Princeton Entrepreneurship Council’s signature series, TigerTalks in the City, returns with yet another exciting topic this month. This time, a panel of five Princeton alumni discusses one of the fastest emerging sectors with promising transformative potential for the industry: search fund entrepreneurship. In the past few years, the search fund industry has increased significantly. According to a 2022 study by Stanford Graduate School of Business, a record $776 million was invested during the 2020/2021 timeframe in 124 new search funds and 66 acquisitions were made globally. Ahead of the talk, we wanted to share the basics of search funds and why it might be right for some to become an “entrepreneur-through-acquisition”.

A search fund is what it sounds like. A team of one or two entrepreneurs (“searchers”) raises capital from a group of investors (“funders”) to search for a suitable small business to acquire. The entrepreneur(s) then conduct a proprietary search, directly researching various market sectors and contacting target companies within these sectors. This process, which might last up to two years and is funded by the initial capital, then leads to due diligence of the top candidate company. The entrepreneurs then return to the investors to raise more funding to acquire and run the company as the CEO. Entrepreneurs typically hold companies for 6-10 years before exiting, but the length varies from short to long term depending on the company’s valuation and other factors.

This approach differs from traditional private equity and venture capital because search fund entrepreneurs direct all efforts to one business, rather than a portfolio of companies. The entrepreneur’s full engagement with their employees, customers, and suppliers leads to organic growth that significantly expands annual returns that exceed the historical performance of the acquired company. The new CEO, with fresh perspectives and strategies, can turn a small business or family-run entity into a growth company. The 2022 Stanford study reported that search fund investments saw a 5.2x return on investment (ROI). There are 17 search funds with greater than 10x returns.  Search fund returns can approach those sought by private equity investments. Ultimately, search funds are a compelling alternative for entrepreneurs and investors and an exit strategy for the small/family business owner. It provides entrepreneurs “a fast path to become an owner-CEO” while investors and companies reap the benefits of high financial returns. 

Search funds are also rapidly expanding internationally. According to a recent report from the IESE Business School, operations outside of the U.S. and Canada have grown significantly, with a record number of 79 search funds and 38 acquisitions in 2020-2021. Investments span across almost all continents, with activity exceptionally high in Europe and Latin America, and searchers have begun to expand to Asia and Africa. International search funds also witness a fantastic performance with 3.4x returns, excluding the top 5 performers.

With the industry reaching new heights across every metric - from the number of funds, acquisitions, and searcher equity - more entrepreneurs are taking classes, joining search networks, and preparing themselves to embark on this entrepreneurial path. In our upcoming TigerTalks panel, "searchers" and "funders" will discuss this "entrepreneurship- through-acquisition (ETA)" model and explore the paths each navigates to launch their search funds, raise capital, acquire, and subsequently operate their companies as CEOs.

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“TigerTalks: Search Funds -- An Alternative Path to Entrepreneurship” will take place on Wednesday, February 28, 2024, at West End Labs, located at 125 West End Avenue in NYC. Please sign up today to reserve your seat. Princeton alumni and their guests are invited to join in this discussion.

Additionally, on Thursday, February 29, two of the alumni panelists will visit campus to share their journeys with interested Princeton undergraduate and graduate students. You can register here for the 2/29 event which is co-sponsored by E-Club and Prospect Student Ventures.