Building a plan to launch
How should you go about the months leading up to your search?
Today, I’ll take a closer look at the months leading up to raising search capital to help those who might be 4-6 months out. I’ll provide five areas to work through in your preparation that helped me close fundraising in one month: experience, focus, networking, differentiation, and action. I cannot thank enough the countless searchers I had the opportunity to talk with last summer as I got ready to fundraise. These insights come primarily from those conversations.
In this post, I assume you are already up to speed on ETA-related coursework, have a good idea of whether you’ll go partnered or solo, and strongly prefer a particular search model. If not, no worries – please refer to the Educating yourself on ETA post and this A.J. Wasserstein article if you’d like a high-level view of planning for a search fund during your MBA. For those not attending business school, who are pursuing a search well after your MBA, or who didn’t take a course in Entrepreneurship Through Acquisition, these tips should still be of value to you.
Experience
Leading a successful search fund requires many skill sets. Think of how different the stages of the fund are; fundraising, searching, transacting, operating, and exiting all require unique skills you will undoubtedly need. Although you will learn many of those skills on the job, doing so without addressing your weaknesses will inevitably be detrimental to your success. Further, you’ll need to demonstrate to investors and others in the community that you are serious about pursuing a search fund, and doing nothing in preparation won’t get you far.
Regarding experience, my advice is to find your knowledge gaps and attack those. Evaluate your work and extracurricular experiences to determine where your strengths and weaknesses are. You should have a good sense of this if you are in business school and already working towards addressing these gaps, but bring it under the context of running a search fund and, subsequently, a small business.
Do you have a financial services, consulting, or private equity background? Consider getting some operating experience at a small business, ideally at a company led by a former searcher. Structurally, working as an investor or advisor is entirely different from the day-to-day at a small business, and you must become comfortable with what you’re getting into. In addition, gaining an internship at a searcher-led business will help you learn in various functional areas that help organizations create value and get you away from an Excel spreadsheet.
Do you have a background in general management or operations? Focus on gaining sourcing and investing experience at a search fund or private equity firm focused on lower-middle markets. Ideally, you’d like to intern at a fund that will most closely resemble the search model you are pursuing. Where you may be more comfortable with growing revenues and driving efficiencies through cross-functional support, the idea of selling or structuring a deal might be a bit foreign. Learning what makes for a good investment is crucial. Coursework can help a lot in gaining a more thorough understanding of acquiring a business, but working with a searcher first-hand will provide you with the knowledge and confidence to do it independently.
Ideally, gaining internship experience at multiple search funds and operating companies would benefit you as you prepare. However, don’t go too overboard. The clock is ticking during your MBA to make a career decision, and you will need to commit fully at some point. You also need time to enjoy being in school. There are tradeoffs between gaining experience and moving forward with your search preparations, but recognize how much you’ve accomplished until this point. Prioritize those critical risks of yours and tackle them directly.
Focus
As you develop more practical experience in the stages of a search fund, an equally important element is to strategize your search’s investment criteria. The three places to start will be to land on broad industries of interest to you, location requirements (if any), and business size, typically defined by a business’s revenue and EBITDA in the prior year and trailing twelve months. These are especially important when a searcher may be more constrained personally and financially, usually through self-funded deals. Be specific about these three, as they will guide you to more tailored criteria as you develop your thesis.
When building out the investment criteria for your search fund, recognize that specific characteristics will attract a particular set of investors. High percentages of recurring revenues, B2B operations, growing industries in fragmented markets, and asset-light businesses are some of the standard criteria for most search fund investors, so it’s essential to consider what type of investors you will target after landing your criteria. Your goal should be to build a thesis that maximizes your strengths and the likelihood of success for you post-acquisition, but you need the right investors to help you get there. The more you stray away from the traditional search fund industry and business characteristics, as mentioned in Prioritizing good economic characteristics, the more challenging it will be to find a syndicate of investors for your fund.
A couple of tips regarding focus: first, utilize the Stanford Search Fund Primer to establish a baseline of common search investment criteria you will abide by and then tweak based on your experience, search model, and personal objectives. Be clear in why you are deviating from these and articulate how you manage to mitigate risks associated with particular criteria. Second, make sure to internalize your criteria. The more you gain confidence in the types of businesses you will focus on, the better you will be able to communicate your story and reasoning behind why to investors and, later on, business owners. Being four months into my search now, let me confirm that focus matters.
Networking
Networking in the ETA community is a continuous process, but we all must start somewhere. ETA networking can be broken down into two categories for those looking to accelerate this: searchers and investors.
Searchers
Networking with searchers is an obvious activity that anyone interested in search should be doing throughout the preparation process. I don’t know if I could take anyone seriously about raising a search fund if they are not actively meeting new people in the community. Luckily, the ETA community welcomes students and professionals interested in search funds, so all you need to do is ask to connect. While you can take a casual approach to these conversations, it helps to have some structure to make the conversations more engaging and personal.
The objective should be to learn more about searchers’ backgrounds and motives behind their decision-making process to become a search fund entrepreneur. Schedule 30-minute meetings and use the time to listen to their story. I recommend starting with searchers that you may personally know or have a mutual connection with, moving to those that attended your universities, and, if needed, cold messaging. I used this tactic when I connected with dozens of searchers in the summer of 2021 and found it to ease my nerves for more serious conversations.
First, create a ‘Networking Notebook’ that logs all your conversations with searchers. Dedicate a tab or section to a particular person, and focus the top of the document on questions for the searcher, some that are broader and others specific. Come up with 10 to 15 questions to ask, so you have plenty of material for a fruitful conversation, but be flexible and see where the conversation goes. When you’re meeting with that person virtually, use the document to take notes and reflect on the conversation. If you meet with someone each workday for ten weeks, you will have connected with 50 people before you know it. Not too bad! In the next post, I will walk through a framework on how to use warm intros to facilitate this process.
It’s important to keep in mind the various types of search fund entrepreneurs out in the market. Each had their own motives in choosing their particular path, and in your diligence, you should try to understand those different perspectives. Using the framework from A.J. Wasserstein’s article on preparing to launch a search fund, there are at least 24 types of searchers that you can meet based on the model they’ve chosen and the stage of the lifecycle they’re at. Some of these entrepreneurs may be more challenging to track down than others but don’t give up and always ask for introductions whenever possible. The most important conversations to have are those who did not do a deal or were unsuccessful in managing a business. Do not raise capital until you have at least one conversation with one of these individuals.
Realize that networking in the community is a continuous process and not finite. You will continue meeting with searchers later on, even as you are CEO. If you have to prioritize certain types of conversations to hit the timelines you are marching to, skew towards chats with those pursuing the path you’re looking to do and those who have failed to do it. While meeting every type of searcher is great, I found that my takeaways were redundant from those pursuing a different path than I was choosing. Stay broad and focus later on if you’re still exploring what model to choose during these conversations. More information on questions to ask in these conversations can be found here in A.J. Wasserstein’s article.
Investors
My guidance on networking with investors is simple. Get to know them as early as possible, even if you are not sure about raising a search fund. As I will discuss in two weeks, you need to be careful, though, in order to put your best foot forward. If needed, use conversations with searchers before talking with investors to refine your story and improve your questions. I believe I needed to do this to better educate myself, but we all come from different starting points, so it will be unique for each person.
Investors can provide some of the best advice on how to best prepare yourself to raise capital since, at the end of the day, they are the ones who will be funding your search and/or acquisition. But another valuable aspect is that the conversations will enable you to find those you feel naturally comfortable talking to. Remember that raising a search fund means you may be partnering with a group of people for the next 7+ years, so it’s important to genuinely like who you are working with. It’s not only about the capital.
To go about meeting and finding search fund investors, again utilize A.J. Wasserstein’s preparation article to become familiar with prominent investors in the space. Also, get connected with the various ETA programming and clubs through different channels. Many investors host fireside chats, lunch and learns, and other events that are typically free for those registered. Further, many business schools lead ETA conferences annually - Booth and Kellogg host a joint one in Chicago, and other business schools, such as Stanford, Harvard, and MIT, each host their own too. There’s no shortage of programming.
If you are getting ready to work on your PPM and raise capital in the coming months, use the time with investors to share your timeline with them with clear details of the plan. This tactic demonstrates your thoughtfulness, enthusiasm, and bias to action for launching a search, but only if you stick to it!
Differentiation
We learn in economics and strategy courses that businesses differentiate to extract rents from the market. That may be a cost, speed, product or another advantage, but the common thread is that successful businesses do a unique thing particularly well. I would argue that it is no different in our own lives. Failing to differentiate makes it much harder to get ahead in life. What’s interesting to me is that we all have our unique strengths but fail to capitalize on them much of the time. It is up to us to better articulate those when positioning ourselves as searchers.
At a bare minimum, you need to answer the following questions when considering your competitive advantage as a prospective searcher. First, why should an investor provide you with capital when many equally qualified candidates target similar companies? Second, why should a business owner sell to you?
Finding what’s proprietary about you requires a good amount of self-reflection and is not something you’ll find the answer to overnight. If you know what makes you different from the rest, that’s great. If you don’t, leverage your personality, experiences, and geographic location to find an edge against other buyers. Maybe you have a unique professional background or personal story that sets you up for success operating a small business. Or, extracurricular experiences could have provided you with exceptional leadership and team-building skills. This exercise is highly individualistic but will help you position yourself well against others raising capital.
Action
Finally, you need to put the pieces together. We can strategize all we want, but having a bias to action will prove to be your friend throughout this process. In fact, in my dozens of conversations with searchers and investors, I learned that those who have that drive to act and decide to pursue the path typically succeed. While there is a bit of luck involved in acquiring the right company, if there is an independent variable that I’d bet on to predict success, it must be a bias to action.
How can you take action to best prepare for fundraising? First, follow the networking strategy by connecting with 5 people per week for 10 weeks. Concurrently, leverage the conversations to work through your investment thesis and differentiation strategy. Even test your strategy with searchers in these conversations to the extent you’re comfortable with it. Next, leverage your experiences and knowledge in ETA to begin researching two to three industries that you find interesting. You may find it is harder to think of good industries that fit your criteria than it sounds. Finally, pull it all together and make two small investments to commit yourself to search: create your search fund branding and work on your private placement memorandum (PPM), even if it feels like you’re not entirely ready.
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