I'm early in my Search journey but my last business raised over $2m in Australia via CSF. I spoke with Matt Vitale, co-founder of Birchal, by far Australia's biggest CSF platform and thought I'd relay what I learned in case it's useful. Obviously things may be different in other jurisdictions, so DYOR.

Matt said, like many things, the regulatory appetite for this hasn't been tested yet, and the same can be said for SPACs (which are a bit like Search Funds but typically funded through an IPO).

Let's break it down into two parts:

  1. Ability to fund the search with CSF

  2. Ability to fund the acquisition with CSF

  3. Funding the search. Birchal believe SPACs may be permitted to do this by the regulator, ASIC, but they do retain doubt until it has been tested. With a SPAC, the CEO or management team are typically high profile individuals with a strong track record (e.g. ex-CEOs of large listed companies). A key issue for Search Funds is how to make the offer attractive to retail investors if you don't have that kind of reputation. Perhaps you could sell investors on the Search concept and historic returns from the Stanford / IESE studies??? But IMHO this seems a stretch when dealing with small cheque retail investors. Plus it's not as cool a dinner party story as, "Hey I just invested in drone company".

The fact a Search Fund is pre-revenue is not an issue (not uncommon for CSF), but the level of uncertainty about the future business that equity would roll onto may add to the difficulty in telling your story and attracting investment.

Overall, I got the impression that funding the search would be a very difficult thing to do.

  1. Funding the acquisition In Australia, CSF cannot be used to raise funds that will be used "to invest in other companies, entities or schemes". It remains unclear to me whether this precludes a takeover, or if investment refers to minority holdings. This becomes a moot point if, as Matt suggested, you purchase the assets of the target company rather than the company itself.

One of Birchal's raises was used to purchase property. A concern the founders had to overcome was how to give investors confidence over exactly what assets they would be buying into. Although they had completed DD on the property they intended to purchase, they created a stronger position by structuring an option that gave them the exclusive right to buy the property. They were then able to attract investors with more certainty and were successful in crowd-funding the acquisition cost.

It seems to me (and to Matt) this concept of buying an option over the assets for purchase should translate to the Search Fund world.

In summary, funding the acquisition of assets should be doable but until sometime tests the boundaries, have a backup plan ready.

Also worth mentioning,

  • There is a cap of $5 million on the size of a CSF round, while raises in excess of $3 million trigger additional audit, reporting and governance requirements (akin to a public company).
  • Good CSF campaigns require pre-built audiences. You'll either need strong marketing capabilities or an existing list with 1000+ potential retail investors.
  • A CSF campaign requires about 2-4 months and roughly $20k-$60k for marketing, legals, etc.
  • It is most worthwhile where the business benefits from the profile created through the campaign, not just the funding. Mostly B2C companies.

    Hope this helps someone out there.