Jim Southern, a serial search fund entrepreneur and investor, spoke at the UK MIT Enterprise Forum. Picture from the NYTimes article on search funds ©.
An MBA opens doors. This week I stumbled upon a door that few take, yet is typically difficult to break open without an MBA from a top business school. Described as a high-probability way of making good returns on investment and entrepreneurial effort, search funds are funds that are typically only raised by alums of top business schools. Essentially, search funds are a way for entrepreneurs to raise money to acquire a company. Once a company is acquired, the entrepreneur works to improve the profitability of the company over a period of 5 years or so, before selling it on for a profit - taking a 30% share of that profit. Usually that 30% share will be worth several million US dollars.
I stumbled upon the idea at an MIT Enterprise forum event earlier this week; I had been to their events before. On this occasion, Jim Southern explained the mechanics of search funds and went through a case study of how search funds work. One of the ideas that struck me about Jim's talk was his point that in the normal entrepreneurial path of building a company, only 1 in 10,000 or 1 in 100,000 people are successful in generating a multi-million dollar earn out. Yet, through the search fund process, the probability is more than 25%.
As Jim Southern's talk progressed, I got more and more excited about the search fund vehicle. The disheartening part for me was that the search fund process prefers acquisitions of companies with simple operational processes, e.g. a freight forwarding company or events company. This is because it makes it simpler for the entrepreneur to understand the process of the company and improve the profitability. Under this restriction, I would have to give up my preference for new media, which I have built my career on. Software development, which is at the heart of new media, can be complex - at times it can seem like a process that does not have a process. This makes it less than ideal for a search fund. However, I find new media exciting and engaging.
Consequently, at this stage - while I am enticed by the idea of search funds - I am reluctant to give up on my new media entrepreneurial plans. Setting up search fund might be a good "Plan B" for me though, if by my second year at Kellogg all else has failed.
The New York Times has a recent article on search funds. Stanford GSB has the most research and information on these funds.
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