Wanted your guys' opinion on how realistic it is for someone competent to raise a search fund without an MBA. Based on my research so far, I haven't come across anyone without an MBA, although some went to no-name schools. Obviously, b-school is where the Entrepreneurship Through Acquisition (ETA) classes are taught. And b-school can be useful with networking with fellow search funders, professors (many who double as investors), and partners and vendors such as commercial bankers. Yet, I feel like there isn't any knowledge in b-school that can't be researched on the internet. I'm willingly to bet many (if not most) professors haven't been through the search fund process themselves. What's that saying? Those who can't, teach? Sorry for the low blow, but an MBA is time and capital intensive.
Some background on me: late 20's, went to a semi-target for undergrad (econ major), and a few years of experience in commercial banking. My slight competitive advantage is having a network of middle-market bankers who can provide unique deal flow (i.e. pocket listings). Who knew commercial banking could ever be more beneficial than i-banking? Plus, I wouldn't only be looking for "SaaS businesses with robust recurring revenues" necessarily; this seems to be generic search criteria right now. Also, I wouldn't mind cold-calling and getting my ass handed to me, since I'm aware it comes with the territory.
Ironically, many business owners I've worked with look down on MBAs, especially if they think you think you know everything about business being in a classroom. Must be a generational thing, where many of these guys have a chip on their shoulders for achieving success without fancy degrees. So not having an MBA might actually make me more relatable. Finding a target can be more challenging than fundraising; you need high EQ for the former. For the record, my personal opinion is that an MBA can be valuable if from an M7 program, but even then, the value has been watered down. Aside from PE/consulting, MBAs aren't highly regarded, not even by HFs and especially not by VCs. I've been told on multiple occasions that undergrad is more rigorous than MBA programs, even at top b-schools.
As a cherry on top, I'm willingly and able to cover my own day-to-day expenses if/until a viable target is found. So investors would only be funding the equity portion of an investment, not paying for my Pornhub Premium subscription. Please be frank with your opinions, especially if you have a search fund/entrepreneurial/MBA background. Some questions:
What are some desirable industries for search funds? Software is appealing for obvious reasons, but valuations are especially rich. Plus I feel that software doesn't offer a strong moat, despite sticky/recurring revenues.
What's the process to solicit and build rapport with investors?
What are some suggestions to maximize credibility?
What else should I know/be aware of?
Looking forward to the discussion.
If you're serious about this, I'd recommend finding a strategic partner or two. I interned for a search fund run by two guys, both recent MBA grads at the time. One had transaction experience, the other was an operations guy. Combined they made a really good team. I'm not sure how commercial banking ties in to ideal search fund candidates. Finding a partner with a background more aligned to search funds would go a long way for you. You need to figure out what your value-added skill is to the process. Knowing a bunch of bankers isnt going to work. Getting industry experience in the industry you hope to purchase a company in would also help. Learning strong financial modeling, due diligence, etc. When you start a search fund, you are doing everything so it is important to have your feet wet before you start.
Search funds are awesome. Can they be started without an MBA? Maybe. It depends on who you fundraise from. Also remember that if you buy a company, you will be in an executive leadership position. How does your background align with the responsibilities of those possible positions?
Good points, but when it comes to leadership, does it really matter how much experience you have? The average search fund entrepreneur is barely 30 years old.
And how successful is the average search fund entrepreneur?
Yes and no. Yes in the sense that you need a story and premise when pitching your plan to investors. Your investors want confidence that they are putting their money in the hands of someone who they can trust to see the job through, have a solid investment plan, find the right company, and close the deal. The two guys I worked for had a good combo of experiences. Each offered the right background and skills to convince investors to fund their venture. Youre right though that age or experience isnt the whole story. These investors have to believe in you the person regardless of experience. Confidence, good people skills, aka the skills you with a banking background would have. That will go in your favor. Be able to tell your story/vision. too many smart guys lose their audience in the details, I'm sure a lot of smart guys wanted to raise a search fund only to have it fall apart because they are bad communicators.
Search fund model makes very little sense if you can't raise capital on good terms fwiw and given your background it's unlikely you'll be able to attract capital. A lot of these top b school grads can't do it and their personal take home sucks relatively speaking.
Going to need a better niche too.
APAE Would love your opinion and insights.
I'm pretty sure its less about credentials such as an MBA and more about your personal network. I wouldn't go down the search fund path without some HNW FFF money/connections with some indication that a decent amount of money will back you.
Got the HNW part, what's FFF?
Friends/family/furries.
First let's get the premise down. You are looking to compete for funds in a world that values pedigree among other things. You acknowledge you lack pedigree in several ways: no MBA, no target and no IB experience. But you believe (reasonably so) that you have experience, deal flow and hustle that could compensate for the weakness.
All of this makes sense if it's true.
But then you say some things that make me wonder how true it is. You ask what industries make sense, which is odd to me because your access to deal flow is the critical element that overcomes other weaknesses, and thus that deal flow should dictate your industries.
Also found the software comment to be strange: "no moat despite sticky revenues." Sticky revenues are almost the definition of a moat.
Also, LPs won't care whether their fees are funding your living expenses. The management fee is a number, they pay it, and you use it how you please (th ough you'll generally need it to pay the costs of the business, so nobody expects any of it to go to Pornhub anyway).
The lack of an MBA can be overcome, but like anything else, you need to show strength elsewhere to compensate for weaknesses. A 5'10 quarterback better be a scrambler. So you need to demonstrate the experience you've built, how it's going to give you an edge in sourcing and executing deals.
My deal flow would predominately be traditional businesses; restaurants, nursing homes, light manufacturing, etc. I'm well versed with the economics and operations of such businesses. My point is that even though businesses in these industries can display a track record of profitability and stable cash flows, I'm not sure how enthusiastic investors would be. Based on what I've seen, software companies seem to be all the hype. Which brings me to my next point...
Sticky revenues does not equal a moat. A moat would be a high barrier to entry-- i.e. hard to obtain special licenses/permits, proprietary R&D, patents, high capital intensity, etc. Unless I'm buying Oracle, a small to mid sized SaaS company wouldn't have these characteristics. Its not uncommon for some coders/engineers to bootstrap a software start up, not to mention, for the time being, there's still plenty of VC money available.
Management fees? Search funds don't charge them. 2% of $500K is $10,000. Its called search capital, and investors pay searchers up to $40K, because they're in it for more than money (empowering young entrepreneurs). There's no guarantee they'll get anything in return for search capital. I'm offering not to take search money, which could potentially save investors $40-80K. I'm sure even Bill Gates wouldn't complain about that.
No offense, but you strike me as a smart ass.
I think most people on this forum know what a moat is, and know what sticky revenue is. Thanks though. My point was that they are highly related (note that I said they're almost the same) because one indicates the other. Very hard to have sticky revenues without a moat.
Apologies for not being an expert in search fund lingo. Whatever you want to call the upfront payment you're not charging, I don't expect people to be impressed that you're not charging it. I agree with you that investors care about more than money, but you're not in rare company as a someone claiming to be a young entrepreneur. The things you'd need to attract those who care about money (track record success, a plan, passion, etc) are roughly the same things you'll need to attract those who care about supporting young entrepreneurs.
Why wouldn't you find the company first and then pitch investors, if you don't need search capital?
Restaurants? I would take restaurants out of that list tbh
I liked your idea of romancing your way into PE better
Actually, she and some in her network have agreed to invest if I move forward with a search fund. But finding a target can be more challenging than raising capital.
how tall are you?
5'9
Did you read the HBS book about this?
It's crazy how many people are out there attempting to do what you are describing. Many are older than you, but I've seen a few spend years trying to find and close on a single acquisition. That being said, if you have pocket listings, those are always preferred compared to finding a business in a process. But, you will face a more difficult and drawn out diligence process as the owners are not going to be prepared like they would in a sale process. However, I would caution you that these "pocket listings" are rarely actionable in the short-term (3 months) and tend to drag out over years. If that were to occur, just be aware how long the courtship process typically takes. Any of the PE brethren on this board can attest to the grueling nature trying to buy off-market add-ons.
Finding capital is not the problem in this market, but convincing investors to back you will be more difficult than you imagine. So, while you may think you resonate better with business owners, what are you going to articulate to capital providers in your meetings? If you are going to be the "guy" running the show, it helps if you have demonstrable experience operating, which it does not sound like you do. In that event, it will require you to be more detail-oriented and creative in how you present the strategies and nuances of the business.
In order to effectively operate a search fund, you should probably find an industry or two to focus on. Those that you have considerable experience with would be preferred, but if you aren't set to one, you could also opt for sectors that you think you will see the highest volume of opportunities from (given your geography, relationships, etc.).
Good luck.
Awesome feedback. Wish I knew about the search fund model a couple years ago when it was even more unknown. But I would've had less experience too.
It can be tough, but obviously, high risk/high reward. There is an HBS book called "Think Big, Buy Small" that you may find interesting. Talks about the search fund model, what to expect, how to get a deal done, etc.
You are overemphasizing the value of your network to the small business brokers.
If you apply the same logic (power of network) to fund raising, advise from alumni, and backing in capital for the actual deal, you'll know that having a MBA in the ETA is pretty useful.
You forgot the part about shelling out $100K (probably even more than that) and lost wages/benefits for two years (very conservatively $120K). So by then, most MBAs simply can't afford going with modest income or risk not locating/closing a target. And all this is assuming one attends an MBA business schools">M7 business program, otherwise you can forget about the benefits you're referring to.
I don't want to fight with you - the assumption was that you go MBA business schools">M7 if not a top 5 MBA program. I think you probably don't see a lot of ETA out of lower ranked MBAs anyway. If you want to do ETA without a MBA, I think you should. No one says you need one.
Most MBA ETA people's background are: semi-target/target undergrad-> IB -> usually MM PE -> MBA business schools">M7 (more like top 3~5) -> ETA. I am not saying that MBA grads will be better than you at managing the business, but ETA is a small world and having a background that LPs can relate to, is extremely valuable and helps with fund raising. I am certain you can still raise capital, but just expect to work a lot harder.
The opportunity cost discussion is a rabbit hole and you can make your own call there. I am joining MF post-MBA so I am getting my money's worth back. MBA nowadays is not really about careers but rather about designing life plans, fine tuning your career goals, and dont forget, have fun for two years. For some it is worth it, for others it is not.
You seem very argumentative for someone seeking advice on the internet. I've had friends that took 2-4 years to find a company they like, convince the owner to sell, and agree on a price to sell it. The last is always the hardest part, and if you are sourcing through business brokers, they will likely try to create any level of competition possible.
From reading the above, it seems like you want someone to say: you definitely don't need an MBA to do a search fund, and you should just go for it. At the end of the day, (a) you don't need an MBA and (b) if you really want to do it, then do it already. I think what you are hearing from those that are offering their advice here, is that many search funds are led by an MBA and it may make the journey a little easier. If you don't think the tuition and lost comp is worth it, team up with someone or prove us all wrong by doing it on your own.
We're just saying that search funds are tough, and doing one in your 20s with ~5 yrs of commercial banking experience and without the credential / network of a respectable MBA program might make the process a bit more challenging. You sound like you are up for the challenge though. I'm interested to hear how it goes
Hey,
When I left my PE job I started looking to buy a business without knowing about search funds. I made a plan to roll up an industry in the healthcare sector and it didnt quite work out. I kept going at it and through my (very short) track record of sourcing deals, securing funding and submitting LOIs, I was able to attract investors to form a search fund.
I received some term sheets, but decided agaisnt it as I didnt feel the terms made sense. You basically give up most of your equity for the security of having a 80k-100k salary while you search.
I remember being very discouraged at some point after several failed deals and reaching out to a contact that had successfully bought a business and he told me: "Do you know what is better than owning 40% of a business. Owning 100%, borrow as much as you can and save your equity for future funding rounds if required". It kind of stuck with me and he was right. Most small businesses (Sub 8M revenue) can be financed 100% with debt if you structure it correctly.
Better off just living poor and hustling for 1-2 years than selling most of your equity for some security imo.
And regarding the MBA, I have no idea why people think that would be a prerequisite to start a search fund. Tbh its pretty simple to make a model and investment case for a small business... the most important skill in a search fund is your ability to source and convince an owner to sell which you can do without an MBA..
EDIT: Also, for someone who has been doing this for 2years, I can tell you its a very lonely and difficult path as all your peers are racking in bonuses and promotions you are in the same spot until you close something. You also dont really have co-workers and it always feels like you on the edge of closing a deal and becoming paper rich.. at first you talk about your deals with your buddies but fast forward several dead deals you kinda just feel like a broken record and keep to yourself.
Magni odit qui quos. Aliquid pariatur sunt alias. Occaecati adipisci labore tempore ea. Dolore quia dolor corporis. Modi ipsum accusamus voluptatum enim et odio.
Et quia omnis dolorum labore et ratione molestias. Voluptatum tempora consequatur est consequuntur voluptatibus qui ipsa ut. Dolorem aliquam consectetur et eligendi dolore officiis laudantium. Dicta voluptatem molestiae quos beatae esse qui consectetur.
Velit quibusdam ab minima unde doloribus vitae adipisci. Ipsam debitis consequuntur excepturi in odit quia. Nam dolor labore error reprehenderit magnam numquam aut quasi. Quia est nobis iste voluptas est.
Consequatur odit repellendus numquam et. Vero quibusdam modi nihil asperiores fuga aut eos.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Eaque quae vel non explicabo repellendus. Voluptas voluptas consequatur voluptatem saepe ratione. Blanditiis voluptas itaque et voluptatem illum. Omnis sed cum fugit ut.
Quibusdam minus sequi aspernatur iure blanditiis. Laboriosam at nulla quia aut labore accusantium minus. Ut beatae ut et omnis. Odio officiis eos ut quod sint excepturi voluptatibus.
Labore quam provident eius animi qui ut. Reprehenderit odio in veniam ipsum. Qui rerum harum et iure vel officia. Vel labore harum est expedita corrupti nostrum et. Laudantium excepturi et laboriosam dolor.
Nemo dolorem eos magni quis molestiae aut. Suscipit enim neque facilis officiis aut. Accusantium nihil consequatur odio voluptatem culpa voluptatem est. Rerum porro tenetur nulla mollitia sed pariatur ipsum.