5 risks of self-funding your search (vs. raising a search fund)
I might get some heat for this post...
You’re thinking of bootstrapping your search rather than raising capital for a search fund. But you’re a bit nervous and looking for a sanity check.
I’m here to tell you that while self-funding your search can work, and has worked for many entrepreneurs, it can also end in failure. In this post let’s outline the potential risks of self-funding:
1) The biggie: you burn your own money. You are the sole investor in your own entrepreneurial venture. If you’re a typical self-funded searcher, you’re going all-in, putting your entire savings (or close to it) into the search.
To some, you must be mad. Successful investors never put all their eggs in one basket, let alone their own. They put some in that basket, and then fill the basket with a bunch of other people’s money. Doing otherwise would be too risky and unwise for someone who has other allocation options.
Such risk concentration can create several knock-on risks:
You panic buy. As your bank account dwindles, you cling to each doable deal with increasing desperation and urgency; your analytical goggles fog up and your eyes widen. Not a great mindset with which to make the biggest decision of your career.
You skimp. You manage every dollar as if it’s your own… because it is. Rather than pay the $5,000 for the right regulatory diligence consultant, you opt to scramble through a half-baked diligence on your own. Instead of investing in the right outreach tools to achieve the volume you need, you manually contact each business owner and never build an adequate pipeline. Rather than travel cross-country to develop that relationship, you attempt to build it over phone and text, and it doesn’t go anywhere. You run an amateur search process, not a professional one.
You run out of runway and options. Because you put all your capital into this project, when it fails you have less remaining to try anything else. You subscribe to LinkedIn Job Seeker.
2) You lack credibility. No investor has given you a dollar, but somehow you must convince business owners, brokers, bankers, and attorneys to spend months of their time working with you despite no tangible indication that you can ever actually get a deal done. You find yourself uttering, “Just trust me,” and nobody does.
3) You lack guidance. People who know this stuff really well, and who could potentially be value-adding mentors for you, are already invested in a bunch of other searchers who require time and guidance. Why would they sacrifice time with people they have already invested in, and on whose future deal they have the right of first refusal to invest, to speak with you, someone in whom they have no economic interest?
4) Your deal is sluggish and choppy. Because you have not yet raised capital, come deal time you must identify willing and able investors and then convince them of the merits of your model, you as an entrepreneur, and the deal, rather than just the deal. This stalls the process, frustrates your seller, and risks murdering your deal.
(Of course, you planned to build these investor relationships earlier in the process, but somehow that never truly happened.)
5) You’re disappointed at the finish line. You go through the misery of self-funding to get access to more favorable terms, only to find that the terms on the table at deal time are not far from typical search fund terms.
Grim? Again, a self-funded search can work - people have been self-funding searches since long before the search fund model was invented!
That said, there’s a reason the search fund model came to be, and a reason it’s worked so well.
When deciding between a search fund and a self-funded search, take inventory of your personal circumstance, objectives, strengths, and weaknesses to ultimately choose the best path for you, risks and all.
