Analysis paralysis
Decisiveness is often cited as a strong contributing factor to a manager’s success, as well of that of her team. Employees are more satisfied and productive when they have a clear direction and confidence in their leader’s decision making abilities.
Ironically, many MBAs I know are prone to spend far too long sorting through more and more data, and interpreting it in as many ways as possible, before taking action. We call this trap analysis paralysis.
In search funds, we often see this behavior at the beginning of a search. The searcher doesn’t quite know where to start, so she falls back into her comfort zone of gathering data and turning it left, right, and upside down, in a self-indulgent exercise of habit. In order to decide on her target industries, she performs a top-down analysis of the market, careful not to ignore any sector, industry, or niche. She reads papers on macro trends, she investigates where VC dollars are going. She researches the regulatory environment. If she gets a bit deeper, she conducts “informational interviews” with a selection of people who might offer some insights. She then develops a mechanism by which she can score each industry 1-5 across a dozen characteristics. (They all wind up with an average score of between 3 and 4.) She takes the top 20 and puts an analyst/intern on each one, tasking them with diligencing these industries for weeks and creating a presentation for the group on their findings.
All before speaking to a single business owner.
Many searchers do come from a consulting background, and in some consulting environments the above pattern would be perfectly appropriate and expected. However, while consultants can make good search fund entrepreneurs, they often need a bit of a push out of the gate.
The world of SMEs brings opportunities and challenges not present in Fortune 500 companies. For one, they’re typically privately held, which inherently means data is less available. It is much more difficult to learn about the small companies and their niche industries by simply browsing the web or purchasing IBISWorld reports. (There is no IBISWorld report for the bird control services industry, just for the broader “pest control.”) Buying data from Hoovers, Salesforce, or Reference USA can get you started, but then you run into additional challenges: 1) Your dataset is identical to everyone else’s, so you are less able to differentiate, and 2) while the contact data from these providers may be useful, the financial data is often wildly inaccurate in the lower middle market. Time spent creating drill-down analyses of this data, therefore, only brings you so far in your journey.
So what is a searcher to do? Get out there and speak with business owners.
I feel your shivers. I can hear you crying, “But how am I supposed to speak with a business owner when I don’t know what I’m talking about? How will I be credible? What if they don’t like me? What if…”
The truth is that your conversations with business owners early in your search won’t be great. But here’s the important part: that’s okay! The point of those early conversations isn’t to buy a business immediately. Rather, these conversations yield at least a few big benefits:
Practice - Think of these early conversations as throw-away conversations. You’re very unlikely to buy one of these early businesses, so take the opportunity to practice your questioning, your cadence, your timing, and your answers to the business owner’s questions and objections. Fail! Fall flat on your face! Embarrass yourself in the name of the scientific process! As Jim Sharpe would say, “Get to ‘no’ fast” - practice disqualifying the business efficiently. Make all your mistakes in these early conversations so that, later on when you find a business you really like, you’ll be well rehearsed and comfortable.
Information - In most cases, a conversation with a business owner who’s been operating for thirty years can yield you more useful information about her industry than would hours of web browsing. For example, the business owner can tell you who the important players are, what M&A trends are present, how companies compete/differentiate, what margins are expected, what metrics are used to measure success, what regulations are important to understand, which trade shows are worthwhile, which trade journals to read, and which industry associations are more relevant. All for the bird control industry.
Pipeline - Some of these conversations might actually turn into opportunities, and simply adding opportunities to your pipeline is a great exercise. The more you have, the higher you’ll raise your bar, and the more ruthless you’ll be with eliminating opportunities that are not worth your while.
Speaking with brokers is also helpful to get early access to deals, and for some industry insights, but brokers generally don’t have near the depth of knowledge about a specific industry niche as a business owner who’s been operating in that industry for thirty years.
It is important, therefore, to incorporate these conversations with business owners early into your search. Having several of them in a particular industry, if you ask the right questions, will help you pre-qualify an industry fairly quickly, enabling you to more comfortably devote time and resources to mining it.
Action items
Develop a regular cadence for your industry selection:
Form a preliminary hypothesis on several narrowly-defined industry niches. Take no more than a few hours for this. Use your b-school skills.
With your team, generate a short list of companies in those industries.
Find a way to speak with a few people, per industry, at those companies. Owners are ideal. Spend no more than a few days on this.
For each industry, quickly decide whether to dive deeper.
During your deep dive, don’t hesitate to bail on that industry as soon as you find enough red flags. You will be less tempted to continue wasting your time on that industry if you already have a backlog of industries to cycle in next.
Use our list of industry ideas as a starting point. Note that these ideas are not pre-qualified, and their attractiveness will vary by market, but they should at least get the creative juices flowing.
