This is my first conversation on this podcast with more than one person. I'm meeting with the team from Searchfunder.com, an online community dedicated to search funds and the various parties involved. A search fund is the smallest form of micro private equity I've found thusfar and is typically one entrepreneur seeking out a company to buy and run as the CEO. The team consists of the two co-founders, Luke Tatone and Mark Yuan, and their COO Karen Spencer, all of whom are graduates of MIT. Luke is the first speaker, followed by Mark and finally Karen.
During our conversation, we discuss what a search fund is, how they're structured, who participates in search funds, and how they've evolved over time. If you are interested in running/buying/or even starting your own company one day, this conversation is for you.
I met the team after signing up on Searchfunder only to discover all three of them lived here in Portland, OR. Mark initially reached out and invited me to coffee where we chatted about all things search funds and I quickly met the rest of the team. This conversation is the result of one of my most recent, and favorite, small world stories. I hope you get as much value out of this conversation as I did.
1:38 What is a search fund? Structure, goals, parties that participate
3:08 Harvard business school: Royce Yudkoff, Richard Ruback, Jim Sharpe
3:26 Search fund accelerators
4:18 What individuals create search funds?
5:38 Risks of launching a start-up vs running a search fund
7:20 Shift from finance professionals to operational professionals
7:47 Most valuable experience to have had prior to launching a search fund?
9:00 It is important to investors that you're able to lead a team
9:32 Number of searchers that Searchfunder.com has studied and had on the site
10:01 Strong growth in number of search funds launched and corresponding acquisitions
10:34 Number of search funds formed last year compared to five years ago
11:09 Reasons for growth in number of search funds
11:30 Who are these searchers buying from and why is the owner selling, normally?
12:22 Steps in creating a search fund and acquiring a company
13:30 Best thing to do to learn about search funds, intern for one
15:44 Importance of practice and repetitions
16:07 Putting a timeline on a search
16:40 Who are the searchers talking to and involving during the search phase?
18:13 Brokers working with searchers, searchers are here to stay
18:57 Pros and cons to working with brokers vs direct outreach
20:40 Searching within regionally vs nationally
21:33 Average distance between the searcher and the company eventually acquired
24:19 Normal size range and multiple size of companies acquired
25:44 Why do these companies have lower multiples than larger companies?
26:30 A business is only as worth as much as someone is willing to pay
27:27 Lower bound of company size in search funds
27:51 What types of companies are these search funds buying?
29:00 Examples of companies acquired
30:32 Company that leases plants to office buildings
32:08 Pet funeral services business
32:44 Asurion Insurance
34:35 Controlling your downside as a searcher, no cap on upside
35:07 Convincing sellers to sell
37:11 Due diligence on acquisitions
39:14 Role of interns
40:01 How many companies close after signing an LOI?
40:40 Structure of deals
41:58 Using seller note
42:39 Benefits to self funded in terms of deal structure
43:09 What should a searcher do in their first year with the new company
44:35 Holding period
45:55 Search fund market on Searchfunder.com
46:15 Stanford report on search funds
47:45 Why they started a site on search funds instead of a search fund
49:43 Would you like to run a search fund in the future?
50:15 How Karen joined Searchfunder.com and importance of your alumni network
50:55 More than just search funds on the site, goals for the site
53:11 Gap between mature private equity and micro private equity/search funds
53:37 How do these larger private equity firms access this space?
55:08 Economics of mature private equity firms buying these small companies with in-house staff
57:33 What's the most fortunate event to have happened to you by chance?
1:00:40 Best business you've ever seen