For the last few months I have been studying Search Funds and trying to understand their nuances as they have been applied across the world. I have learned a lot, but one thing continues to eat away at me: I still don’t know what a Search Fund is. I know how it is defined. I know how many entrepreneurs have described it. But these definitions are either awkward or vague – they lack the precision and clarity necessary to identify a Search Fund when you see one.
Two examples highlight this point. Consider a Search Fund that does not acquire a company, but instead identifies an excellent opportunity to start a new venture. The investors agree to back the new venture and a successful business results. Is this a Search Fund? Or consider an entrepreneur that raises capital to search for a distressed business to buy. Again, supported by their investors, the entrepreneur identifies and acquires a slightly distressed business. Is this a Search Fund? By the strict definition put forth by the Stanford Primer on Search Funds, neither of these examples would qualify. However, they both feel a lot like a Search Fund to me.
How can this be reconciled?
In my view, the term Search Fund is difficult/confusing to define because it mixes a strategy with a financial structure. The strategy is to purchase a business that meets as many as possible of the standard “Search Fund Criteria” (found in many notes on the subject), and the strategy is executed using the financial structure we associate with Search Funds. This is like defining a hedge fund as “an investment fund that uses short positions to make money”, or like saying “Private Equity Funds only use financial levers to create value”. These definitions are incomplete and wrong. Instead, Hedge Funds and Private Equity Funds are defined by what type of securities and financial structures they employ, not the strategies they use to chose between opportunities (i.e. Private Equity goes after equity positions in privately held businesses, while Hedge Funds employs riskier/more sophisticated securities and strategies than more conventional investment funds).
Extending this argument to Search Funds, a more appropriate definition is: A Search Fund is an investment vehicle that finances an entrepreneur’s efforts to locate, acquire, manage and grow an entrepreneurial opportunity. The subtle change from the traditional definition is in the last two words. Search Funds target entrepreneurial opportunities. What that opportunity is, i.e. the fund’s investment strategy, will be defined by each fund and should be chosen to based on the skills of the entrepreneur and the characteristics of the Search Domain (the geography and industries of interest).
Nonetheless, the characteristics chosen by most Search Funds are very similar to those chosen by the first Searchers. In many circumstances this remains an excellent strategy. However, as the model becomes increasingly popular, and as the type of people engaged in Search Funds, and the Search Domains chosen, become increasingly heterogeneous the strategies/target opportunities should also become more homogenous. Remember, the original strategy was built specifically for new MBA graduates, with limited operational experience, searching in the US. It is not unreasonable to think that more experienced professionals with different skills and backgrounds can, and perhaps should, target opportunities defined by different characteristics. At the very least, entrepreneurs searching outside the US, or with a significantly different professional profile than the ‘standard searcher’, should consider what differences could/should be employed by their Search Fund.