What Is a Search Fund?

Starting a new business from scratch is notoriously risky—most new ventures fail within their first few years due to factors like lack of product-market fit, insufficient resources, or legitimacy challenges. But what if there was a proven alternative that let you acquire an existing, profitable company instead? Enter the world of search funds, a sophisticated investment vehicle that’s been quietly creating successful entrepreneurs for nearly four decades.

A search fund is an investment vehicle that allows entrepreneurs to raise capital from investors to search for, acquire, and operate a small to medium-sized business. Think of it as a structured way to buy your way into entrepreneurship rather than starting from zero.

The concept is elegantly simple: an entrepreneur (called a “searcher”) raises initial funding to cover their salary and expenses while they spend approximately two years searching for the right company to acquire. Once they find a target, they raise additional capital to complete the purchase and become the CEO.

The Two-Phase Structure

Phase 1: Search Capital

Raise $200,000-$400,000 from 10-15 investors
Cover searcher’s salary and search expenses for ~2 years
Investors receive the right (but not obligation) to invest in the eventual acquisition

Phase 2: Acquisition Capital

Raise $1-10 million to purchase the target company
Searcher typically retains around 30% equity ownership (but it really depends)
Begin operating the business as CEO

This structure creates powerful alignment between the entrepreneur and their financial backers, with initial investors often converting their search capital on a stepped-up basis (typically 150% of actual investment) into securities issued as acquisition capital.

The Origins and Evolution of Search Funds

Search funds were pioneered in 1984 by H. Irving Grousbeck, a professor at Stanford Graduate School of Business. His vision was to provide interested professionals with limited capital resources a structured path to search for, acquire, manage, and grow their own business while holding a meaningful ownership position.

The growth has been remarkable:

Year	Number of Search Funds	Geographic Reach
1996	20 first-time funds	North America only
1992	First international fund	Outside North America
2020	401 total funds	25 countries, 5 continents

By 2020, over 130 first-time search funds were operating across the globe, with the model expanding from its North American origins to Latin America, Europe, Africa, and Asia starting in 2003.

How Search Funds Work: The Complete Process

1. Fundraising (1-12 months)

The searcher develops a compelling investment thesis and secures commitments from potential investors—often successful entrepreneurs, family offices, or institutional investors looking for exposure to this alternative asset class.

2. The Search Phase (Up to 2 years)

Once funded, the systematic hunt begins. This involves developing multiple sourcing channels, with cold calls often yielding response rates between just 0.5% and 1%, requiring large-scale outreach campaigns.

Key Search Activities:

Broker relationships: More competitive but faster process
Proprietary outreach: Less competitive, higher success rates
Industry networking: Leveraging professional connections
Systematic screening: Building repeatable evaluation processes

3. Due Diligence and Negotiation

Unlike larger companies with audited financial statements, most smaller companies have weaker accounting systems, making due diligence more difficult and costly. Negotiations typically last one to six months, covering price, timing, the seller’s post-transaction role, and other critical terms.

4. Acquisition and Operation (6+ years)

Searchers stay on to run companies for a minimum of six years before selling, though some of the best-performing search fund-backed companies have operated for over ten years.

What Makes a Good Search Fund Target?

Financial Characteristics

The classic acquisition target operates in a mature sector with stable cash flow and modest investment requirements. Smaller firms typically sell for substantially lower multiples than larger ones—often half to one-third less—creating opportunities for strong returns.

Ideal Size Range:

Companies that are too small (~$1 million EBITDA) have thin margins for error
Companies that are too large (~$7 million EBITDA) may be too complex for inexperienced managers
Sweet spot typically falls between these extremes

Business Characteristics That Matter

✅ Stable, predictable cash flows ✅ Recurring revenue streams ✅ Defensible market position ✅ Clear growth opportunities ✅ Strong operational team

❌ Turnaround situations ❌ High customer concentration ❌ Declining industries ❌ Competitive auctions

Popular Industry Sectors

Search funds have evolved from primarily business services to include:

Software and tech-enabled services
Healthcare provision
Manufacturing and distribution
Services sector companies

The Economics: Impressive Returns and Performance

Search funds have generated compelling returns that demonstrate the model’s effectiveness:

Historical Performance Metrics

Internal Rate of Return: 32.6% aggregate
Return Multiple: More than 5-fold aggregate pre-tax return
Success Rate: 75% of acquisitions achieve gains in equity value
Average Hold Period: 7 years (longer than typical PE)

The performance has improved over time, with 75% of entrepreneurs achieving positive equity gains, up from 71% in 2018. This patient capital approach, without finite fund lifespans, contrasts favorably with the pressure of traditional private equity or venture capital structures.

Search Fund Models: Traditional vs. Self-Funded

Aspect	Traditional Search Fund	Self-Funded Search
Initial Funding	External investors	Personal savings
Equity Ownership	~30%	Potentially higher
Support Network	Investor guidance	Greater independence
Financial Risk	Shared among investors	Higher personal exposure
Success Rate	Higher due to resources	~25% acquisition rate
Target Size	Larger deals possible	Typically smaller companies

Self-funded searches offer more flexibility and potentially better economics due to favorable deal terms, but require entrepreneurs to shoulder higher personal financial risk.

Who Makes a Good Search Fund Entrepreneur?

The Ideal Profile

Background & Experience:

Typically mid-career with general management experience
High level of education (often MBA graduates)
More work experience, financial resources, and wider social networks than startup entrepreneurs
Previous exposure to small company operations

Essential Characteristics:

Risk tolerance: Research shows risk-averse individuals favor business takeovers
Age factor: Preference for takeovers increases with age
Leadership ability: Natural capacity to inspire and manage teams
Persistence: Ability to handle extended search periods and rejection

Educational and Professional Background

Since search fund education is most prevalent in the US, searchers are often recent graduates of top MBA programs, particularly Harvard and Stanford. However, the trend has expanded beyond these institutions, with searchers increasingly coming from diverse backgrounds including private equity, general management, consulting, and investment banking.

Comparing Search Funds to Alternative Paths

Search funds occupy a unique position in the entrepreneurship ecosystem:

Investment Model	Risk Level	Success Rate	Typical Hold Period
Search Funds	Medium	75%	7+ years
Private Equity	Medium-Low	70-80%	5-7 years
Startups	Very High	5-10%	Variable

Key Differentiators

vs. Private Equity: Search funds are driven by entrepreneurial intent focused on growth strategies, while PE often emphasizes efficiency gains. Search funds also tend to be more patient capital without finite fund lifespans.

vs. Starting from Scratch: Significantly higher success rates through acquiring existing businesses that have survived early-stage challenges, versus the high failure rates of new ventures.

Getting Started: Your Path to Search Fund Entrepreneurship

Essential Steps

1. Develop Your Investment Thesis

Define target industries based on your expertise
Articulate specific value creation strategies
Establish clear acquisition criteria

2. Build Your Network

Connect with successful search fund entrepreneurs
Engage with potential investors early
Develop industry relationships and deal sources

3. Execute Fundraising

Create compelling materials showcasing your background
Present to potential investors (typically 10-15 investors)
Secure commitments for both search and acquisition phases

Common Challenges and Solutions

Finding Quality Targets

Challenge: Competition from strategic buyers and private equity Solutions: Focus on smaller deals, build direct owner relationships, develop proprietary deal flow

Information Asymmetry

Challenge: Target companies often lack audited financials Solutions: Thorough due diligence, seller financing to align incentives, appropriate warranties and holdbacks

Transition to CEO Role

Challenge: Different skills needed for finding vs. operating businesses Solutions: Leverage investor expertise, maintain existing teams initially, focus on learning before making changes

The Future of Search Funds

The search fund model continues expanding globally and evolving:

Geographic Growth: From North American origins to 25 countries across 5 continents by 2020

Sector Diversification: Beyond traditional business services into technology, healthcare, and other sectors

Model Innovation: Including hybrid funding structures and sector-specific approaches

As baby boomer business owners retire in coming decades, search funds are positioned to play an increasingly important role in business succession and wealth transfer.

Is a Search Fund Right for You?

Consider the search fund path if you:

Have relevant business experience and leadership skills
Prefer moderate risk over the high uncertainty of startups
Can commit 2-3 years to search and acquisition process
Have access to potential investors and industry networks
Want to acquire proven businesses rather than start from scratch

The search fund model represents a compelling evolution in entrepreneurship, offering a structured path to business ownership with demonstrated results over nearly four decades. For ambitious professionals seeking CEO-level responsibility and meaningful equity upside, search funds provide a proven alternative with attractive risk-adjusted returns.

As the model continues expanding globally and business succession needs grow, search funds offer one of the most systematic approaches to entrepreneurial success available today. The combination of proven performance, structured processes, and growing market opportunities makes this an exciting time to consider joining the search fund community.