The Search Fund Coach

I was at a search fund conference this last week and the topic of executive coaching came up. There was a lot of silence in the room and a few scattered hands went tentatively in the air, almost as if it was not cool to admit that one would need such a thing. The panelist who brought up the topic, a very experienced search fund investor, went on to talk about how important executive coaching had been to him as a CEO. How, in fact, at the moment the coach arrived he was convinced he was at the top of his game but his employees were profoundly unhappy with him--something he did not realize until his executive coach went and asked them. 

This conversation set me to thinking about the role of coaching in search fund CEO success, both the formal kind which is paid for and the less formal kind provided generally by investors and board members.

Let me first say I've been around a bunch of different asset classes, and as I listened at the recent search conference I was struck by the uniquely collaborative approach of everyone in this ecosystem. Sure, they have egos like every other collection of human beings on the planet. But to a man (and yes, the lack of women was a striking absence we have to do something about), the motive was and is to help the searcher succeed. Investors want to make money. The searcher wants to make money. But there is also a strong altruistic ethic that I have never seen in VC or hedge fund or private equity managers.

This plays back into the idea of coaching. I've said before that buying the right business at the right price is an important part of search success. But it isn't the most important part. CEO performance is what separates the home run search fund deals from the rest. I view buying a good company as necessary, but clearly not sufficient to get us collectively where we want to go.

And the biggest risk in CEO success is that we’re dealing with very talented, very hungry, very smart CEOs who have never done the job before. We all believe youth and talent wins out over experience every time. But youth does have its challenges.

The tacit understanding is that the search funder needs coaching, and that his board and investors are the most important source of that coaching, whether or not the CEO takes on a more formal executive coach.

I'll first talk about a few things that can go wrong and then what ideally goes right in the search fund model on this point.

The coaching can break down on either side.

Probably the biggest impediment to search success is CEO arrogance. Many search fund investors screen first and foremost for searchers who are "coachable." Not brilliant or the perfect operating background or even the most well thought out target industries.

I will say that coachability has a tendency to increase as things get screwed up and the CEO faces challenges far greater than he anticipated. But if your instinct is to trust yourself more than your investors (who have generally been around dozens of successful deals), then that instinct will get everyone into a heap of trouble.

I have certainly seen situations where the investors and/or board disagree with each other or the CEO on strategic direction to such an extent that productive coaching becomes impossible. Those instances are rare, at least in my limited experience, given the well established rules of the road amongst search fund investors, all of whom come with a collaborative mindset and truly want to do the right thing. But those rare instances do happen.

There is also a distinction to be made between what happens at a board meeting, which is a fiduciary process with official roles and responsibilities on all sides, and what happens off-line apart from official board deliberations.

What works best, in my opinion, is when the CEO has one person—whether investor, board member, or hired coach—with whom he or she can discuss everything with brutal honesty. And the level of trust should be high enough that the CEO can accept feedback without becoming defensive. This primary coaching relationship can be based on industry expertise, but most often it will not be. The important elements of leading and scaling a business are consistent across industry lines. It can be a traditional executive coach, a board member, or an investor who is not on the board. The important part is that the young CEO not go into battle alone. Someone has to have his or her back every step of the way. And someone has to be willing to take the phone call in the dead of the night to talk through a thorny problem.

For my own part, my most rewarding times as a search investor occurred when I became deeply involved in coaching a search fund CEO. It's win-win. Of course I want to generate a good return and see my CEO create wealth for him or herself. But it's in the process of growth and maturation where the magic happens and what distinguishes this asset class from all others.