Articulating Search Fund Model to Investors

April 10, 2017

by a searcher from Virginia Polytechnic Institute and State University (Virginia Tech) in Bengaluru, Karnataka, India

I was asked this question by an Investor who has a Non-Search Fund background. “Why should I not invest directly in the acquired entity against equity rather than invest through Search fund entity?". Curious if anyone has faced similar line of questioning? Also, What are some of the tested ways to convince on the search fund model to investors who do not have exposure and experience in search fund investing?

Any insights will be useful.

Best,

Arnov

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Reply by a searcher
from University of Pennsylvania in Charlotte, NC, USA

Hey Arnov - the best advice I got from a former searcher on this topic was this -- you can successfully raise a fund by either A) selling yourself as an entrepreneur to a traditional SF investor OR B) selling the SF model to a personal relationship who has no SF experience... but if you have to sell both yourself and the model to the same investor, you probably won't be successful. None of my investors had prior search fund experience (they are all personal PE relationships). The simplest way I found to explain the model is positioning it as an option. And it's a pretty good option at that (what other option, when not exercised, still converts to 1.5x its value ~75% of the time??). Traditional SF investors are investing in the model (portfolio approach). Your personal relationships are investing in you. If they're asking why they shouldn't just invest in the deal vs. the search fund, they may not be the right folks to be courting.

Reply by a searcher
from Cornell University in Sudbury, MA, USA

The few times I have tried to explain the search fund model to non-search fund investors, i got similar questions. I tried to explain that this was a lower risk approach. Most told me that they sort of get the model and that they were not interested. They suggested that to talk to investors in the search fund community as they would be more open to it.

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