WHAT IS A SEARCH FUND?
The search fund model was created in 1984 by H. Irving Grousbeck, the Director of the Center for Entrepreneurial Studies at the Stanford Graduate School of Business. The model provides a path for aspiring entrepreneurs to acquire and run an existing company, rather than launch a company from scratch. The success of the search fund model relies on seasoned investors actively supporting the entrepreneur through each phase of the process.
The entrepreneur begins by assembling a group of investors who make an initial investment, which is used to fund the search phase of the process. The search phase typically takes two years. During that time, investors serve as advisors to the entrepreneur, providing ongoing guidance and networking resources, participating in due diligence and developing negotiating strategies.
Once a company has been identified, those same investors provide the capital required for an acquisition. The entrepreneur becomes the CEO of the acquired company and forms a Board of Directors from among his or her investor group. Those board members continue to play an active role, advising and supporting the entrepreneur as he or she endeavors to achieve profitable growth.
The final phase for a search fund is a liquidity event. Search funds often have longer-term outlooks than other investment vehicles. It can take 10 years from inception for investors and the entrepreneur to realize returns.
Not everyone has the temperament or skills to be a successful search fund entrepreneur, nor are search funds the optimal vehicles for all investors. But for those who are well-suited, search funds provide a means for entrepreneurs to build successful companies, for investors to mentor young CEOs, and for both to have the opportunity to earn healthy returns over the long run.