⚙️Types of Search Funds. Same Goal. Different Paths.

Search funds have gained traction as a viable investment model for entrepreneurs aspiring to acquire and manage small to medium-sized businesses. This model offers a unique bridge between entrepreneurship and traditional private equity, providing a structured approach to business ownership. Below, we explore the different types of search funds, their distinctive characteristics, the potential for hybrid models, and the advantages and challenges associated with each, alongside selective examples for context.

Types of Search Funds

1. Traditional Search Funds

Traditional search funds involve raising capital from a group of investors to cover both the search phase and the eventual acquisition of a target company. This model was first introduced by Professor Irving Grousbeck at Harvard / Stanford University in 1984.

Advantages:

• Access to a broad pool of investors who offer expertise and mentorship.

• Enhanced ability to identify acquisition targets through a wide network.

• Shared risk among multiple investors, reducing the searcher’s personal exposure.

Disadvantages:

• Searchers retain a lower equity stake (usually 15-30%).

• Decision-making can be more complex due to input from multiple stakeholders.

• Increased pressure to deliver returns to a larger group of investors.

Example:

Jim Southern, one of the pioneers of the model, successfully acquired Continental Fire & Safety Services in 1984, demonstrating the potential for strong returns and scalable operations within this framework.

2. Self-Funded Search Funds

In self-funded search funds, entrepreneurs finance the search phase using their personal resources, allowing for greater control and equity retention.

Advantages:

• Significantly higher equity ownership (usually 40-100%).

• Greater autonomy in decision-making throughout the process.

• Flexibility to pursue acquisition targets without constraints from investors.

Disadvantages:

• Limited financial resources during the search phase.

• Greater personal financial risk, as the entrepreneur's capital is at stake.

• Potential difficulties in raising acquisition capital later.

Example:

Self-funded searches often focus on smaller companies or employ innovative acquisition structures. For instance, entrepreneurs targeting niche industries or regional markets frequently find this model advantageous.

3. Accelerator-Backed Search Funds

This model involves accelerator programs providing funding, training, and resources to searchers in exchange for equity. These programs are designed to support first-time entrepreneurs entering the search fund ecosystem.

Advantages:

• Structured support, including mentorship and resources for growth.

• Accelerated learning through exposure to proven methods and strategies.

• Access to proven playbooks, and a dedicated team providing transaction support.

• Networking opportunities from being part of an accelerator cohort.

Disadvantages:

• Potential equity dilution, as accelerators typically require a significant stake of 10-15%.

• Reduced autonomy compared to a self-funded search.

• Specific requirements or limitations imposed by the accelerator.

Example:

Programs such as Seqos (where Legacy MD, Chris von Wedemeyer is an Entrepreneurial Partner),  Tactyc and Broadtree Partners exemplify accelerators supporting search fund entrepreneurs, offering tailored assistance to navigate the acquisition process.

4. Solo-Sponsored Search Funds

In solo-sponsored search funds, a single investor or a small group of investors financially supports the searcher while also providing mentorship.

Advantages:

• Streamlined decision-making, reducing delays from stakeholder alignment.

• Strong alignment between searcher and sponsor due to close collaboration.

• Direct access to the sponsor’s expertise and professional network.

Disadvantages:

• Greater dependency on the sponsor, which can limit flexibility.

• Risk of reduced perspective diversity compared to a traditional fund.

• Concentrated risk exposure for both the searcher and sponsor.

Example:

While specific examples are not widely documented, many solo-sponsored search funds involve backing from family offices, Private Equity or seasoned individual investors with expertise in private equity or entrepreneurship.

5. Hybrid and Regional Variations

Search fund models are highly adaptable, and entrepreneurs often blend elements from multiple types to suit their needs and regional contexts. These hybrid models combine the strengths of various approaches, creating a customized solution.

Advantages:

• Flexibility to leverage benefits such as higher equity retention, structured support, or diverse investor networks.

• Increased adaptability to regional market dynamics and specific industry needs.

• Reduced exposure to the limitations of any single model.

Disadvantages:

• Greater complexity in structuring agreements and aligning stakeholder interests.

• Challenges in maintaining balance between flexibility and commitment to core principles.

• Limited investor pool, who prefer to invest into proven models.

Examples:

• In regions with nascent search fund ecosystems, such as parts of Europe and Latin America, hybrids often combine self-funding during the search phase with later-stage investments from traditional or solo-sponsored funds.

• In highly developed markets, entrepreneurs may use accelerator programs for initial guidance and capital while securing additional backing from individual investors for autonomy in acquisitions.

Conclusion

The search fund model continues to evolve, adapting to changes in the entrepreneurial and investment landscapes. Each type of search fund offers unique advantages and challenges, catering to diverse entrepreneurial styles and investor preferences. The increasing popularity of hybrid models demonstrates the model’s flexibility and its potential for innovation, particularly as it expands into new regions and industries.

Entrepreneurs should evaluate their financial capacity, risk tolerance, and desired level of autonomy when selecting or designing a model. Likewise, investors must consider their preferred involvement level and risk exposure when supporting a search fund.

Whether choosing a traditional, self-funded, accelerator-backed, solo-sponsored, or hybrid model, success in the search fund ecosystem depends on:

• Rigorous due diligence.

• Strong operational and leadership skills.

• The ability to navigate the complexities of acquiring and growing small to medium-sized businesses.

  
  

With the right approach and execution, search funds offer a compelling path to entrepreneurship and attractive returns for investors, while their versatility ensures continued relevance in an ever-changing economic environment.