PSA: Search funds and entrepreneurship through acquisition (ETA) are not the same thing.
Entrepreneurship through acquisition (ETA): the process of searching for and acquiring a business for entrepreneurial reasons
Search fund: a specific model designed at Harvard and Stanford in 1984 to enable an entrepreneur to search for, acquire, and operate a business with the mentorship and financial backing of investors
As search funds have grown in popularity in recent years, the word is spreading about the model’s benefits to searcher, investors, and sellers. More schools than ever before are teaching, or at least mentioning, the model in their entrepreneurship or finance courses, and more content on the topic is populating the web. This is all great news.
However, the model’s growing popularity has caused an uptick in the number of people who have heard of search funds but don’t fully understand them and how they differ from the more general term entrepreneurship through acquisition (ETA).
In particular, the term search fund is commonly misused to mean any of the following:
self-funding the search for a business to buy
creating a venture builder
seeking add-ons for the family business
acquiring a portfolio of businesses
a management buyout
normal deal sourcing for a PE firm
Unfortunately, none of the above is a search fund. They are all viable models and noble endeavors, but technically speaking, they do not fall into the definition of a search fund.
A search fund is one specific model of entrepreneurship through acquisition (ETA), which is the endeavor to search for, buy, and operate a business. (See my summary here.) An entrepreneur is running a search fund if the following criteria are met:
The entrepreneur has raised capital from investors to fund the search process. (This is the derivation of the term search fund.)
The search-phase investors have right of first refusal on the deal and a step-up on the search capital.
The entrepreneur plans to acquire a controlling interest in the business and actively operate it full-time for at least several years.
I have heard recently of various “search funds” in Asia Pacific, but upon further investigation most have been self-funded searches or other forms of lower middle market private equity. As I write this post there are three active search funds in Australia, one raising capital in South Korea, and one search fund accelerator in Japan.
Buying a business is nothing new; people have been employing various models to buy businesses for a long time. By contrast, the search fund model was born in 1984 and has been used by only a few hundred people since then. Its unique structure has unique benefits for all involved, which is why I’m very excited to be introducing the model to this part of the world.
Action Items
Take inventory of the conversations you’ve had. With which model(s) do these people have experience? How might that experience color their perspective?
If you are doing something other than a search fund, check that your materials reflect the path you’re taking.
