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Innovation Blog

Search Funds:  When It Comes to “Buy or Make”,  Some Entrepreneurs Prefer “Buy” !

By Shlomo Maital

    A former student has pointed out an interesting wrinkle in entrepreneurship,  tracked most carefully by Stanford Graduate Business School.  [1]   It is called a “search fund”.  My student is seriously planning to try it.

     The idea is simple.  Take highly-trained managers from top business schools, give them some money, and let them buy under-managed or poorly-managed companies with promise and potential, and apply all they’ve learned to scaling them up.  This model works in place of one where the same graduates raise money and start their own businesses.  Its appeal lies in the fact that it saves time, because you revitalize existing businesses rather than build new ones from scratch.   In other words,  “buy” rather than “make”.

    According to the search fund Case,

 ” Most Search Funds are started by entrepreneurs who are viewed as having high potential (many are recent graduates from top-tier business school programs), though they typically have limited operational experience and often no direct experience in their target industry.   Searchers tend to be drawn to the model for two principal reasons. First, the model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position.   Second, Search Funds have historically generated significant financial rewards for a small, but growing, number of principals. The core thesis of the Search Fund model is that placing well-educated, high caliber, strongly motivated managers into an environment that is under-managed or lacking a professional management approach will yield attractive risk-adjusted returns for Search Fund investors as well as compelling experience (owning and managing a business) and financial returns for Searchers.”

How well have the Search Funds done?  According to the Stanford Case:

   Since 1984, 129 known funds have raised search capital for the first time. Of those, 41 are currently still searching to acquire businesses, 33 are currently operating the companies they acquired and 55 are terminal.

  Innovator:  If you have a powerful entrepreneurial idea – go for it!  But if you do not, and you still dream of being an entrepreneur, consider the search fund model.  For example, in a previous blog I mentioned Fiskers’ purchase of a GM plant for pennies on the dollar, to build new hybrid cars.  By taking old assets and renewing them, wealth, jobs and income are created, at times just as powerfully as when totally new assets are created by conventional entrepreneurship.

[1] Stanford GBS,  CASE: E-386 DATE: 7/21/2010


Blog entries written by Prof. Shlomo Maital

Shlomo Maital
October 2010
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