A search fund, or “search fund,” is an investment vehicle through which an entrepreneur raises money from investors to acquire a company, which he will direct through its operation to create value and sell it later in order to generate returns for the investors and entrepreneur. The fund may or may not find a company to acquire, if they find a company and convince their investors to contribute capital for the business, they will enter the stage of operating the company. Over five years, the entrepreneur, as the new CEO, will try to grow the business, paying the acquisition debt. The last stage occurs about seven years after the start of the process, which is the sale of the company or the exit. The fund will search for new buyers for the company and divide the returns among its investors.
There are three main types of “research funds”: self-funded, conventional, and accelerated. In the first case, the entrepreneur finances his research himself, and lives on his savings until he is about to acquire a company. At that time they apply for equity and debt financing for the acquisition. A self-funded researcher typically owns at least 50% of the business after the acquisition. Second, traditional research funds have investor support with two-stage funding. First, to fund the research period of 24 months, which includes salary, due diligence costs, per diem and other expenses. In the second stage, the capital of the company they wish to acquire is financed. Entrepreneurs often get 25% of the business and their investors get 75%. Finally, in the third type, the accelerator entrepreneur lives the process through a “Search Fund Accelerator” (SFA), which will provide capital and direction to increase his or her success potential. In general, the entrepreneur will receive 25% of the company, but with experts who will accompany him during the process.
Since 2015, SFAs have been integrated into the entrepreneurship ecosystem through acquisitions. It is an innovative alternative model for private equity that provides mentorship and capital to a carefully selected generation of entrepreneurs. Every entrepreneur is looking for a company to acquire, manage, grow and sell. Building on proven technologies from startup accelerators such as Y-Combinator and Techstars. SFA has created an ecosystem to accelerate entrepreneurial success, and it has taken various forms as the model has gained traction globally. It is present in the United States, Canada, Japan, Switzerland, and now in Mexico with initiatives such as the one recently established by the EGADE Business School. The main reason for creating an SFA is that finding, acquiring and managing a business is not an easy task. In fact, it is very difficult. Most of those who choose this path do not achieve their goals. SFAs are designed to increase the likelihood of success of entrepreneurs, “researchers,” or search engines. 31% of traditional search engines fail to acquire a company. The usual two-year search is a race against time. Search engines waste time having to learn to look for themselves, and are often distracted by hunting down flawed companies, thus not striking good deals. At every step of their research, they encounter new learning curves, compounding the risk of failure. 28% of traditional search engines buy a company, but gain nothing. Search engines sometimes buy business they should never have acquired. They lack adequate guidance by implementing due diligence and structuring and closing deals. Thus, about 60% of search engines gain nothing in the traditional search pool model. 11% of researchers who buy a company do not earn enough to cover opportunity costs. The researchers spend two years researching a company and five to seven years as CEOs, which they have committed to for nearly a decade. The scholar’s personal financial returns will be significantly lower than in other post-MBA jobs if his business grows only modestly under his leadership. While researchers learn a lot from buying and running a business, many will not reap the financial rewards they hope for, let alone cover the opportunity costs. SFAs come to Mexico to increase the likelihood of economic success for the entrepreneur and his investors.
Felix F. Cardenas: [email protected]
The author is director of the Center for Innovation and Entrepreneurship at the EGADE Business School. He is a partner in Ascendis Capital where he partners with entrepreneurs to create corporate value.