The Rise of Search Funds: A New Path for Entrepreneurs

Search funds, a concept first introduced in 1984, allow individuals, known as "searchers," to raise capital from a select group of investors to acquire and manage small to medium-sized private companies. According to a 2024 study by the Stanford Graduate School of Business, the search fund process involves four key stages: raising initial capital (2 to 6 months), searching for and acquiring a company (12 to 24 months), operating and creating value (4 to 7+ years), and finally exiting (approximately 6 months). This model is appealing as it presents lower risks compared to starting a business from scratch, given that the target companies typically have established customer bases and revenue streams.

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In recent years, search funds have gained traction as an alternative investment class, particularly during downturns in venture capital and private equity markets. Jon Staenberg, founder and CEO of Agate Hound Fund, noted that search funds remain relatively small compared to the vast opportunities available, leading to exceptional returns. The same Stanford study revealed that search funds formed in the U.S. and Canada since 1984 have achieved an internal rate of return of 35.1%, with an average return on investment of 4.5 times.

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Jason Jackson, a notable figure in the search fund community, co-founded his search fund in 2015 and successfully acquired three dental practices. Despite facing significant challenges, including discovering inflated revenue figures shortly after the acquisition, Jackson managed to grow the business and ultimately sold it for a substantial profit in 2023. He emphasized the importance of mentorship from his investors, stating that their guidance was crucial in navigating the complexities of running a business.

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While search funds present a promising avenue for aspiring entrepreneurs, they are not without criticism. Some detractors argue that the model may not be accessible to all potential entrepreneurs, particularly those from underrepresented backgrounds who may lack the necessary networks or resources to raise initial capital. Additionally, the competitive nature of acquiring quality businesses can lead to inflated prices, potentially diminishing returns for investors.

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• “These are businesses that are, frankly, hard to break,” — Jackson, Search Fund Investor

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• “Venture [capital] is so crowded now. Search funds still remain small, while the opportunity set is so big — it's the only thing I want to do for the rest of my career. You look at the returns, they've been phenomenal. They've been outsized,” — Staenberg, Founder and CEO, Agate Hound Fund

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• “We eventually were able to sell the business at a decent multiple. It's decent for the search fund industry. It's really good compared to private equity, but it's really great compared to where my partner and I came from. He came from Lagos, Nigeria. I came from an under-resourced community,” — Jackson, Former CEO, Unified Dental Care

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As traditional career paths become increasingly uncertain due to automation and economic shifts, search funds offer a viable alternative for aspiring entrepreneurs. With a structured approach to acquiring and managing businesses, search funds not only provide a pathway to entrepreneurship but also foster mentorship and community support. As the landscape of entrepreneurship continues to evolve, search funds may play a pivotal role in shaping the future of small business ownership.

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