Search Funds

TechExec Week 23 - Monday Edition

Author

Gaurav Singh
September 18, 2023

(Total read time: 3 minutes)

Hey there,

Welcome to Week 23 of TechExec - the newsletter that turbocharges your growth to become a Tech Executive!

As always, we are sharing a new set of BLTs this week

  • 💼 B - a Business concept / theory / story

  • 💝 L - a lifestyle advice

  • 🤖 T - a Tech explainer

Here is the schedule:

Monday —>💼 B - a Business concept / theory / story

Wednesday —> 💝 L - a lifestyle advice

Friday —> 🤖 T - a Tech explainer

This week we will cover Eat the Frog on Wednesday and TSMC on Friday.

Today’s Business Concept is Search Funds!

💼 B - Search Funds

It’s crazy, how almost everyone I know is starting a search fund, yet the general public has no idea what search funds are. So brace yourself! We're about to dive into the riveting world of search funds!

Search Funds are an amazing financial investment vehicle, and they're gaining popularity like wildfire. But what exactly are they? Well, a search fund is essentially an investment tool that allows entrepreneurs to raise funds from investors for the purpose of acquiring an existing company. The investors provide the necessary capital to the entrepreneur, who then goes out to find small to mid-sized businesses that are ripe for acquisition. Fascinating? Yes. Simple? No.

There are two types of search funds: traditional and self-funded. Traditional search funds, as the name suggests, are the conventional form where investors pool money to finance the entrepreneur in their search for a profitable company to acquire. Here, the investors take on a lot of the risk but also stand to gain a significant return on investment if the entrepreneur is successful. On the other hand, self-funded search funds are where an entrepreneur uses their own capital to finance their search. This reduces investor risk but also limits the potential return.

Now, you must be wondering, how do these differ from startups? Well, let me tell you, the difference is like night and day! With startups, entrepreneurs start from scratch, building their business from the ground up with all the associated risks and uncertainties. However, in the case of search funds, entrepreneurs seek out already established companies with a proven track record. This significantly reduces risk and increases the likelihood of success. It's no surprise why this concept is becoming a hot favorite among savvy entrepreneurs!

And why wouldn't they be attractive? Search funds provide an incredible opportunity for entrepreneurs who may not have a groundbreaking idea to start a business but possess strong operational and management skills. It's like taking a shortcut to owning and running a successful company! Plus, for investors, it offers an alternative investment route that could potentially yield high returns.

Starting a search fund is like embarking on an exhilarating journey! The first step is to raise the initial capital, typically from a group of investors. This is followed by a rigorous yet exhilarating search for the perfect company to acquire, which could take anywhere from six months to a couple of years. Once a suitable company is found, the entrepreneur acquires it using the raised capital, and then steps into the role of CEO, managing and growing the business. The end goal? To sell the company for a profit after a few years, providing a hefty return for both the entrepreneur and the investors.

Takeaway: Search funds, an increasingly popular investment vehicle, offer entrepreneurs a unique path to business ownership. They come in two forms: traditional, where investors pool capital for entrepreneurs to acquire companies, and self-funded, where entrepreneurs use their own funds. The key distinction from startups is the focus on established, proven companies, significantly reducing risk. This attracts entrepreneurs with strong operational and management skills but no groundbreaking idea for a new business. For investors, it presents an alternative with promising returns. The journey begins with raising initial capital, followed by a quest for the ideal acquisition, culminating in the potential for profitable sales after a few years, benefiting both entrepreneurs and investors.

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