Partner vs. dog
Royce Yudkof of Harvard Business School famously says that if you need emotional support during the entrepreneurial journey, then you should “get a dog”. However, the Stanford search fund study suggests that partners perform marginally better than solo searchers. It is no surprise then that aspiring search fund entrepreneurs often ask whether they should go it alone or with a partner.
Whether to partner for your search is an incredibly important and impactful decision, but it needn’t be a very difficult one. In my view, most searchers should default to going it alone, and they should require proof beyond a reasonable doubt that they’d be better off partnering. Partnerships can work very well, but do consider the following before going down that path:
1) The marriage
When I decided to launch a search fund and became aware of the statistical edge partnerships have over solo searches, I decided I had to find a partner if I wanted to maximize my probability of success. I attempted to woo several of my entrepreneurial classmates at INSEAD, but they all opted for corporate jobs, to my despair. I then began asking around for connections to people at other business schools, hoping I could find a potential partner with similar ambitions. It quickly became clear that this would be a difficult task as well.
Then I received some great advice from two of my professors, independently of each other. They told me I was nuts for trying to find a partner for the sake of partnering. They told me this was likely to do more harm than good, that deciding to partner was akin to deciding to get married.
This hit home with me. As my amazing wife will confirm, I was slow to come around on the whole marriage thing. For the record, marrying my wife was probably the best decision I’ve ever made, but it took time and a fair bit of prodding from those around me. I certainly wasn’t one to get married for the sake of being married. Logic followed then that I shouldn’t choose to partner for the sake of partnering.
If you’re married already, consider how much time you spent (or should have spent) with your spouse before tying the knot. Think about how well you knew each other, what you had done together, the plans you made together. Think about how well you understood each other’s strengths and weaknesses, family, friends, influences, loves, hates, habits, and tendencies. Think about how comfortable you felt being vulnerable with them, showing your honest self. If you’re not yet married, imagine what it will take to convince yourself to walk down the aisle with someone. Consider the depth, duration, and prerequisites of that commitment
The requirements for a business partnership should not be dissimilar, in my view. At least in the early years of your business, you will likely spend more waking hours with this person than with your marital spouse. Your economic, emotional, and psychological well-being are tied to your business partner. Heck, even the health of your marriage is affected by your business partnership. And of course, the business, its employees, its customers, its partners, and its vendors are all affected by the partnership at the top of a business.
The road to success is littered with the casualties of partnerships gone sour. To avoid your business becoming one of those casualties, appreciate the gravity of your partnership decision. Raise the bar, and then raise it again.
2) Your upside
Traditional search fund economics enable the solo searcher to earn a 25% carry in the deal and a partnership to earn a 30% carry. In a partnership, therefore, each partner can earn a 15% carry in the deal, which is 40% less than the potential carry in a solo search. That’s huge! Before partnering, you should be thoroughly convinced that the partnership is likely to make up for that sacrificed upside potential.
3) Your cost
Two searchers are obviously more expensive than one. This has a few implications. First, it generally means you’ll have to raise more search capital to support both of you during the search, which means you’ll have to return more capital to your investors before seeing any distributions for yourself or vesting that performance-based third tranche of carry.
The other implication, more material than the first, is that the business you buy will have to support both of your salaries. If two of you are replacing one seller, this has a material impact on the bottom line. This can affect your budgeting, growth projections, and even the price you’re willing to pay for the business.
Often partnerships decide that in order to make the economics work, the target business must be larger than the average business acquired by a solo searcher. The larger the target size range, the fewer the opportunities, the more buyer competition you will encounter, and the higher the multiple required to close.
4) The yin to your yang
What efficiencies would you be looking to gain from a partner? Name them, and understand exactly the value you’re looking for. Then decide whether a partner is the best way to get that value, or whether you can find it elsewhere.
When searchers choose to partner, the value they seek generally falls into three buckets: complementary skill sets, operational efficiency, and emotional support.
Complementary skill sets
Broadly speaking, the search phase requires a PE-like skill set (deal sourcing and execution) while the operating phase requires an operational skill set. Very few searchers have significant experience in both areas, and it is common for searchers to try to fill this gap with a partnership - one with a PE/banking background and the other with something closer to an operating background.
While this approach does enhance your chances of having the right skills and knowledge on hand at each phase, I often challenge aspiring searchers on whether it’s the most efficient approach and whether it’s worth the economic cost to the searcher, particularly when the searcher doesn’t yet know what skills or resources will be required by the acquired company.
Say you’re an operator with limited investment or deal making experience. You’ve never made an acquisition before, so you decide to partner with an investment banker to increase your probability of doing so. Your decision to partner may indeed help you close on a deal, but then what? Today you don’t know what business you’re going to buy, or even in which industry you’ll buy. You therefore have little understanding of the needs of that business or whether your partner’s skill set will fill a gap. Perhaps what your company really needs, in addition to a new CEO (you) is a chief revenue officer to drive marketing and sales, not an M&A professional. If you didn’t have a partner, you would have additional budget to spend on that CRO, not to mention additional equity to lure the best talent.
As a solo searcher, your objective is to find the right business for you and your skill set, already a fairly complex problem. With two of you, the complexity of that equation grows. See below for a few alternatives to a formal partnership.
Operational efficiency
Two people working in a coordinated effort should theoretically be able to cover more ground and make better decisions. This is usually true, but 1+1 sometimes equals less than 2 during the search, primarily due to the need for both searchers to be present at meetings with investors, sellers, employees, lenders, attorneys, and other stakeholders, and the resulting need for each searcher to be up-to-speed on the same issues for each discussion. Bifurcation of responsibilities might be a bit easier post-acquisition, but redundancy is fairly common during the search phase.
Disclaimer: There may be examples of more efficient operational models during the search phase that I haven’t yet seen. All of our searchers to date at SFA and SMEVentures have been solo searchers, as the accelerator model alleviates some of the allure of partnership. (See Alternative solutions below.)
Emotional support
The entrepreneurial path is no walk in the park, and there will be plenty of low points. Without the right people to support you, those rough patches can take a toll on your productivity and well-being, and they can take your eye off the prize. A partner can help, but your partner’s highs and lows are likely to be highly correlated with yours. It would be worthwhile to think of who else might be able to serve this function. For me it was my spouse, two of my investors, a kick-ass team of interns, and yes, my dog. Again, see below for alternative solutions.
5) No-brainers
Once you’ve decided to partner and clearly identified the value you’re looking for in a partner, you’ll likely face a harsh reality that no potential partner exists that perfectly matches the avatar in your mind. What follows is a cost-benefit analysis of each candidate; what value will your venture gain from each, and how does that potential gain stand up against the costs, economic and otherwise, of bringing on a partner? Then discount that future value of partnering to account for the inevitable uncertainties in any partnership.
In general, I recommend partnering only with “no-brainers”. I do not mean to suggest that you should partner with people who lack a brain. Rather, the decision to partner with a given individual should be a no-brainer, or an obvious choice. The projected incremental value of that partnership vs. going alone should far outweigh the projected costs. This is often the case if you and your prospective partner have successfully worked together on a meaningful project before. Or, if you feel you very clearly cannot go it alone due to a severe gap in your skill set, then it may make sense to hitch your wagon to a partner’s, but then the question is whether the partner sees enough value in the relationship.
Alternative solutions
Accelerators
Depending on the structure, an accelerator can provide the benefits of a partnership in the search phase without the economic cost to the searcher. A tight and strategically assembled cohort of searchers can provide both the emotional support and the complementary skill sets searchers often seek in a partnership. Searchers I’ve worked with at SFA and SMEVentures consistently name the cohort of fellow searchers as the most valuable part of the accelerator framework, for just these reasons.
Co-location
I often recommend co-location to searchers operating outside an accelerator. Simply sharing a space with other searchers can both reduce your misery and provide access to other sharp, like-minded entrepreneurs.
Structured collaboration
Short of co-locating, I recommend at least coming to an agreement with 1-3 other searchers to speak on a regular basis. But the only way this works is if you all commit to sharing completely and honestly. It’s foolish and delusional to think that anything you’re doing is so proprietary and special that it would be anything but hugely beneficial to share and collaborate with other smart people on similar paths. Drop the curtain, open up, share everything, and help each other out.
Action Items
Explicitly identify what you would seek to gain from a partner. Then challenge yourself to find alternative solutions.
Understand the implications of buying a larger business in your market.
If you decide you might like to partner with someone, spend more time than you think is necessary discussing all dimensions of the partnership with that person before plunging in.
