Raising $ is not the objective. Buying isn't either.
Be warned: this post is a bit harsh. But brief.
At the HBS ETA conference last month, Will Thorndike moderated a fantastic discussion with Kent Weaver. They covered many nuanced areas of the searcher experience and the relationship between searcher and investor, and even those of us who have been in the space for a while were interested in what they had to say.
Then they opened up to Q&A.
The first question, almost as if by necessity, was “What does an investor look for in a searcher?” My head fell.
Don’t get me wrong - there are many good reasons to ask this question. Investors have a great deal of experience working with searchers, operators, and other investors. They have seen what works, what doesn’t, and how best to work around challenges.
But accessing these deeper insights wasn’t the objective behind this question from the audience. It never is. Rather, the audience member wanted to answer the question, “What is my probability of successfully raising a search fund?” (I’ll answer this in a later post.) And by extension, “Can I reasonably forego my other career options and pursue this path?” And, “Am I going to have to deal with failure and rejection when approaching investors asking for capital? Or will they like me?”
These are valid questions, and they should be answered by a prospective searcher. However, all too often these questions occupy the vast majority of a searcher’s concern and energy, when the much more important questions are farther down the road.
A more important question is, “What is my probability of buying a good business?” If you can’t, then raising the search capital means diddly.
But far more important than either of the previous two questions is this:
“What is the probability that I will effectively operate the business I acquire and generate outstanding investor returns?”
This is the goal! The holy grail! The outcome that makes everyone happy. It validates your decision to pursue this path, your investors’ decision to back you, your choice of business, and the many operational decisions you made along the way. This is the goal, not raising search capital.
If you successfully raise search capital and successfully buy a business, but you then produce a negative or unimpressive return to investors, you have achieved the worst possible outcome for a search fund entrepreneur.
Yes, the worst.
This outcome is worse than failing to raise search capital and worse than failing to buy a business because you have not only wasted your investors’ time and money, but you now have little to show for the 5-15 years in the prime of your career that you’ve invested in this project. Sure, you’ve likely learned a great deal, but what are you going to do next? Your options are far more limited than if you had produced a successful outcome, and perhaps even more limited than if you hadn’t pursued ETA in the first place. Needless to say, this outcome is not a fun one.
For that reason, prospective searcher, I recommend spending far more time evaluating your ability to effectively operate a business and discovering the pieces that need to be put in place to maximize your opportunity to do so. After this thorough evaluation and planning process, if you feel you have a good understanding of what will make you a successful operator and can effectively communicate that rationale, you are already more likely to raise capital and buy a business.
Action items
Develop a list of questions to ask investors and searcher-CEOs about the operational phase. That list should be longer and deeper than your questions about raising capital and the search.
Speak to searcher-CEOs. Ask them about their skill set going into the role, where the holes were, and how they filled those holes.
Don’t intern with a pre-acquisition search fund. Get operational experience in an SME. If it’s with a searcher-CEO, that’s great. But really any operational experience in a business similar to the one you will ultimately acquire will be useful. If you’re deciding what to do with your summer, offer to do a cheap or pro bono consulting project for a local SME. This experience will give you access and relevant insights you won’t get creating power points at Bain.
