Economics of the Seed Capital?
January 26, 2019
by a searcher from Norwegian School of Economics and Business Administration in Lisbon, Portugal
Can someone please help me see the economic attractiveness of being a Search Capital investor? I have difficulties convincing myself that it is such a good deal, and will have more difficulties convincing prospective investors of that. I fully appreciate the softer sides of it (small initial investment while you get to know the searchers, priority to invest participate in the acquisition capital etc.).
Given the risk of the searcher never actually acquiring a company, why should an investor participate in the search capital and not say "come back when you have a deal and I will help you fund that". To me, the ideal scenario for an investor would be to participate in the acquisition capital for a deal where another investor has financed the "search capital" and stayed on to finance part of the acquisition capital. That would serve as a stamp of approval, while I would not run the risk of investing at the search stage...unless, of course, there is a strong investment case for the Search Capital itself.
If anyone could enlighten me on this subject, I would be very grateful.
Best regards,
Adrian
from Cornell University in Santa Cruz, CA, USA
However, even ignoring access (ie you as an investor might not get into or even see a deal if you did not fund the search stage) the terms are definitely not the same for a traditional vs a self funded search. The structures I’ve seen leaves the searcher with a smaller (usually minority) stake in an acquisition in a traditional search, where as the searchers stake is much higher in a self funded search. Sometimes even retaining a majority stake.
i think of a self funded deal to something more akin to an independent sponsor situation. If you manage to get a deal under LOI under attractive terms you have significant leverage.
It’s not too dissimilar to early stage venture terms (which i’m more familiar with) - pro-rata rights, discounts and caps makes a $100k convertible note a better investment than just telling the founder “well, come back when you’re ready to do a priced round and I’ll give you my $100k then”
from Morehouse College in New York, NY, USA
If you're not capitalized enough to make several investments a year in searchers and play the portfolio game and/or you don't meet the minimums to LP into one of the funds, then search fund investing is probably not the best place to seek returns.
There is an attractive alternative is to earn similar returns as search fund investors and that's to be visible to self-funded searchers like myself and others who come to investors with a fully negotiated deal under LOI and evaluate that company along with the searcher.
The check sizes we raise tend to be smaller and you're evaluating a proven asset, rather than just a resume and your gut feeling in one person.