My decision to search solo
To partner, or not to partner, that is the question.
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As I discussed in my article on assessing risk tolerance, the decision to pursue entrepreneurship often depends on an individual's comfort with taking on risk. Some people are natural risk-takers and feel comfortable with substantial risks, while others are more cautious and prefer to avoid potential pitfalls.
Interestingly, MBA students are often viewed as risk-averse and less likely to face the challenges of starting a new business. However, with the rise of entrepreneurship through acquisition (ETA) and its popularity among MBA programs and mid-career professionals, MBA students now have an alternative path to starting a business that improves their own Sharpe Ratio, often through partnership. Many times have I heard prospective searchers talking about how the path can maximize their risk-adjusted returns.
As long as you are not living under a rock, I am sure you’ve heard people praising the power of aligned incentives. And we cannot talk about incentives and one’s Sharpe Ratio without talking about returns, or in this case, expected compensation for the searcher(s). Those interested in the traditional search fund model have often referred to the Stanford Selected Observations study that provides a glimpse of how much one might get paid in the event that all goes well. Even for self-funded searchers, there is the new Search Investment Group study that sheds light on similar compensation data as the Stanford study. While internal rate of return (IRR) and multiple on invested capital (MOIC) to investors are the most important metrics highlighted in these studies, prospective searchers rightly want to know how they will benefit from the path.
As prospective searchers look to maximize their expected returns (through equity ownership, job performance, personal satisfaction, career opportunities, etc.) and lower their risk (failure to return investor capital or acquire a business, amongst other things), the decision of whether or not to partner up is an important one to consider.
What I find interesting is that the default answer to many MBAs appears to be, “Find a partner, and you’ll increase your odds of success.” That thinking may come from investor advice, statistics, personal biases, previous experiences, or peer pressure.
By the end of this post, I hope you can question your thinking around partnership more critically and remove some of the noise surrounding the topic. Deciding to pursue a partnered search is a highly personal one that you must work through diligently with yourself, your prospective partner, and likely your loved ones. It is not the decision you make because you’re looking to maximize your financial gain or because investors encourage you to do so. Today, I share my thoughts on partnership along with my decision to pursue the path solo.
What is the data saying on partnerships, if any at all
Pros and cons of going solo
Pros and cons of partnership
My decision
What’s the data saying?
Data from the Stanford Selected Observations study in 2022 indicates that partnerships can be quite lucrative as well. In a data set of 225 observations (133 solo searches and 92 partnered searches that successfully made an acquisition), solo searches have underperformed partnered ones in the operating stage when looking at the IRR and MOIC, excluding the top 3 performing funds. Solo searches generated a 24.7% IRR on a 2.9x MOIC compared to partnered ones at 40.3% IRR and 3.8x MOIC.
Let’s compare the outcome probabilities of the two groups (i.e., solo vs partnership) once the funds have successfully acquired a business (a key point). Looking at the distributions above may be helpful but does not necessarily paint the full story. Instead, I found it interesting to segment by group and then assess the probabilities of success. What we see is a slightly different narrative than the one the above chart indicates. Partnerships have roughly an equal chance of generating a total or partial loss (25%) compared to solo searchers (28%) but roughly twice the likelihood of generating a return greater than 5x (40%) over solo searchers (19%). Pay careful attention to the number of observations. I went ahead and reorganized the chart into the below table for your reference.
From the searcher’s perspective, assuming you successfully acquired a business, your decision to partner appears to have little impact on the likelihood that you (or you and your partner) generate a negative return to investors (total or partial loss). On the downside, partnership may or may not be a factor, but on the upside, it is a different story. It’s clear in the data that partnerships likely contribute to higher returns for investors, but it is not clear exactly how that’s being distributed to searchers.
From the investor’s perspective, partnerships provide twice the horsepower (two searchers) without giving up twice the equity (partnerships receive up to 30% common equity in funded searches vs 25% for solo). The argument is that partnered searchers more than make up for this dilution in ownership by receiving a smaller piece of the larger pie (higher $, lower %) at exit. But is that really the case? Let’s take another look at the Stanford study to see if we can take away any new insights.
Our data set above from the Selected Observations study contracts from an N of 225 to N of 166. The chart distributed entrepreneur equity earned across eight different pay scales, ranging from $0 to $10+ million, with partnership contribution within each bucket in the yellow boxes. If we were to assume that operating and exited businesses have the same contribution of partnerships, we can group them into one set of bars and calculate the probability that one will achieve a given equity compensation range based on partnership status. Again you can see a reorganized chart below for your reference.
What we can see is that partnerships have similar payout characteristics to those of solo searchers. Roughly one fifth of searchers earn no equity once acquiring a business, regardless of their decision to partner, and two fifths earn over $4 million. Very interesting.
Before we jump to any conclusions here, let’s consider the limitations of this approach. First, current operators accounted for 60% of the responses in the survey above, and we have no knowledge of how partnerships breakdown between operating and exited companies (we were just provided with a total contribution). With rising interest rates and depressed market in the past year, the reality of these could be much different. Without the details behind this data it’s difficult to find any evidence that partnerships lead to higher financial gains for the respective searchers. It could very well be the case, but I hope that looking at the data in a slightly different way paints the picture that it’s not so clear.
After reviewing some of the data available on funded searcher performance by partnership status, let’s walk through some of the pros and cons for going solo or partnering up.
The case for and against going solo
There are several compelling reasons for one to consider a solo search fund, and we’ll consider these briefly. Those pursuing a solo search have the benefit of greater control and autonomy over their day-to-day work, including industry thesis generation, processes, and structuring the week. This sense of control can enable the solo searcher to make decisions faster while at the same time enabling them to focus on their own strengths and interests with respect to the search. They don’t have to worry about a partnership going sour whether due to a lack of effort, working style, or something more idiosyncratic. Searchers have the opportunity to earn a bigger piece of the pie (up to 25% common equity) although that pie could on average be smaller than partnered searches.
Solo searches are not without their own challenges, however. Loneliness and isolation can creep into many solo search efforts as they often lack the proper support system around them to feel understood. Even with people to confide in, responsibility all falls on the shoulders of the solo searcher, adding to the pressure against the clock. With reduced resources for the solo searcher, they must rely more heavily on investors at times to get the support they need. Another factor to consider is that solo searchers may not be sufficient to takeover businesses with significant management gaps or key man risk related to the seller, whereas partnerships can hedge against that more efficiently.
The case for and against partnership
Like solo searching, there are several compelling reasons for two individuals to consider a partnered search fund. For partnered searches that work well, the pair can leverage each other’s strengths and networks to develop industry theses, attract and retain talent, and efficiently allocate brainpower. With clear communication and responsibilities assigned within the partnership, partnerships are able to divide and conquer, often creating synergies that are not there in the solo search. Sometimes 1+1 can in fact be equal to 3, especially when partners have complementary skillsets. And, going through the downs of the search are much more bearable when you’re in it together with a partner where the highs can be that much more satisfying.
Just like the solo searchers, partnerships have their own challenges. The largest risk is a partnership breakup, which can be due to differences in vision or strategy, communication breakdowns, unequal contributions or expectations, or changes in personal circumstances. Even if it does not end in a breakup, these challenges will come up and searchers in the partnership model must do everything they can to protect this critical relationship. When power dynamics change over time for whatever reason, not having a clear mitigation plan in place to address such differences can cause further conflict. In the event that partners are family or close friends, there’s the risk that a broken partnership could splinter those close ties indefinitely.
My decision
I wish I could tell you that there was some detailed, thoughtful analysis that I did like this prior to making the decision to search solo, but in reality, it was relatively straightforward. I had spent the summer before business school doing some soul searching to better understand myself, my personal interests, and how I would find meaningful work. Once I had gotten to the point where I was committed to launching a search fund, most of the questions I needed to ask regarding partnership had been answered months prior. However, there’s a bit more to it than that, and let me walk you through some of my thinking that occurred during the moment.
I committed to raising a search fund in the summer of 2021 after about eight rigorous months of diligent research into better understanding the career path. I was one who came into business school interested in pursuing a career in entrepreneurship but knew relatively little about search funds and ETA until I took a course in the topic at Booth. As someone who already keeps to himself, the pandemic made it more difficult to network with prospective searchers that would be interested in a partnership, and the idea of partnering with someone I knew for a relatively short period of time (less than two years) made me hesitant. Further, there was no one in my immediate network (i.e., family, close friends, ex-colleagues) that could have been a potential partner, as timing and interest in raising a search fund were not aligned with my own timeline and expectations.
I believed it was more important to focus on educating myself on what I needed to do rather than networking to find a potential partner, especially given my somewhat late start into ETA. My skepticism towards partnership would have required me to spend more time than others finding the right person to partner with, and I made the conscious decision to allocate my time and energy towards moving forward with the search instead.
There was a bit of underlying confidence (and ignorance) that gave me caused me to quickly move forward with a traditional search fund without a partner. Overall, I believed that my skillset was relatively well-balanced compared to other MBAs pursuing the path (partnered and solo) given my experiences in various functional roles within technology and retail firms and my specialization in business school in finance. Because I am a competitive person at my core (to a fault I might add), searching was a new exciting challenge for me to channel my inner drive, especially after retiring from the game of basketball.
I definitely found the elements of more control and flexibility attractive compared to accelerated models and partnerships, and I believed at the time that I could fill my knowledge gaps and occasional loneliness through the support of my fellow searchers and investors. To be honest, that one was a bit of a leap of faith and ignorance on my behalf, but fortunately, I found comfort and connection in talking with other searchers about what we are seeing and challenges we are going through on a day to day basis. Investors are there to ensure I am focusing on the right things and providing feedback where necessary.
Despite the heavier load that I would bear as a solo searcher, I found the task at hand to be a wonderful learning opportunity. Regardless of the outcome, I would come out of the search having done something different than my previous career experiences with better alignment on my long term goals. And with more meaning behind my work, which I can thankfully say has persisted up until this point, the downs of the search are that much more bearable.
“He, who has a why to live for, can bear with almost any how.” — Friedrich Nietzsche, quoted by Viktor Frankl in A Man’s Search for Meaning.
Closing thoughts
In closing today’s post, I would like to offer a few recommendations to help those who are debating whether or not to pursue search with a partner. We discussed earlier some of the data regarding partnerships and performance, and I hope that you can see that partnership does not guarantee success or a better outcome for you. While there may be higher upside opportunities for the investor, the jury is still out on whether that translates into financial upside for the search CEO.
We then discussed the pros and cons of solo and partnered searches, and how those factors weighed into my own decision to launch a search fund. What I hope you can see from this is that it is a highly personal decision that requires a good understanding of yourself, how you work with others, and what you find meaningful in work and life. Many who pursue the traditional search fund by themselves may have known right from the beginning that it was the only path for them, and the same goes for some partnerships. But if you are one who is on the fence of whether or not to partner up with someone, please do your research.
Talk with searchers in the community, both individuals and partnerships. Reflect on your own interests and what you find meaningful in work and life. Recognize where your weaknesses are and find options to mitigate those in your search career. That might be with a partner and it may not be. Don’t rush into it, and have the proper discussions and practice environments to test out the partnership if you do decide to pursue it with someone else.
While I cannot speak fully on partnership since that’s the other side of the coin, there are some great resources available in the search community to help you assess that path more, if you do decide to explore with more intention. A starting point to use is the Stanford Search Fund Primer, which shares specific questions you should ask leading into a potential partnership. With these resources, open communication, and talking with others in the community, you can make the decision on whether or not to partner with more confidence.
Thanks for reading today’s post. Did I miss anything on partnership? If you are a current searcher, how did you make your decision regarding partnership? Comment below with your thoughts!