First quarter lessons
Q1 Update on White Cedar
As many people have recently launched their search funds, I would like to share the lessons I took from the first quarter of my own search. While these won’t address everything you need to know to get started running your search, I believe they will help you allocate resources (mostly your time) to the right activities.
Focus on key business questions during the first owner call to efficiently qualify
I view the search process as essentially a sales activity, and for those of you who have taken a form of Entrepreneurial Selling in business school, some of this will not be new news. When business owners respond to our email campaigns and are willing to hop on a Zoom call, the action in and of itself sends a positive signal that the business could be a real opportunity. However, for whatever reason, the company and respective owner may not be a good fit due to size, business model, growth prospects, structure, valuation, or several other factors. If you don’t have action-oriented conversations with them in that first call, you may spend more time than you should down the line trying to figure out whether you should pass and move on or dig deeper.
When you are qualifying a business (i.e., lead with high-level qualities about the company and deal that match your thesis), think of the questions that matter most to you regarding your search fund investment thesis. For me, I aim to get a sense of the following topics covered in the first one or two calls:
Size of the business through annual recurring revenue (ARR), growth rate, and profitability (usually Net Income is easiest to communicate with owners)
Revenue quality and customer stickiness
Top customer as a percentage of total revenue
Timeline for transitioning out of the business and ideal involvement in the business post-transaction
Ownership structure
Valuation expectations
These questions are dependent on the conversation. Some calls will lead you down a different path where you might not have the time to get through every question, but that’s okay. I look to focus on getting to know the person first while being very transparent with them about what we are looking for to be respectful of their time. It can be a bit intimidating at first to ask business owners specific questions (particularly valuation expectations), but the more quickly you can get these critical questions answered, the more efficiently you can dive deeper into the opportunity or move on to the next. Sometimes, however, I do slow this down when it is helpful for the business owner to walk through their business model in more detail.
Owners care deeply about transparency, collaboration, and flexibility when discussing a potential exit
Although it feels like I am somewhat stating the obvious here, being mindful of the business owner’s situation is very important. Chances are that they receive dozens of emails just like yours to have a succession discussion, so we should be mindful when asking for their time. At the beginning of my search, it felt a bit unnatural for me to be so transparent about what we’re looking for in a business. I felt this need to please the owner and change my criteria to accommodate the owner, which was an inefficient use of my time. Further, it wasted the business owners’ time since I was never a legitimate buyer in the first place in those situations.
As I learned and got more comfortable having business owner calls, I found that transparency, collaboration, and flexibility were traits that these owners value deeply. Being transparent relates to the first point on respecting the owner’s time, but there’s much more to these conversations than that. I now approach the calls to be as collaborative as possible when discussing their needs in an exit. It all comes down to listening to what they’re looking for and seeing where you can be flexible in terms of structure. While you can’t bend every factor in your criteria, every business will have its flaws, so do not expect to see one check off all the boxes. Remaining flexible can help you spot where there might be an opportunity to move forward, and the owner will respect you for not being so rigid as many other prospective buyers. There’s freedom in knowing you are not beating around the bush.
Don’t spend too much time diving into industries where your search fund is not a viable buyer
I lead an industry-thesis-driven search which involves spending a couple of weeks identifying and educating myself on a particular space before sourcing companies within that vertical. As I begin sourcing, I continue strengthening my knowledge in that area to drive more effective conversations. I failed to recognize early on the damage behind choosing poor industries or good ones where a search fund is not the ideal buying target. For example, looking at Covid testing facilities may be a poor industry to look at now as companies have innovated and we transition out of the lifestyle we were living in the pandemic. For obvious reasons, an example of a promising industry where a search fund is not the ideal buying target could be multifamily real estate. While these examples are just illustrative and not representative of where I have been searching, consider the consequences of running an industry-thesis search and dedicating weeks (or months) to one of these examples above. While you may learn a ton and even find deals with interested sellers, fishing in the wrong pond can waste precious time during our search.
In the first month of my search, I failed to screen out a vertical that was recommended to me by one of my undergraduate interns. With solid growth prospects and a lot to like about the industry, we proceeded to research more and more about the industry. I succumbed to the sunk cost fallacy and decided we should continue moving forward with deeper research and sourcing. However, it wasn’t until my email campaigns kicked in that I realized the error in my thinking. Response rates were much lower, and my knowledge of the vertical was still not to a place where I could have confident, knowledgeable conversations with the business owners. Since then, I have been much more systematic in industry choice and have implemented screening tools to add some objectivity to the process with the help of my interns. With the tweak, I believe we greatly benefited as a team by spending our precious time on more attractive and fitting industries for my team and me.
Don’t spend too much time hiring interns
Before launching the search, I had spent numerous hours building resources for current interns and future interns to have a better understanding of what the processes of the search fund are more tactically, how their work relates to those processes, and guides on how I’d like them to conduct industry research and sourcing. I posted jobs on Handshake and LinkedIn, aiming to get the best, most motivated talent and reviewed hundreds of candidates that I felt would be the best fit for my needs. At first, I would analyze each resume closely and wait for what I felt to be the strongest interns for the role. My pickiness turned out to be overconfidence in my candidate-choosing abilities. When I believed I had found the factors that predicted success with interns, I was proved otherwise. I learned that it is tough to predict successful undergraduate interns purely based on their resumes, schools, and extracurriculars.
Instead, my onboarding experience, resources to educate interns, resource guides, and general structure were much more predictive in determining intern success. I learned that building a solid internship program and foundation will enable you to benefit from a few things: time back from hiring interns, time back from answering easy questions from interns, and time back from figuring out what you think interns should be working on. With these guidelines and structure in place, there is more consistency in intern performance that allows me to coach and mentor them in a way that I couldn’t without that foundation.
If you are looking for some ideas to build your own internship program, consider the following tools that helped me immensely during the first month:
Use Handshake to hire interns and assign them a case study to screen out those who are not serious about the internship
Use Loom or other screen recording tools to walk through FAQs and the work you’d like them to do (i.e., list building, industry research, etc.)
Create a folder of educational materials separated by topic where interns can go if they’re interested in learning more about a particular subject matter
Use shared folders such as Google Docs to ensure everyone has access to the files the team is using and knows where to find files
Create resource guides (PDFs or slide decks) that articulate the processes and structure of the fund – I’ve even gone as far as creating a step-by-step guide to creating industry research reports in a systematic way
More personalized email sequences drive better response rates
Another obvious lesson I learned firsthand is how more personalized email sequences drive better response rates. I won’t belabor the point, but my approach to building email campaigns is through a sequence of seven emails I send to business owners over 55 days. At this time, I write somewhat standardized messages for each email, with the first being the most personalized, as we include detail about why we’re interested in their business. Through A/B testing and writing more general email sequences, I've found that including these personalized messages significantly improve response rates. I will look to utilize even more personalized methods as my search evolves, but there is a trade-off between quality and quantity that I am still considering. To respect the guidance from my investor group on building these sequences, I will not be sharing more detail on them now.
If you are in the early stages of your search and would like to bounce ideas off of one another, please reach out to me, and we can discuss. I hope you find this resource helpful in accelerating your learning in the first few months.