southern and McCreary, both GSB graduates, successfully acquired a company. This acquisition demonstrated the viability of search funds as a means for driven entrepreneurs to bypass traditional barriers and achieve business ownership.
The Development of Search Funds Since the 1980s
Since the establishment of the first search fund, the model has undergone significant evolution and growth. The proliferation of search funds has expanded far beyond the walls of Stanford University, becoming a recognised investment strategy at numerous business schools and within entrepreneurial communities globally.
Formalisation and Growth
In the decades following the 1980s, the process of establishing a search fund became more formalised. Business schools, particularly Stanford and Harvard, began incorporating search fund education into their curricula and they now feature within MBA programmes any many of the world’s top business schools. These educational institutions provided case studies, resources, and mentorship to help guide aspiring entrepreneurs through the search fund journey. Simultaneously, a burgeoning network of investors specialised in supporting search funds began to take shape, providing not only capital but also invaluable strategic advice and industry connections.
Geographical Expansion
Initially, search funds were predominantly a North American phenomenon, with most activity concentrated in the United States. Over time, however, the model has gained recognition and traction internationally. Countries in Europe, Latin America, and Asia have seen a rise in search fund activity, adapting the model to fit local markets while preserving its core tenets. This geographical expansion underscores the flexibility and appeal of the search fund mechanism across a diverse range of economic environments.
Impact and Success Stories
Throughout its history, the search fund model has generated numerous success stories that have solidified its reputation as a viable path to entrepreneurship. Many search fund entrepreneurs have successfully acquired and scaled companies, delivering substantial returns for investors and creating lasting value. These success stories highlight the potential of search funds to transform not only the professional lives of entrepreneurs but also the businesses they acquire.
Evolving Investment Landscape
In recent years, the investment landscape for search funds has continued to evolve. The advent of technology and improved access to information has facilitated the search process, making it more efficient and data-driven. Moreover, the growing ecosystem of advisors, networking events, and online platforms dedicated to search funds has provided entrepreneurs with greater resources and support than ever before.
Challenges
Despite their success and growing popularity as an asset class, search funds are not without criticisms and challenges. One commonly cited challenge is the risk associated with the extended search period, which can sometimes span several years. During this time, searchers may face uncertainty and financial strain. Additionally, the competitive nature of the investment landscape means that not every search fund will successfully acquire a company. Critics also argue that the search fund model may not be suitable for all industries or markets, suggesting that careful consideration and market research are crucial.
Sources, citations and recommended reading:
- Spain based search fund investor Moonbase Capital explains the origins of search funds here: https://moonbasecapital.com/what-is-so-special-about-search-funds-moonbase-capital/
- Wikipedia’s article on search funds explains how search funds can be traced back to Professor Grousbeck and Stanford GBS: https://en.wikipedia.org/wiki/Search_fund
- The Tuck School of Business also references the search fund’s 1984 origins in their ‘note on search funds’: https://www.tuck.dartmouth.edu/uploads/centers/files/search.pdf
