Kissing frogs: the importance of volume in search fund sourcing
If you have a chance to eavesdrop on aspiring search fund entrepreneurs discussing their sourcing strategy, you will likely catch a discussion of quantity vs. quality. How much attention should I give to personalizing my outreach? How many opportunities do I need to look at? Should I take the high-touch cold-call approach or the high-volume email approach?
After trying and observing years of search fund deal sourcing with a variety of approaches, I can tell you where I stand. But I’ll first say that your sourcing strategy will of course not guarantee you a deal in any amount of time; there are too many other variables. I’ve seen or heard of searchers buying after contacting less than a hundred companies and I’ve seen searchers close shop after contacting thousands… and vice versa.
There’s also an argument to be made for how geography and culture affect a searcher’s sourcing strategy. If I’m targeting a smaller market, say Singapore, does it make more sense to take a high-touch approach to every company I identify? Are some cultures more responsive to phone/email/letters than others? In truth, due to the limited historical number of search funds outside of North America, we have little data to support an argument either way here. I’ll therefore avoid drawing any conclusions until that data emerges.
Here’s what I know:
If you see more opportunities...
1) You’re more likely to see a good one.
Call it probability, or the law of large numbers, or whatever you like. The more at-bats you have (excuse the baseball term), the higher your chances of getting on base (again, sorry), all else being equal.
For the sake of argument, let’s say 1 in 100 companies would make a good search fund acquisition. If you see 50 companies, you may not see the 1. If you see 100 companies, you still may not see the one. If you see 1,000 companies, you’ll probably see at least a few.
2) You’re more likely to know an attractive opportunity when you see it.
One of the most frustrating challenges early in the search is not knowing when to pull the trigger. You have a deal in front of you, and it looks good. But you’ve only seen three real deals before. How do you know whether this one clears the bar? How will the next five deals compare? What about the next 100? If you move forward on this one, are you sacrificing better deals yet to surface? If you pass on this one, will you be losing out on the best opportunity you’ll ever see?
There are really only two ways to accurately benchmark an opportunity:
Practice. Look at enough deals to get a sense of the market and where you should set your bar.
Ask someone experienced. If you are partnered with someone who’s done this many times before, you can always rely on that expert’s opinion. In practice, being the entrepreneur you are, you’re unlikely to make such a big decision on blind faith in that expert; you’ll want to know for yourself… which brings us back to option 1 - practice.
3) You’ll be more efficient.
Sounds counterintuitive, doesn’t it? I’m telling you to be more efficient by looking at more companies. How does that make sense?
By looking at more companies, you’re getting smarter. As you get smarter, you eliminate the subpar opportunities much more quickly, and you’ll spend more time and effort on worthwhile opportunities. Fewer opportunities will make it through your filter, and those opportunities will be of higher quality. If you’re spending the bulk of your time on a smaller number of higher-quality opportunities, your probability of success increases dramatically.
4) You’ll bid with greater confidence.
In addition to being able to recognize good deal when you see one, you will have likely seen and evaluated similar deals previously. You’ll have a better understanding of how to evaluate the deal. You’ll know what attributes to look for, what potential weaknesses to uncover, at what valuation similar companies are trading, and how this one compares. Your bid will be less of a guess and more of a data-driven decision. You’re therefore more likely to make an offer that both you and the seller feel comfortable with, and if the seller refuses, you’ll confidently move on to the next opportunity.
5) You’ll pitch with greater confidence.
Imagine you’ve only seen twenty deals and seriously evaluated only two. You decide you want to buy one of them, and you ask your investors for $5 million in equity capital and the bank for another $5 million. How are they going to feel about that? How are you going to feel about making that ask?
Chances are all parties will be somewhat uncomfortable with that discussion. In fact, some investors discourage searchers from buying too soon for fear that their assessment of the opportunity is not adequately informed. If you haven’t seen many deals, let alone in your target’s industry, it will be difficult for you to make an informed assessment of the opportunity.
By contrast, if you’ve seen a number of deals, some of which were similar, and you can speak confidently about the strengths and weaknesses of the target relative to other companies in the same and similar industries, your confidence will come through and your sources of capital will, in turn, be confident in your assessment.
Action Items
Evaluate your sourcing strategy. Are you getting exposure to as many opportunities as possible? If not how can you increase that volume?
Evaluate your pipeline. Are there opportunities in your pipeline that you’re holding onto simply because you don’t have enough opportunities to take their place? If so, eliminate them, increase your sourcing volume, and raise your bar.
