All the reasons not to do a search fund… and why they’re fundamentally wrong.
By Alex Hodgkin
As a champion of the search fund career path and heavily involved in endeavors relating to them, I regularly engage in conversations about the career path with our students at Chicago Booth. Oftentimes it happens early in their academic tours, when career options are a cornucopia of possibilities — untainted by the all consuming draw of more conventional options. Most students are highly skeptical. I suppose it’s the notion of some sort of efficient market in career paths — i.e. if this option was truly legitimate, more MBAs would pursue it.
Even for those that spend the time to learn more about the model, there are objections. My favorite is the one most often posed by the smartest MBA in the room, who proclaims that the target niche of search funds, businesses with EBITDA between $1M and $3M, suffers from the same valuation problems as larger sized businesses — i.e. they’re overvalued as a result of an oversupply of buyers and a proliferation of sophisticated intermediaries. Of course, few of these students have spent any time in this layer of the market and most have never met an owner of a business of this size, so their proclamations are based on far removed theories and hearsay. With over 175,000 companies that fit this profile, there remains an abundance of opportunity — it just takes some hustle to find the right one.
The other comment I often hear is in reference to the “2 year delay.” Many students like the idea, but think a 2 year tour at a top consulting firm, i-bank, or PE shop will somehow better prepare them. Yet, I have to disagree. And, I say this for several reasons.
First, the older you get, the greater your overhead — mortgages, children, and expectations of increases in standards of living. All of these elevate your burn rate. Search funders have to subsist on incomes that are below that of the conventional jobs, at least initially.
Second, nothing will prepare you to run a small business, aside from running a small business. I say this because I have one, and the issues I deal with on a day to day basis are a far cry from the sorts of things you do at one of the aforementioned jobs. Having done tours at investment banks, large and small, I can attest to that.
It’s also disheartening that many students fail to see the immense benefits to pursuing a search fund. The opportunity to step into the shoes of the CEO at such an early stage in your career cannot be understated. The pure volume and diversity of decisions just can’t be simulated elsewhere. Managing working capital, optimizing human capital (recruiting, retaining, and managing talent), and growing the top line, all the while dealing with the practical challenges that go with small organizations, is experience that cannot be replicated in any other professional capacity.
Speaking of top line, the challenge of maintaining sufficient revenues to meet expenses at a minimum, and to ideally meet the growth expectations of your investor base, requires that one become adept at the most critical skill in business and the one most neglected by top MBA programs: sales.
No matter what career you elect to pursue, being good at sales matters. At consulting firms and investment banks, the partner track is highly dependent on one’s ability to bring in clients. In private equity, those who can fundraise will always find a home. As a search funder, you learn this lesson earlier than your colleagues.
Equally importantly, as a search fund entrepreneur you get exposure to some of the most brilliant and successful people in business — in fact, they’re personally invested in you. That means you have the opportunity to build a very special relationship with these individuals very early in your career. Getting the same level of exposure to them at their respective firms would take decades. Likewise, it is my observation that they just don’t afford their employees the same level of respect as the search funder, who has the guts to lay it on the line and ask them for a personal investment.
So if you’re pondering the option, learn as much as you can as early as you can, start your networking early, and don’t delay. And don’t listen to your classmates. The herd isn’t always right.
Alex Hodgkin has spent his career as an entrepreneur, strategist, and capital markets specialist, having developed his finance acumen as an investment banker serving companies large and small. He cofounded Intrinsic, a financial advisory firm which he helped grow from a kitchen table concept to one of the largest firms of its kind in the Rocky Mountains, servicing some of the most well-known and well-respected institutional investment firms and privately-held companies in the region. As a steadfast supporter of ETA, he has been instrumental in the creation of the ETA program at Chicago Booth, where he currently serves as entrepreneur in residence and senior adviser of ETA programming. Alex holds undergraduate degrees from Claremont McKenna College and the University of Colorado and an MBA from Chicago Booth. He is also a CFA charterholder.