Tl;dr

• I worked on a search fund for a few months in 2021. I didn’t buy a business but I learned a lot. People ask me about it a lot, too.
• A search fund offers a great way to be an entrepreneur, have a more interesting day-to-day life, and have a shot at a high personal payout. 
• My investment theses: 1) apps building on top of software ecosystems, 2) B2B media.
• I didn’t transact for three reasons: market (high multiples), capital (didn’t want to allocate more to runway + down payment) and business-operator fit (something you’re passionate enough about and have a skill set in). 
• Lesson 1: finding good deals is the hardest part.
• Lesson 2: everything gets easier when you have expertise (industry, functional, etc.) and you leverage it. This is true both for convincing sellers you are a worthy buyer actually operating and growing your business. 

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In 2021 I left my job as a newsletter writer to pursue entrepreneurship by acquisition. The idea was to search far and wide for a small business. Once I found a good one, I would buy it using a mix of my own money, investors money, and an “SBA loan”(1). Then, I would run it myself for 4-7 years, growing the business and paying off the debt. At the end, I would be left with a cash flowing business that I owned a good chunk of. 

(This is called a self-funded search, in contrast to a traditional search. In a traditional search, you raise money from investors to pay your salary for 1-3 years while you search for the business and then use their capital to buy the company. You as the searcher own less at the end, but have more stability and are typically searching for larger businesses.)

I spent a good 3-4 months heads down focused on the search. I was primarily searching for a digital business: a small software company or a niche digital media brand. I got a lot done: I looked at thousands of businesses, looked a little harder at hundreds of businesses, and actually spoke to a few dozen. But I didn’t ever close a deal, and it bothered me for a while. 

This article talks about why I pursued a search fund, my investing theses, why I didn’t transact, and the lessons you can take from my experience. The self-funded search fund concept has exploded in popularity and even though it’s basically a footnote on my resume, I get a lot of questions about it. Maybe my experience can help some folks who are on this path or want to pursue it. 

Let’s start with the appeal of a search fund. 

Why search funds?

The obvious reason to pursue a search fund is inherent in the definition of the action: the ability to search for, buy and manage a small business. Search funds began out of Stanford business school in the 1980s, and today, most people who pursue this strategy are of a similar professional class. Most searchers have worked a few years in finance (investment banking or private equity), consulting, or maybe big tech, and so the appeal for search funds is framed in contrast to those industries. 

Day-to-day work

A big benefit for search funds is the day-to-day work is different from a lot of the other high horsepower career tracks like consulting, finance and big tech. Operating your own business, you get to:

• Set the strategy and act on it
• Hire team members
• Manage those team members
• Do sales yourself and then build a sales team
• Build internal systems and processes
• Complete other tasks related to your business and industry

In addition to the tasks themselves, you also have a different kind of lifestyle. You probably will work fewer total hours, but feel a lot more pertinent stress and responsibility. The buck stops with you so you are constantly putting out fires and dealing with different challenges. Guesswork Investor (an SMB operator from the PE world) lays out the differences between deal work and operations well:

Think about sitting down at a poker table. In PE/SMB acquisitions, you only get to play one hand all the way to the river card, and when you do, you have to go all-in. In that scenario, you’ll choose to sit and wait for the right hand, and then only bet all the way to the river if the perfect setup presents itself.

SMB operations feel more like sitting at a blackjack table with $5 minimums. Most hands have an optimal play of some sort, but nothing is guaranteed and you’re guessing at what the dealer has anyway. Losing a hand is annoying, but doesn’t kill you. You may even lose a few in a row, and it’s okay.

The decisions you make impact the kind of lifestyle you live. 

Compensation

Any career discussion wouldn’t be complete without talking about financial compensation. One of the big appeals of a search fund is the financial component: if it works out, there’s unlimited upside. Even if it just does “okay”, there’s still a great financial payoff.

Let’s imagine you’re a 2nd year private equity associate. The salary data for staying on this path is pretty well publicized. 

Then let’s compare that to the search fund route. This one has a lot of variables, but I’m going to present the best-case scenario as it’s the reason this route is attractive.

Say you find a business with $5m in revenue and $1.25m in EBITDA (20%). It takes you a year to find this business ($0 in income that year) but you’re able to transact at 8.0x EBITDA for a $10m purchase price. You put $150k of your own money in, you pull $7m from the SBA loan, and you raise the additional $2.85m from search fund investors. You have your business and you’re off to the races. 

As an operator, you’re able to conservatively grow the business by 15% per year while maintaining margins. You take a $150k annual salary, hire a salesperson, and use the rest of the excess free cash flow to pay off the debt (and eventually the preferred equity). 

You do a good job and by God’s grace don’t screw things up such that after five years you still have a functioning business. Now the revenue is ~$8.7m and the EBITDA has ~doubled. Assuming 1.0-1.5x multiple expansion (conservative), you sell the business to private equity for $20m with an equity value slightly below that due to the last bit of debt. 

Depending on the terms you negotiated, you probably own 30-70% of the remaining equity value, leaving your personal proceeds at somewhere between $5m-$10m. Feel free to rip your own LBO model with your own assumptions, but chances are you’ll end up somewhere in that ballpark. 

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This chart is quite blunt — if you’re at a large fund, you’ll have a higher comp; maybe you get promoted sooner or later; maybe you start with a smaller business but own more of it, etc. — but it’s in the right zip code. The search fund is incredibly hard to do and is very risky, but if you can make it work, it pays off very well financially. 

Entrepreneurship

Perhaps the most important reason of all, you get to work for yourself without having to start something from scratch. You are your own boss. While you might have investors, you make the decisions and live with the consequences. 

Given these factors, I took to the street to buy a business. 

Thesis 1: Building on a software ecosystem

A lot of the businesses I looked at were software businesses. One thesis I had at the time centered around “piggybacking” off of a really big software company by buying plug-ins, themes, templates and other products related to the bigger software company. Some of the canonical examples of this are WordPress plug-ins, Shopify App Store apps and Salesforce Appexchange apps. A lot of really big businesses have been built this way, too:

• WeCommerce, a portfolio of Shopify apps, went public at the end of 2020 valued at over $500 million
• Appfire, a company that builds software for various ecosystems, started as an original partner in the Atlassian software ecosystem. In 2022, it reported over $150 million in ARR
• Yoast SEO, one of the larger individual WordPress plugins, did $12 million in ARR in 2019

And there are many other examples. 

One of the reasons I was excited about this thesis was that you had built-in distribution. High growth, large software companies tend to evolve in a similar pattern. It’s something like this: find product-market fit, scale the sales team to become a market leader, then build an ecosystem of third-party apps, developers, advocates, etc. to create a moat. 

Kevin Kwok wrote an excellent piece about this evolution in his piece How to Eat an Elephant, One Atomic Concept at a Time. The platform software business enjoys network effects from the ecosystem: there are now hundreds or thousands of “nodes” that all rely on the underlying software for their business. It also makes the experience better: the ecosystem members make improvements to the core experience by building for edge cases. 

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This isn’t a new concept, and I didn’t think I had a ton of alpha just going around to any old ecosystem and picking out business. I did, however, have a thesis that “up and coming” software ecosystems would make the plugins a priority. Figma in particular caught my attention: they had already scaled quite large and, in early 2021, had a small but growing ecosystem of plugins. I did some backchanneling and got word that their CEO did indeed have it as a personal priority to grow the ecosystem, which validated my thesis. 

Thesis 2: Niche B2B media

After writing my newsletter for a while (which focused on a tech / investor B2B audience), I felt like I knew B2B media as well as I knew any industry. This industry also had a lot of the dynamics I was looking for in my search: 

• Lots of small players ($500k - $10m in EBITDA) and a fragmented market
• Clear possibilities for growth. You can either grow the audience through more content or new channels, or you can try new monetization levers (ads, subscriptions, events, etc.)
• Sticky customer base — many publications, newsletters and trade shows have been running for several decades

For each and every industry, there was an opportunity for (likely several) publications and trade events. I focused my search on industries that were growing. For example, one of the spaces I spent the most time on was the business of cannabis. At the time, a large media company covering the space was up for sale. I mapped out the entire industry and spoke to a number of investors and journalists working in the space. 

Besides these two thesis, I looked at a lot of opportunistic deal flow. One interesting deal was in the legal education space, for example. 

Why I didn’t transact

When I reflect on this time period, the reason I didn’t transact on a deal centers around three factors. 

1. Market. The time I was heads down on a search fund was Feb - Jun 2021, but I first got the idea for a self-funded search back in 2019. The increase in multiples for public software companies had trickled down to the lower middle market. I talked to entrepreneurs with, say $5m in revenue growing 25% per year, that wouldn’t settle for anything less than 10x. Looking back, it was good that I didn’t transact at this price. 
2. Capital. I worked on a self-funded search, which means that I funded my operating costs in addition to putting some of my own capital into the deal. (This is in contrast to a traditional search fund where you raise money to fund the search, and then those investors have pro-rata allocation into a deal when you find one). If I were to do it again — or advise someone who is working on one — I’d allocate two years of living expenses + a couple hundred thousand set aside to put into the transaction. An alternative is to search on the side of a day job or have a part-time gig to fund the living expenses while you search. Either way, jumping in the deep end with a shaky capital plan was a mistake. 
3. Business-operator fit. If you work in private equity, you need to find great businesses at fair prices. Then you buy them and hire an operator. If you run a search fund, you need to find a great business at a fair price, and then it needs to be a good fit for you personally. Do you know about the end market? Or, at least are interested in it enough to work on it for a decade? Do you have a skill set that matches the biggest risk in the business? This combination means the venn diagram of “good business” and “good business for me” is quite small. 

I also think in general I just wasn’t “ready”. I didn’t have the right combination of stability, experience, and drive to transact and run a business at the time. Maybe I'll be interested in doing it at another point in my life. 

Now, what did I learn from it? 

Lesson 1: Finding and winning good deals is the (first) hard part

You’ve heard it before and I’ll say it again: a good deal will be able to attract capital. The excitement (and frustration) of deal-based work is that there are so many factors that can cause it to fall through. 

Maybe you find a deal, but the seller isn’t ready to sell for another year or two. Or you get all the way through the diligence process, submit an LOI and a private equity fund outbids you by a half a turn. Or perhaps the markets change and your lender reduces the amount they give you. Whatever the cause (I only listed a very few), there are a million things that go wrong before a deal gets done. 

In order to solve this problem, you need to get really good at sourcing. As I wrote in my update after one month, if I were to do this again, the metric I would maximize would be first conversations with businesses that meet my target criteria. This is the best way to find great deals. The channels and strategy for sourcing deal flow is outside of the scope of this post, but finding and executing a good deal was the hardest part for me. 

Lesson 2: You need expertise, and you need to leverage it

I had the best success when I talked to businesses that were related to my background, and I had the least success when I talked to businesses that were unrelated to my background. Besides a strong sourcing engine, this is the most important consideration: have expertise and leverage it. 

In the first phase of a search fund, you need to find a deal and convince the owner they should sell to you. Ideally, they sell it to you for a reason besides that you give them the most money (otherwise you have a lot more competition). This is a sales job. 

With every step of the sales funnel, having industry experience will help. You get more referrals because you know more people. People on the fringes of your network send you deals because you have a brand. Owners respond to your emails because you worked at a brand they admire, or at least they know what you did. On the phone, you build rapport because you’ve already learned how the industry ticks. 

For example, say you’re coming from the startup world. Maybe you’ve run BizOps at two different high-growth payments startups. If you come to small payments companies, you have a real perspective to share with the owner. You can provide value even on that first call. 

And then there’s the second phase of the search fund: operating the business. If you’ve worked in the industry, you have a much better chance of success. You know which processes matter. You know what red flags matter in sales reps. You have some connections to open up new revenue. You’ve done it before. 

If you’re coming directly from financial services, it’s even more important that you choose something directly applicable to your experience, because you haven’t been an operator yet. If you’ve worked with $30-50m revenue commercial services businesses at your lower middle market PE shop, those are the exact kinds of businesses you should look to buy. At least you know the right metrics to look at and key items to diligence. Maybe you know a CEO or two really well from the deal who can help vouch for you. 

It’s too hard to execute on a search fund if you don’t leverage your unique expertise. 

Final thoughts

I’m writing this article from a very inexperienced vantage point — I spent all of 4 months doing a search fund full time. I never closed a deal, operated a small business, or sold it.

But despite that, I still get asked a lot of questions about searching for a small business to purchase and run. It’s entrepreneurship, AND it’s private equity. It’s a leap of faith without having to go through the low status schlep work of working on your own failing projects for a while. If things go well, it checks the financial freedom box. And even on a risk-adjusted basis — taking into account the very real downside case of a bankrupt business — it’s still a compelling path. 

My current point of view is this: if you have a story for why you are buying a business and why you can run it as well as anyone, you should search for a business to buy and run. The best personas for this are exited founders buying companies in their industry, or operators who have spent 5-10+ years in a functional area and can use that experience to carve their own path. Other folks — M&A background, for example — certainly can make it work, it’s just a lot more risky without that direct experience. Build your advisory team accordingly. 

Which is also why I’m no longer on the search fund path. If I get to the point where I have a best-in-class skillset, or have worked in an industry long enough to know exactly where the opportunities are, then I’ll dive back in. Until then, I’ll support others who take the leap (and am starting to write small LP checks to searchers who have the kind of above profile — please reach out!) and am speaking with a few teams to get back to doing deal-based work full time. 

(1) An SBA (“Small Business Administration”) loan is a loan issued by small banks and backed by the government (similar to how many mortgages are issued). These SBA loans can be used to buy businesses. The biggest benefit of these loans is that they can finance up to 90% of a transaction — yes, you read that right. On a $5m deal, you could finance it with up to $4.5m in SBA loans. The biggest drawback is that the loans are personally guaranteed. If the business defaults on the loan, they can seize your personal assets.

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