
Search Funds: The quiet, dependable, risk-averse sibling to the startup - ForHackernews
http://www.slate.com/articles/business/buy_a_small_business/2014/10/search_funds_the_quiet_dependable_risk_averse_sibling_to_the_startup.html
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nlh
Search Funds are an interesting beast. I have some direct experience here as I
was in contact with a number of "searchers" earlier in the year (word about my
business, which is retail/consumer focused, made its way around what I learned
is a pretty tight-knit network.)

The model works as such: The searchers are typically recent MBA grads and
sponsored by a group of backers (who, in many cases, are the actual professors
& their network). The searchers have less power than you (or they) think --
their job is to find, interview, dig in and model out a business -- and then
present it to their investment partners, who are the ones who actually make
the investment decision (not entirely unlike angel investing cohorts).

Risk-averse is spot on -- they're looking for a _very_ specific type of
business (TFA doesn't cover it exactly): They want safe straightforward B2B
operations with an intense focus on recurring revenue. That's the phrase I
kept hearing over and over - "locked-in recurring revenue." The idea is that
the searcher can jump in at the helm and not worry about rocking the boat
while he/she gets up to speed.

The particularly risk averse ones (especially those that have been searching -
unsuccessfully - for 2+ years) are looking for a different type of "unicorn".
They want businesses - like Asurion - with massive growth potential and iron-
clad (i.e. low churn) long-term recurring revenue from other businesses. Don't
we all ;)

Most of the targets are businesses that are all around us but that we techies
probably haven't heard of -- things like oil services companies with contracts
to transport crude from ports to refinery. Or commercial janitorial companies
with 10-year contracts to service all properties in some real estate
management company's portfolio.

It's an interesting niche of the investment world, for sure.

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pitt1980
how much of this is capitalizing on cashflow miseries of of other

ie small business owners going through divorces, small business owners who die
unexpectedly and the heirs don't know what to do with the business, etc etc?

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pitt1980
[http://www.gsb.stanford.edu/ces/resources/search_funds.html](http://www.gsb.stanford.edu/ces/resources/search_funds.html)

[http://www.npr.org/blogs/money/2014/05/05/308352614/seeking-...](http://www.npr.org/blogs/money/2014/05/05/308352614/seeking-
a-fortune-through-search-funds)

[http://www.hbs.edu/entrepreneurship/resources/searchfund.htm...](http://www.hbs.edu/entrepreneurship/resources/searchfund.html)

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peterjancelis
This is basically cigar butt investing for the private market, as I doubt the
most stable recurring revenue type businesses they seek to own are available
at a low enough price to make it work for them.

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codescorrectly
Cigar butt investing is a very interesting term. What does it mean?

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peterjancelis
It's a term value investors use for investing in "net nets", i.e. companies
that trade below their net cash position. The idea is "if we can buy the cash
at a discount and get the (crappy) company for free, at some point the market
will pay at least for the full cash value".

The approach was made famous by Benjamin Graham and used by Warren Buffet in
the first phase of his investing life.

Nowadays it's harder to find "net nets" as everybody and his dog can run a
screen to find those companies now, so they get bid up above their net cash
position most of the time.

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dontmindifido
It seems strange to me that someone who doesn't have the risk appetite to
start a business would think they are well suited to running one still in its
early stages.

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TTPrograms
So you are arguing that in general one would want a ceo that makes riskier
decisions? That seems pretty irrational.

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sharemywin
Growth is about risk. Calculated risk is core to making money.

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pitt1980
is this somehow different than just buying a business?

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cliftonk
IMO the author has the entire idea of why people do this wrong. If you can
raise tens of millions of dollars on the idea that you will be able to buy a
business and get a 3-6x ROI for your investors in a 3 year timeframe, before
even identifying the acquisition target, I sincerely doubt you're in it for a
temporary ego boost.

It's extremely difficult to move up the ladder of a PE firm to the partner
level, so often times associates/analysts will strike out on their own as a
fundless sponsor or start a search fund.

~~~
foobarqux
Do you have any prominent examples of PE employees doing that? Does this
happen at premiere firms?

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michaelochurch
Search funds, like what the Valley's VC ecosystem has become, are just another
disgusting way for rich turds to help their undeserving, underqualified
progeny jump the corporate queue and look like they earned it.

If someone says he has a search fund, he's basically saying that he's rich and
otherwise nonviable, so his Daddy got his friends to invest in his job search
(and buy the company, so he becomes CEO). He's admitting that he wouldn't be
able to make it in the world except for his father pulling a bunch of
connections.

It exists because intelligence is probably 75% maternal and that fact pwns the
shit out of alpha-male businessmen who impregnate trophy wives 30 years their
junior who they married based on one criterion that isn't intelligence. They
have stupid kids that they need to sell off on the world somehow, and search
funds are great way to do it. However, if you look at some of the people
getting funded, Valley venture capital seems to have eclipsed that avenue,
because the sociopaths running the Valley have figured out that nerds want to
put their heads down and will follow pretty much anyone who's raised VC.

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falsestprophet
What empirical evidence is there that intelligence is "75% maternal"?

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michaelochurch
The number is just a stabbing guess (and I meant, "75% of the component that
is genetic") but there are a lot of results showing the maternal influence on
intelligence. The point (which is that a lot of powerful, rich men end up with
kids stupider than they predicted, and have to buy jobs for them) would be the
same if I said "60%" or "80%".

Here's one of the seminal papers on the topic, from 1996:
[http://jpepsy.oxfordjournals.org/content/23/3/197.full.pdf](http://jpepsy.oxfordjournals.org/content/23/3/197.full.pdf)

What's unclear is whether it's genetic or related to other confounding factors
(e.g. maternal health). We really don't even have a good grasp of what
intelligence is or why these differences between individuals exist.

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falsestprophet
Yeah that is correct. Maternal is very different from genetic of course. I was
surprised that you of all people would have missed the mark on the
heritability of intelligence.

