Leaving Banking for Entrepreneurship (Specifically Search Funds)

AllDay_028's picture
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Anyone on here who's done It? What was the process like to raise capital, find a company, and then run a company as someone who has only ever been a junior or mid career employee? How did you quantify the risk vs. Staying in banking/other options? Was it what you expected? Etc, etc. Seriously considering changing course after next bonus season and looking for perspectives.

I have a feeling I might not get any hits, but thought I would throw out the feelers anyways.

Comments (24)

Mar 30, 2018

Are you willing to relocate to boston - if so, pm me!

Apr 1, 2018

Interned at a search fund last summer. From what the managing partner said, most investors will only give money to those with an either a MBA or prior operational experience. That being said, he himself had neither and was able to raise capital due to extensive networking.

Apr 1, 2018
Boosted Bonobo:

Interned at a search fund last summer. From what the managing partner said, most investors will only give money to those with an either a MBA or prior operational experience. That being said, he himself had neither and was able to raise capital due to extensive networking.

Yea, I'm not particularly worried about raising money. I generally have the background and I have some decent contacts with some big players in the space. And I'm also considering the accelerator route.

I'm more interested in the experiences of the founders, were they happy, was it what they expected, what were the challenges, etc.

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Apr 1, 2018

Very interested in this as well, although I have just started to look into it.

Found the HBR Guide to Buying a Small Business useful to get an overview.

https://hbr.org/2016/03/why-more-mbas-should-buy-s...

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Apr 4, 2018

Interesting article. The author's keep bringing up "angst", as if that's the only reason MBAs aren't searching for small businesses to buy. They never mention lack of capital or access to capital though. I get the sense that a bunch of MBAs with $200,000 in debt don't have a ton of money on hand to start buying businesses when they graduate.

Apr 4, 2018

Fair point and I agree. I believe they are just trying to make the case, that perceived "secure" choices i.e. consulting and banking carry quite some risk in the long-term. Especially when compared to buying a stable business with its own established niche. In the book, the financing part is described fairly well, although overall it just scratches on the surface of the whole process. Hence why some personal experiences would be a great read

Apr 1, 2018

I hear it's insanely hard to raise capital without pedigree

Feb 18, 2020

sources?

Apr 1, 2018

Not a search funder myself, but interned at one while I was in school. It can obviously be a very rewarding experience, but I would highly recommend reaching out to those who tried/succeeded in the space; generally the search fund community is tight knit and very willing to help out and give advice. I think the biggest thing you have to consider is that this is something you really have to roll your sleeves up on. It's not going to be glamorous, and it very well may take two full years to get going. You're most likely not going to be dealing with business owners with much financial knowledge and it's quite a change from a big banking environment. I would just recommend reaching out to past search funders for discussions.

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Apr 1, 2018

Appreciate it. Yea, I just set up time with a regular search fund investor as an informal "help me get to know this space" lunch. I'm looking through my MBA alumni network to connect me with some people who did it, as well.

Best Response
Apr 1, 2018

When I worked at a search fund, I asked my MP for as much information as possible on the space. He sent me hundreds of pages of information on case studies and experiences described by H/W/S grads. One thing I really took away from it was that you aren't solving the same problems that a CEO of a mid cap or large cap companies would. Many individuals were extremely frustrated as they spent all day figuring out incredibly mundane things (e.g. fixing payroll problems, helping their employees make it to work on time when their car is in the shop, maintaining client relationships after a transition in ownership). My previous MP was successful and I believe is quite happy now, but he came from an operations background and knew that it wasn't all sunshine and gravy. I would recommend getting your hands on some of the reading materials I mentioned earlier (I can send them to you if you like), so that you can analyze the problems many search funds face, and determine for yourself whether or not it seems worthwhile. I am sure you know this, but I just want to reiterate a couple of the main issues with search funds as well:

  1. Deals die as well, just as much if not more so than when you're working at a LMM - MM IB/PE shop. We spent months working toward a deal that seemed like a slam dunk, and it fell apart more times than I can count. Brokers and Bankers who work in the LMM space are not as dependable, qualified, or seasoned. Also, the sellers are oftentimes incredibly passionate to their businesses and loyal toward their employees. Some back out at the very last second (after signed LOI) just because "they aren't feeling a sale anymore".
  2. You are on your own. Sure, you may have a handful of trust worthy advisors, but at the end of the day it is oftentimes you (and your interns) who fill your office space. This can make things lonely and stressful, as you are unable to vent about your frustrations to anyone who can truly empathize (unless you take on a partner or have a close network of searchers, both of which I would recommend).
  3. You have no ground to stand on if you don't come into the space with operations experience. You may be a banker that comes from GS and scooped your BS from Harvard undergrad, but sadly that will not give you any credibility. While I myself might trust you to run a business, the current equity holders likely wont. How can they in good faith put their business (which 99% of the time they built themselves from scratch) in the hands of some 26-30 year old who never even managed a team of 6-10 guys?

Lastly, if you plan on proceeding without operational experience (or an MBA), you need to have a very good reason as to why you have enough industry knowledge to run a business in ONE industry. Going for the generalist approach off the bat may seem logical, but if all your IB experience is in industrials, you will be hard-pressed to gain traction within the tech space. I hope I don't come across as a know-it-all intern, but I had a very close relationship with my MP and he vocalized all of the issues he had within the process, and drew my attention toward others I would not have realized.

Happy to help if you want any further insight

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Apr 1, 2018

I really appreciate the informed and detailed post. I have a bit of an eclectic background (Corp Dev at a MM company, top EB/BB banking, some limited experience in LMM PE, m7 MBA) so I feel like I would be able to raise money without too much effort based on some alumni ex bankers I know who have done things similar.

I would definitely appreciate you sending me across any information/reading materials/etc you have. I'm trying to get as informed as possible in the space.

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Apr 1, 2018

Having worked at a search fund before, @Deal Team Six summed it up perfectly. Can't even stress how important the part he mentioned about deals dying is. People might search for two years for a company, aren't able to find one and then lose all their investors money (if they were a funded searcher).

Also, given your credentials, you'll have a pretty easy time finding unpaid interns who are looking to get their foot in the door and experience, and they can do a lot of the bitch work (ie looking through company data bases, reaching out, etc).

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Apr 1, 2018

Thank you for the context. I am familiar with an individual who has a very similar background, and it may be even less applicable (3+ years top EB, H/W/S, ==> search fund) and raising capital was a walk in the park. Your background is equally as impressive, so I bet you won't struggle. It helps if you can find a major backer first. For example, the guy aforementioned was able to get a F500 CEO on board, who made the rest of the funding process very simplistic. They literally were turning people down, even after they raised far more than the typical search fund model looks for. Shoot me a PM with your email and I will send you what I have, I think it will be incredibly beneficial.

Apr 1, 2018
Deal Team Six:

One thing I really took away from it was that you aren't solving the same problems that a CEO of a mid cap or large cap companies would. Many individuals were extremely frustrated as they spent all day figuring out incredibly mundane things (e.g. fixing payroll problems, helping their employees make it to work on time when their car is in the shop, maintaining client relationships after a transition in ownership).

As someone who acquired and ran a small company, I cannot stress this point enough. This will literally be your life every day. Dealing with Hiring/HR/Payroll that you took for granted at a large corp, and dealing with all the BS from employees, whether they are threatening a lawsuit, have family drama, no baby sitters, broken cars, burned down homes, getting medical treatment, it will suddenly become your issue and impact your business.

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Apr 1, 2018
Guest1655:
Deal Team Six:

One thing I really took away from it was that you aren't solving the same problems that a CEO of a mid cap or large cap companies would. Many individuals were extremely frustrated as they spent all day figuring out incredibly mundane things (e.g. fixing payroll problems, helping their employees make it to work on time when their car is in the shop, maintaining client relationships after a transition in ownership).

As someone who acquired and ran a small company, I cannot stress this point enough. This will literally be your life every day. Dealing with Hiring/HR/Payroll that you took for granted at a large corp, and dealing with all the BS from employees, whether they are threatening a lawsuit, have family drama, no baby sitters, broken cars, burned down homes, getting medical treatment, it will suddenly become your issue and impact your business.

Great context. Would love to hear anything else about challenges, if it was the right move, would you do it again, etc etc.

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Apr 1, 2018

+SB Well said. Also interned at a search fund during my undergrad and your point on deals dying is spot on. It can be hard to see the light at the end of the tunnel when you've spent months on a deal and having it die for no reason other than the seller 'not feeling comfortable' anymore. Perseverance is much easier said than done.

One point I would like to emphasize is the emotional attachment that owners have to their business (this was somewhat touched on above and more applicable to business owners open to selling their business that did not hire a broker/LMM banker). A bunch of the businesses that I looked at, and I would argue are the types of businesses a 'typical' search fund would look at acquiring, are family owned and are exploring some kind of succession plan. These owners tend to care deeply about the future of their business and the well-being of their employees. In my experience, what I found helped my MP close a deal relatively quickly compared to other search funds was the ability to give the owner comfort in their ability to run the business. MP had experience in MM PE which provided experience getting in the weeds and dealing with some of the not-so-fun things mentioned above (payroll/other bs etc.). Sure, coming in with an M7 MBA and banking experience looks good and will get you funding, but if you can't close a deal what good is that? Being able to empathize with the owner and demonstrating the capability to run the business is key.

Apr 5, 2018

+1 SB. Well spoken @Deal Team Six

The path to the industry is really difficult, stressful, filled with long hours and there is no "backup" if crap hits the fan.

Entrepreneurship by all means can create its own pathway to success. If you ever watched Shark Tank, it is possible but on a very slim margin.

Heck, go for it. We only get one shot at this life. So, why not?

No pain no game.

Apr 4, 2018

Can someone explain what this is? Is it just recruiting?

Array

Apr 5, 2018
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