Investors Don't Want a Bored (or Broke) CEO

I was part of a panel discussion recently at a top business school, discussing the ins and outs of search funds. Next to me, a seasoned investor – someone who’s seen countless deals come and go – shared an insight that really stuck with me. When asked about risk, he didn't first point to flawed business models. He said, "You know what truly concerns me? It's the CEO getting bored."

Bored. It might sound like a mild concern when you're discussing significant investments, but he was entirely serious. The nods from other experienced investors in the room underscored his point. For people who back search fund entrepreneurs, a disengaged CEO isn't just a minor issue. It’s a significant warning sign for the entire investment.

For an investor, a CEO who has lost their passion for the business can lead to a series of problems. These include diminished focus, questionable decisions, a rudderless team, or, in the worst-case scenario, the CEO departing prematurely. Experienced investors understand this well. They know that effective due diligence goes far beyond financial statements and market analyses. The human element, specifically your sustained motivation and commitment, is fundamental to success. "Boredom" can often be a euphemism for burnout, a lack of stimulating challenges, or a gradual stagnation over a multi-year holding period.

You’re the Key Player in This Venture

Let's be clear that in the search fund model, you, the entrepreneur, are at the very center of the endeavor. The success of the search fund hinges on your ability to find a promising company, build an effective board, and drive value creation post-acquisition. This approach inherently concentrates much of the risk, and potential reward, on your shoulders. Your resilience, adaptability, and unwavering motivation have an outsized impact on the outcome.

Consider the implications if you decide to leave. Finding another high-caliber individual to step in and run, for example, a $10 million specialized manufacturing business in a non-major metro area is a tough challenge. The unique appeal of the search fund path – the entrepreneurial opportunity, the equity stake, the autonomy – is difficult to replicate for a replacement CEO midway through the journey. If the searcher who becomes CEO departs, achieving those ambitious investor returns becomes considerably more difficult.

This is why investors carefully assess your drive to remain with the business and operate it effectively for the entire five, seven, or even ten-year journey. They aren't just backing a business plan. They are, in a very real sense, backing you.

Finding Fulfillment That Goes Beyond the Bottom Line

The potential for a significant financial outcome is certainly a major motivator in the search fund world. However, for most searchers I've encountered, the appeal extends further. It's about the challenge of creating value, solving complex business problems, leading a team, and having genuine autonomy. This path naturally attracts individuals with a high need for achievement and a desire to make a tangible impact.

But even the strongest intrinsic motivations can wane if certain personal engagement factors aren't met. Sustained, fulfilling engagement over the long term requires more than just a general interest in business management. I've seen a few personal sensitivities become significant hurdles if not carefully considered. These include the following points.

First is the nature of the business and its inherent challenges. It is less about whether you have a pre-existing passion for a specific industry and more about whether the company itself offers enough intellectual meat on the bone. If the core work, its operational puzzles, or the strategic opportunities do not provide ongoing intellectual stimulus for you, then even a profitable business can become a grind. Investors need to believe you can find truly compelling challenges and learning opportunities within that business to sustain your engagement.

Second, personal life factors like geography are considered carefully. The question is not whether you acquire a business in your ideal location. Instead, investors try to understand your sensitivity to location. If the business requires you and your family to be in a place that you wouldn’t choose otherwise, will other factors like the intellectual engagement from the role and the financial rewards be strong enough to maintain your long-term happiness and commitment.

Astute investors understand these factors. They will try to get a feel for your personal drivers and sensitivities to gauge your long-term commitment and assess potential risks. If you can demonstrate self-awareness and clearly articulate why a specific opportunity genuinely aligns with your personal and professional motivators, you will build greater investor confidence.

My friendly advice here is to be rigorously honest with yourself about these non-financial aspects. Think deeply about what truly excites you and what kind of environment will keep you energized and engaged for the many years a typical investment requires. 

Your Compensation as a Form of Risk Mitigation

While intellectual engagement is important, financial incentives also matter immensely. It might surprise some searchers, but investors generally want the CEO to have the opportunity to achieve a significant financial reward.

This isn't primarily altruism. It's pragmatic alignment. The search fund journey is demanding and carries inherent risks. A substantial financial outcome for you is an important part of the investor's risk mitigation strategy. If you stand to gain a life-changing sum, you are more likely to remain focused and committed through challenging periods.

So, what do investors consider significant? They often use your likely earnings in a comparable corporate career as a benchmark, expecting a considerable premium for the entrepreneurial path. If the base case for your deal shows your combined equity and salary over the holding period to be similar to, or not much greater than, what you could earn in a stable corporate role, it can be a concern for investors. It might signal a higher chance you might be tempted by less stressful or more lucrative alternatives that will inevitably arise. The deal structure needs to provide strong financial incentives for you to stay the course.

Investors need to believe that remaining CEO of the acquired company is your most compelling professional and financial option. That’s the ideal scenario. It’s not about investors profiting greatly while the searcher makes little. Such a misalignment presents a high risk of CEO disengagement. Naturally, there are limits. Outlandish personal return projections for a typical small or medium-sized enterprise deal will invite scrutiny.

For example, if your base case projections suggest you'll earn, say, $2 million (combining salary and equity) over a six-year period in a developed economy, some investors might find that figure a bit low for a high-caliber entrepreneur. They might question if that's enough to ensure your unwavering commitment if the business faces serious headwinds. They are generally looking for a more substantial potential reward to anchor your long-term focus.

This financial consideration becomes particularly acute with smaller deals. The question then becomes what absolute dollar amount makes the intense effort and risk worthwhile for you. Even if the projected Multiple on Invested Capital for investors is strong, if the initial enterprise value is modest, your potential take-home might not pass the "is this truly worth it?" test. For smaller acquisitions, you often need to demonstrate a very clear and credible path to significant value creation.

Engagement: The Foundation for Your Journey

The central message is that investors don't want you to become disengaged, either intellectually or due to inadequate economic incentives. They need both aspects of the opportunity to be highly attractive to you so that you remain motivated, focused, and effective. Sustained success as a CEO in the search fund model requires both deep intellectual fulfillment and a financial reward that justifies the considerable effort and risk.

Understanding this investor perspective is invaluable. It helps you vet opportunities more effectively, looking beyond superficial appeal to assess your long-term personal fit and the adequacy of potential rewards. Knowing that investors need you to be stimulated and well-compensated should give you the confidence to seek deals that satisfy both criteria. It also helps you frame your investment thesis in a way that resonates with investors, demonstrating sophistication and self-awareness.

So, as you evaluate deals and present to investors, clearly articulate why this specific opportunity will keep you passionately engaged. Explain your personal connection to it. Describe what excites you, the intellectual challenges you look forward to tackling, and why the financial rewards justify the entrepreneurial commitment. Your narrative about personal connection, genuine passion, and appropriate payoff carries significant weight. It builds trust, fosters stronger partnerships, and lays a robust foundation for the challenging, yet potentially very rewarding, journey ahead.