Search Funds Primer

A Practical Guide to Entrepreneurs Embarking on a Search Fund

A PRIMER ON SEARCH FUNDS

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There are multiple ways into the world of entrepreneurship, including buying an existing business. For prospective entrepreneurs who are motivated by the desire to build and manage their own business, but who may lack an idea or the desire to start a company from scratch, acquiring a small business may be an excellent option to consider. In the past several years, the search fund model has gained popularity. When the Center for Entrepreneurial Studies (CES) at the Stanford Graduate School of Business conducted its first Search Fund Study at the end of 2001, it identified 46 first-time search funds. By the end of 2009, that number had grown to 129. While originally popular among newly minted MBAs, the search fund model has captured the interest of many mid-level managers, and in the last several years approximately one-half of new “search funders” raised their funds 2-10 years after business school. The entrepreneurial aspect, the challenge of growing an existing company, and the independence the model provides draw many people to it, as does the 37% IRR and 13.5x multiple of investment for search funds as an asset class (as of 2009). The search fund model is not without risks, however. More than one in five search funds have not acquired a company despite the principal(s) spending 2-3 years in this pursuit. Further, while the average internal rate of return of search funds is highly impressive, 59% of search funds had a partial or total loss of capital. In 1984, H. Irving Grousbeck pioneered a...