The founder(s) usually pitch the fund to a handful of initial investors and raise a few hundred thousand to bankroll the search process (their pay, employee pay, travel and meeting funds, etc...). Once an opportunity is identified they go back to the investors and figure out how to best fund the purchase then stay on to manage/turnaround the business. It's different because they aren't usually putting their money on the line and they get paid to search for opportunities.
IMO the author has the entire idea of why people do this wrong. If you can raise tens of millions of dollars on the idea that you will be able to buy a business and get a 3-6x ROI for your investors in a 3 year timeframe, before even identifying the acquisition target, I sincerely doubt you're in it for a temporary ego boost.
It's extremely difficult to move up the ladder of a PE firm to the partner level, so often times associates/analysts will strike out on their own as a fundless sponsor or start a search fund.
It seems strange to me that someone who doesn't have the risk appetite to start a business would think they are well suited to running one still in its early stages.
The companies they are buying aren't in the early stages; they are established companies. They are companies that have been around a while, that have owners who want to exit, with the typical reason for an exit being an age.
Search Funds are an interesting beast. I have some direct experience here as I was in contact with a number of "searchers" earlier in the year (word about my business, which is retail/consumer focused, made its way around what I learned is a pretty tight-knit network.)
The model works as such: The searchers are typically recent MBA grads and sponsored by a group of backers (who, in many cases, are the actual professors & their network). The searchers have less power than you (or they) think -- their job is to find, interview, dig in and model out a business -- and then present it to their investment partners, who are the ones who actually make the investment decision (not entirely unlike angel investing cohorts).
Risk-averse is spot on -- they're looking for a _very_ specific type of business (TFA doesn't cover it exactly): They want safe straightforward B2B operations with an intense focus on recurring revenue. That's the phrase I kept hearing over and over - "locked-in recurring revenue." The idea is that the searcher can jump in at the helm and not worry about rocking the boat while he/she gets up to speed.
The particularly risk averse ones (especially those that have been searching - unsuccessfully - for 2+ years) are looking for a different type of "unicorn". They want businesses - like Asurion - with massive growth potential and iron-clad (i.e. low churn) long-term recurring revenue from other businesses. Don't we all ;)
Most of the targets are businesses that are all around us but that we techies probably haven't heard of -- things like oil services companies with contracts to transport crude from ports to refinery. Or commercial janitorial companies with 10-year contracts to service all properties in some real estate management company's portfolio.
It's an interesting niche of the investment world, for sure.
how much of this is capitalizing on cashflow miseries of of other
ie small business owners going through divorces, small business owners who die unexpectedly and the heirs don't know what to do with the business, etc etc?
This is basically cigar butt investing for the private market, as I doubt the most stable recurring revenue type businesses they seek to own are available at a low enough price to make it work for them.
It's a term value investors use for investing in "net nets", i.e. companies that trade below their net cash position. The idea is "if we can buy the cash at a discount and get the (crappy) company for free, at some point the market will pay at least for the full cash value".
The approach was made famous by Benjamin Graham and used by Warren Buffet in the first phase of his investing life.
Nowadays it's harder to find "net nets" as everybody and his dog can run a screen to find those companies now, so they get bid up above their net cash position most of the time.
Search funds, like what the Valley's VC ecosystem has become, are just another disgusting way for rich turds to help their undeserving, underqualified progeny jump the corporate queue and look like they earned it.
If someone says he has a search fund, he's basically saying that he's rich and otherwise nonviable, so his Daddy got his friends to invest in his job search (and buy the company, so he becomes CEO). He's admitting that he wouldn't be able to make it in the world except for his father pulling a bunch of connections.
It exists because intelligence is probably 75% maternal and that fact pwns the shit out of alpha-male businessmen who impregnate trophy wives 30 years their junior who they married based on one criterion that isn't intelligence. They have stupid kids that they need to sell off on the world somehow, and search funds are great way to do it. However, if you look at some of the people getting funded, Valley venture capital seems to have eclipsed that avenue, because the sociopaths running the Valley have figured out that nerds want to put their heads down and will follow pretty much anyone who's raised VC.
The number is just a stabbing guess (and I meant, "75% of the component that is genetic") but there are a lot of results showing the maternal influence on intelligence. The point (which is that a lot of powerful, rich men end up with kids stupider than they predicted, and have to buy jobs for them) would be the same if I said "60%" or "80%".
What's unclear is whether it's genetic or related to other confounding factors (e.g. maternal health). We really don't even have a good grasp of what intelligence is or why these differences between individuals exist.
Yeah that is correct. Maternal is very different from genetic of course. I was surprised that you of all people would have missed the mark on the heritability of intelligence.
The last paragraph of this comment rather ruins it; there's no overwhelming evidence that intelligence is more "nature" than "nurture". The phenomenon is more likely to be reversion to the mean.
Having said that, buying your way into a job is a ridiculous situation that I thought we'd got rid of long ago along with buying commissions in the army.
22 comments
[ 4.0 ms ] story [ 50.8 ms ] threadIt's extremely difficult to move up the ladder of a PE firm to the partner level, so often times associates/analysts will strike out on their own as a fundless sponsor or start a search fund.
http://www.npr.org/blogs/money/2014/05/05/308352614/seeking-...
http://www.hbs.edu/entrepreneurship/resources/searchfund.htm...
The model works as such: The searchers are typically recent MBA grads and sponsored by a group of backers (who, in many cases, are the actual professors & their network). The searchers have less power than you (or they) think -- their job is to find, interview, dig in and model out a business -- and then present it to their investment partners, who are the ones who actually make the investment decision (not entirely unlike angel investing cohorts).
Risk-averse is spot on -- they're looking for a _very_ specific type of business (TFA doesn't cover it exactly): They want safe straightforward B2B operations with an intense focus on recurring revenue. That's the phrase I kept hearing over and over - "locked-in recurring revenue." The idea is that the searcher can jump in at the helm and not worry about rocking the boat while he/she gets up to speed.
The particularly risk averse ones (especially those that have been searching - unsuccessfully - for 2+ years) are looking for a different type of "unicorn". They want businesses - like Asurion - with massive growth potential and iron-clad (i.e. low churn) long-term recurring revenue from other businesses. Don't we all ;)
Most of the targets are businesses that are all around us but that we techies probably haven't heard of -- things like oil services companies with contracts to transport crude from ports to refinery. Or commercial janitorial companies with 10-year contracts to service all properties in some real estate management company's portfolio.
It's an interesting niche of the investment world, for sure.
ie small business owners going through divorces, small business owners who die unexpectedly and the heirs don't know what to do with the business, etc etc?
The approach was made famous by Benjamin Graham and used by Warren Buffet in the first phase of his investing life.
Nowadays it's harder to find "net nets" as everybody and his dog can run a screen to find those companies now, so they get bid up above their net cash position most of the time.
If someone says he has a search fund, he's basically saying that he's rich and otherwise nonviable, so his Daddy got his friends to invest in his job search (and buy the company, so he becomes CEO). He's admitting that he wouldn't be able to make it in the world except for his father pulling a bunch of connections.
It exists because intelligence is probably 75% maternal and that fact pwns the shit out of alpha-male businessmen who impregnate trophy wives 30 years their junior who they married based on one criterion that isn't intelligence. They have stupid kids that they need to sell off on the world somehow, and search funds are great way to do it. However, if you look at some of the people getting funded, Valley venture capital seems to have eclipsed that avenue, because the sociopaths running the Valley have figured out that nerds want to put their heads down and will follow pretty much anyone who's raised VC.
Here's one of the seminal papers on the topic, from 1996: http://jpepsy.oxfordjournals.org/content/23/3/197.full.pdf
What's unclear is whether it's genetic or related to other confounding factors (e.g. maternal health). We really don't even have a good grasp of what intelligence is or why these differences between individuals exist.
Having said that, buying your way into a job is a ridiculous situation that I thought we'd got rid of long ago along with buying commissions in the army.
Regression to the mean is a genetic phenomenon.