The success of the search fund model.
A search fund is a pool of capital raised by an entrepreneur to support them in locating a privately-held company with the intention to acquire, operate, grow and sell it.
Search funds began in 1984, and each vintage of search fund entrepreneurs has been assisting and inspiring the next wave, leading to more than 500 search funds around the world to date.
A search fund typically has 12 to 16 investors, such as Vonzeo Capital.
Vonzeo offers investors access to an alternative asset class that provides:
strong performance persistence
low correlation with traditional asset classes
diversification
Magic happens when experienced hands mentor passionate youth.
The collaborative model is a distinguishing element that partially explains the success of search funds.
Throughout the life cycle of the fund, the entrepreneur receives the support of seasoned mentors.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
– Berkshire Hathaway Shareholders Letter, 1989
The search fund model’s success is also partly explained by its adherence to some of the criteria familiar to value investors.
Vonzeo Capital works with searchers to analyze whether companies of interest meet the necessary conditions to be a “wonderful” acquisition.
We look for industries:
Growing above average
History of profitability
Fragmented with lack of dominant players
Favorable in terms of Michael Porter’s 5 Forces
Acceptable risk level (e.g. cyclicality, operational risk, regulatory risk, technology risk, environmental risk)
And at the company level, we are looking for acquisitions with:
High and predictable profitability
Low capital intensity
Growth opportunities
Moat - ability to defend profitability
Fair value
Search Funds are the alternative to a start up for entrepreneurial MBAs.
This idea to support bright, entrepreneurial and ambitious young people in their quest to acquire and a company began more than thirty years ago. In 1984 the innovative contraption of search funds was created under the leadership of Irv Grousbeck, who at the time was a professor and director of Stanford Graduate School of Business’ Center for Entrepreneurial Studies. Irv, who held an MBA from Harvard, was himself a successful entrepreneur, co-founding Continental Cablevision (Media One), and he sought to address a void he saw for MBAs.
Entrepreneurial MBAs with new ideas could write business plans and convince investors to fund their start-ups. MBAs with a knack for management could join one of the many management consulting or blue-chip companies recruiting on campus. But what about MBAs on the intersection of entrepreneurship and management? For graduates who did not want to start a new company but rather acquire and grow one, Irv and a handful of enthusiasts pioneered the search fund model.