We have already given an overview of what Search Funds are in Part I, and today we are going to dive a little deeper to help you think through whether or you might be a good fit for the Search Fund model of entrepreneurship.
Recap: What is the Search Fund Model?
Just in case you missed it in Part I, the Search Fund Model is an alternative path to entrepreneurial management where the Fund purchases an existing company, grows and eventually sells it, as opposed to starting a company from the ground up.
Throughout our blog series we will make extensive reference to materials developed by Stanford, especially the Search Fund Primer, which is widely considered to be the premier source of information on the topic.
How do I know if I am a good fit for the Search Fund Model?
Before asking whether or not the Search Fund Model may be a good choice, it may be wise to ask more broadly whether or not an entrepreneurial lifestyle suits you. Anyone who is seriously considering an entrepreneurial career path should think carefully about their motivations, professional aspirations, personal risk tolerance, and financial and social circumstances.
We have discussed entrepreneurial motivations in the past, and perhaps a key difference between entrepreneurs who build a company from the ground up and search fund entrepreneurs is their primary motivation.
Traditional entrepreneurs are often motivated to build and develop an original idea or product, and are deeply passionate about something they, or their team, has conceived of. Search Fund entrepreneurs are more agnostic about the idea they are developing, or the industry they are in. They maintain a flexible attitude, and their primary desire is to manage, lead, and grow a company to a successful point.
From a risk standpoint, traditional entrepreneurs may have a great idea, but end up offering a product or service which does not fit the market. While some start-up companies become wildly successful, 80% of startups fail within the first 18 months, thus making traditional entrepreneurship highly risky. On the other hand, traditional entrepreneurs may bring more inspiration and creativity to their work by building something which will solve an important societal problem, or creating value for customers they don’t yet have.
Search Fund entrepreneurs assume a different sort of risk compared to traditional entrepreneurs. They acquire a company which has a proven business model, existing customers and revenues. The risk Search Fund’s assume when they acquire a business is a bet on themselves – or in other words that their own strategic planning and managerial skills are strong enough to create a disproportionate amount of value in the business, and grow it to the point that the business can be an attractive acquisition target, or go public.
Thus, if you have a lower risk tolerance (due to financial, family considerations, etc.) or are agnostic about the industry you enter or what sort of product or service you represent, and are certain your goal is to exercise your managerial muscle to build and grow a successful company, you might be an outstanding candidate to pursue a Search Fund.
Would I Enjoy the Search Fund Lifestyle?
Stanford’s Search Fund Primer encourages any potential searchers to consider their lifestyle, and their ability to lead a modest lifestyle:
“…The search fund principal should realize that his compensation during the period of the search will be modest, particularly relative to other career options. Likewise, during the first years of running the acquired company, the principal often receives modest compensation, so as not to unduly burden the company. As the company grows, the compensation generally increases, but the principal should recognize that true economic benefit comes from the ownership in the company and is not realized until there is a liquidity event for his investors.” Search Fund Primer P. 7.
If you are highly motivated by short-term compensation, or prefer a steady and secure source of relatively high income, perhaps the finance industry or management consulting would be a better fit for you than becoming a Search Fund entrepreneur.
If, however, you are motivated to prove yourself as a CEO, and you are confident enough in your management abilities that you would forgo short-term income to earn a higher reward after you lead your company to a liquidity event, the Search Fund Model may be for you.
Please stay tuned for upcoming posts in our series on Search Funds if they are proving to be of interest to you.
If you are exploring ways to demonstrate more leadership and management skill in your current work, or are pursuing new career opportunities through an MBA or another graduate business degree, we are always here to help. Feel free to reach out to us at info@transcendadmissions.com, and we will be happy to respond to your inquiries.