A Data Essay on "Has the searchfund model become too saturated?"

There was a great post and discussion on “is the search market saturated?” In four charts I will show how we can use the State of Search Survey to understand the answer to this question today, and over time.

Download all the data at https://www.legacy-eta.com/product-page/state-of-search-2024-q1-and-q2-full-report

First, let's take a look at traditional searchers and how many fundraisers there are. If the market is becoming saturated, we should see an increasing number of searchers fundraising from investors. And indeed, we do see that. After a big spike in first half of 2023, the average number of searchers fundraising from investors came down to around 40 searchers per investor but is still above averages between 20 and 30 in late 2022 and early###-###-#### The other interesting thing we see is that the success rate, the number of searchers receiving a check for their fund from an investor, is lower in late 2023 and early 2024 than it was in###-###-#### This suggests that the base of investors is not growing at the same rate as the number of searchers entering the market.

All in all, this chart suggests the market is becoming saturated.

Saturated: 1 | Not Saturated: 0

Second! Let's look at EBITDA multiples being offered in LOIs. If the market is becoming saturated then demand for businesses should be going up, which should increase price, which means multiples should increase. However, what we see is that multiples are stable. They were above 5x in the second half of 2022 but are lower and hovering between 4x and 5x the last two periods. So maybe the market is not saturated!

Saturated: 1 | Not Saturated: 1

Third! If there is more demand, more people trying to buy similar target types, then in a saturated market you would expect LOIs to be placed on smaller and smaller businesses where there is less competition. In fact, we do see the EBITDA size under LOI trending downwards over time. That being said, there seem to be peaks and valleys in EBITDA size under LOI so this metric may be less conclusive or convincing than others. We’ll call this a draw.

Saturated: 1 | Not Saturated: 1 | Draw: 1

Fourth! Let's look at a new metric in the latest State of Search survey: lead efficiency. This is where we divide the number of leads in a searcher’s outreach pipeline by the number of LOIs they sent out that period. It’s a rough way to measure efficiency. In a perfect world of 100% efficiency, you would send 1 outreach and then send 1 LOI. If the market is saturated with too many searchers, you should see efficiency go down: too many searchers trawling over the same businesses and it becoming harder to find a business worth putting under LOI. This metric supports the idea that the market is becoming saturated. Efficiency has tanked since the spike in the second half of###-###-#### In the first survey efficiency was at 0.27% and now sits at 0.10% in the first half of 2024.

Of course, that is an interpretation of this metric in the context of this question. This chart could simply be telling us that efficiency has gone down, due to any number of factors such as a reliance on the stale database leads.

But we’ll score a point for saturated.

Saturated: 2 | Not Saturated: 1 | Draw: 1

Conclusion.

Maybe the market is saturated. There’s definitely some quantitative data to back up the idea. Best way to tell is to keep taking the survey. With more data we will be able to paint a better picture. State of Search only goes back to 2022, so we might have a clear cut-picture if we are comparing things to 2010.

Please comment what you think, I welcome feedback and hope to keep making this the most useful survey on search.

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