⚙️How to operationally start a Search Fund: A practical guide for young entrepreneurs

In the world of business acquisitions and management, the concept of Search Funds is gaining increasing significance. This blog article explores how to operationally start a Search Fund and provides practical insights for ambitious young entrepreneurs considering this path.

What is a Search Fund?

A Search Fund is an investment vehicle initiated by one or more young entrepreneurs. The goal is to find, acquire, and subsequently manage an existing company. Capital is raised in two phases: first, to finance the search process (search capital) and later, to finance the acquisition of the company (acquisition capital).

The Path to a Successful Search Fund

1. Literature Research (📖)

Before diving into the world of Search Funds, it is essential to familiarize yourself thoroughly with the topic. Read specialized books, academic articles, and case studies about successful and failed Search Funds. This will provide you with a solid foundation of knowledge and an understanding of the challenges and opportunities involved.

2. Networking and Learning from Experienced Professionals

A crucial step is to speak with at least 20 people from the Search Fund ecosystem. This includes successful and unsuccessful searchers, investors, and incubators. These conversations offer valuable firsthand insights and help you avoid potential pitfalls.

3. Self-Assessment

Before embarking on this journey, an honest self-assessment is essential. Ask yourself:

• Do I have the necessary determination for a Search Fund?

• Are my family and financial circumstances suitable?

• Do I have the necessary network, or can I build one?

4. Analyzing PPMs and Pitch Decks

Study as many Private Placement Memoranda (PPMs) and Pitch Decks as possible. Many searchers are surprisingly open with their information. This will provide you with valuable insights into successful presentation strategies and help you create your own memorandum.

5. Gaining Practical Experience

Start by reaching out to entrepreneurs and developing a process for identifying and contacting potential acquisition candidates. Consider which industries interest you and where you can add value. Your personal experiences and skills should play a central role here.

Preparing for the Establishment of a Search Fund

6. Defining the Search Strategy

Determine which industries and criteria you want to use to search for potential companies. Consider:

• Market size and growth potential

• Competitive dynamics

• Industry stability and profitability

• Synergies with your own strengths and experiences

7. Building a Strong Investor Network

Even before officially founding a Search Fund, you should establish contacts with potential investors. Create a list of business angels, family offices, and institutional investors who might be interested in Search Funds. Prepare convincing arguments as to why you are a promising searcher.

8. Developing a Financial Plan

Calculate how much capital you need for the search phase and how you can efficiently utilize this capital. Plan different scenarios and realistically estimate the duration of your search phase. Consider costs for:

• Salary and living expenses

• Research and analytical tools

• Travel expenses for company visits

• Legal and due diligence costs

9. Structuring the Search Fund

Choose an appropriate legal structure for your Search Fund. Common options include:

• Sole proprietorship

• Partnership with a co-searcher

• Establishment of a corporation to manage search capital

10. Preparing a Compelling Pitch Deck

Your pitch deck should clearly and concisely outline:

• Your vision and motivation

• Your qualifications and experience

• The search strategy and investment criteria

• The timeline and required capital

• The potential value for investors

The Challenge of Finding Investors

Finding investors, particularly for search capital, is a significant challenge. Unlike traditional investments, there is initially no specific company or product in focus but rather an investment in one or two young entrepreneurs. This makes the personal profile of the entrepreneurs especially important. Successful searchers typically have impressive resumes and often an MBA degree from a prestigious university.

The Role of Investors

Investors in Search Funds play a dual role. On the one hand, they provide the necessary capital; on the other hand, they act as mentors. An ideal investor team should be able to support the founder in all phases of the Search Fund – from the search phase to company acquisition and subsequent management. Often, the investor group is complemented by experienced international investors who bring specific expertise in the field of Search Funds.

Conclusion

Starting a Search Fund is a challenging but potentially highly rewarding path for young entrepreneurs. It requires thorough preparation, a strong network, and the ability to convince investors of your vision. Through careful planning, continuous learning, and leveraging the experiences of others, you can significantly increase your chances of success. The journey may be demanding, but with the right knowledge and tools, any goal is achievable.