To accelerate or not to accelerate: the value of accelerators to search fund entrepreneurs
In 2015 Search Fund Accelerator (SFA) in Boston became the world’s first accelerator of search funds. Founder and CEO Timothy Bovard saw an opportunity to apply the learnings of prominent startup accelerators to the search fund model, and SFA has so far been a story of successful business model innovation in the search fund ecosystem.
Since SFA’s inception, several other search fund accelerators (e.g. NextGen Growth Partners, Broadtree Partners, and of course SMEVentures) have been born. They differ in their capital sources, origination strategies, branding, and on other dimensions, but they share a common goal: to help the searcher succeed, thereby optimizing shareholder returns.
As SFA’s first employee, I had the privilege of building this unique business and helping to run it in its early years. During my tenure, we launched our first two cohorts of searchers, raised our first two funds, and saw our first three completed acquisitions. We learned a great deal through the process, and we iterated whenever possible to improve our model. SFA continues to thrive today.
Having run a traditional search fund immediately prior to launching SFA, I had the unique opportunity to witness first-hand the difference between the searcher experience in the traditional model vs. the experience in an accelerator. Today, I remain in a very small group of people globally who have run both a traditional search fund and an accelerator. I say this not to impress, but to give credibility to what I say below.
Aspiring searchers have several paths from which to choose. Namely, they may choose to do a traditional search fund, join an accelerator, or self-fund their search. (There are other variations that I won’t go into here.) In their discovery process, aspiring searchers often ask me what the true value of an accelerator is. My answer is as follows:
An effective accelerator is designed to reduce the amount of squandered time, the number of costly mistakes, and the degree of misery throughout search fund journey, thereby ultimately improving the searcher’s likelihood of success.
TIME
Two years sounds like a heap of time. Aspiring searchers hear of M&A activity frequently and see companies successfully completing multiple acquisitions per year. So how could the search for one deal possibly take two full years? With this mindset, searchers run the risk of beginning a search with leisurely confidence that they will close a deal well before the deadline.
And yet, with this time constraint about ⅓ of searchers fail to complete an acquisition, and even worse, too many of the remaining searchers buy the wrong businesses, often toward the end of the search period. This is sometimes symptomatic of what I call “panic buying”, that tendency searchers have to widen their filter and lower the bar toward the end of the search period.
Why do searchers run out of time?
The Ramp Period
Outside an accelerator the typical searcher spends 2-6 months raising capital, and then the first 6-9 months of the search figuring things out. Here’s what eats time:
Shopping for, testing, configuring, and learning various software tools (e.g. CRM, project management, email prospecting, email marketing, email, document storage, contact finders, databases, website development, VoIP, freelancer management, accounting, expense management, scheduling, videoconferencing)
Scripting, designing, and creating a website, business cards, social media profiles, letterhead, email marketing templates
Creating the legal entity
Identifying an office, negotiating the lease, and purchasing equipment and/or supplies
Opening a bank account
Setting up payroll
Compliance & tax forms
Preparing NDA, LOI, and IOI templates
Researching and producing a list of target industries
Scouring hundreds of sources for tens of thousands of company names
Screening each company against the search criteria
Identifying owners & their contact information
Recruiting, training, and managing interns (over and over again)
Outreach via email, phone, and/or post
Communication with potential sellers
Diligence on opportunities
Travel
Building lists of intermediaries
Outreach to and communication with intermediaries
Reviewing teasers and CIMs
Investor updates - phone & email
Calls with current and aspiring searchers
Building decks, projections, and IMs
Self-teaching the unfamiliar components of M&A transactions
As a traditional searcher, you’re effectively doing all of this alone, much of it for the very first time in your career. You’re doing your best just to get it all done, let alone gather and implement best practices from your peers (many of whom have done this only once themselves), and there are no SOPs or manuals for you to follow.
In addition, early searchers haven’t seen enough opportunities and therefore don’t know where to set the bar. “How good is good enough? When should I pull the trigger?” (See my post here on the importance of volume.) They therefore either face analysis paralysis (a common ailment of MBAs) or fall in love with the first real opportunity and succumb to confirmation bias, or both.
The result is a great deal of inefficiency. Searchers not only get lost in administrative tasks and pretending to be web designers, but they also learn much of the more impactful processes, such as their communications with sellers and industry identification and analysis, through highly inefficient trial and error. Most searchers are high-caliber people and do end up eventually getting a decent handle on most of these activities, but it takes time, sometimes quite a bit of time, time you might otherwise spend on your most value-added activities, and time that you can’t afford to lose.
An accelerator can help the searcher achieve a state of high productivity much more quickly, reducing the ramp period by 3-5 months according to the anecdotal observations of some serial search fund investors. Reducing the ramp period increases the time spent searching productively, thereby putting a higher volume of quality deals in front of the searcher and improving the searcher’s opportunity to buy the right business. The accelerator can reduce the ramp period in the following ways:
Removing administrative burden from the searcher by centralizing administrative tools, processes, and data
Easing HR burden by streamlining the recruitment, training, and management of interns and contractors
Preserving and recycling IP (e.g. data, deal flow, relationships, research) and other assets from one searcher to the next
Centralizing and automating some of the sourcing process (while preserving the direct connection between the seller and the searcher)
Providing templates and checklists for repeated tasks
Connecting the searcher with helpful investors, coaches, consultants, and vendors at critical moments
Giving real-time feedback on deals, industries, processes, and strategy; producing a quick turnaround time for searcher inquiries and needs
Assembling a cohort of high-caliber searchers with complementary skills who will support each other daily.
Broken Deals
A typical searcher will experience the death of several deals over the course of a search, and in a traditional search, the searcher will spend a month or two on each of these deals. Generally speaking, this can result in wasted time for either of the following reasons:
The deal is unattractive, but it took the searcher 1-2 months to realize it. The searcher had several conversations with the seller, perhaps making a company visit once or twice, built projections, did some industry research, worked with a team of interns to prepare a beautiful deck, and presented it to the investors only to learn from their experience that the deal isn’t as attractive as the searcher had originally thought.
The deal is attractive, but the searcher makes a fatal mistake or two at some point in the diligence or negotiation. This is understandable, given that the typical searcher has never bought a company before.
By providing real-time coaching and guidance, an effective accelerator can both reduce the number of broken deals by preventing rookie mistakes and reducing the time spent on deals and industries that are not worth the searcher’s while.
Diligence & Capital Raise
A typical searcher will spend 3-5 months, sometimes much longer, working on a deal before finally finalizing the acquisition. While thorough diligence is crucial, a protracted diligence process increases the likelihood of the deal dying. “Time kills all deals.” Any of the many parties involved may lose confidence, identify more attractive alternatives, or simply lose patience. An expedient diligence and capital raise is therefore critical to getting a deal done. You’ve worked hard to find this opportunity, and you don’t want to fail to cross the finish line because your process was inefficient.
Common sources of inefficiency include the following:
Improperly prioritized diligence items
Lack of vetted network of attorneys, accountants, lenders, and specialized consultants
Lack of experience building projections and investment memoranda
Lack of experience raising equity capital
Lack of experience raising debt
Unchecked emotions leading to irrational decision making
Lack of an established relationship between the investors and the searcher
Untactful or unstrategic communication with any of the parties involved
An effective accelerator can at least partially mitigate all of these risks with the proper coaching, processes, templates, and contacts.
In summary, if we subtract the 6 months of ramp time, 3 months spent on broken deals, and 4 months working on the final deal, that leaves only about 11 months of productive search. An effective accelerator will elongate that productive search period by reducing time spent elsewhere.
FEWER MISTAKES
Regardless of the path you choose, you will make mistakes. However, the greater the frequency and the greater the cost of those mistakes, the less likely you are to be successful in the end. And the mother of all mistakes, the grande mistake that your other mistakes might lead you to, is doing the wrong deal.
When you buy a business, you’ll initially feel great regardless of what business you bought and what deal you did. At least you’re done with the grueling search process, and at least you’re in the CEO seat. This is what you wanted all along. You’ve succeeded.
Right?
Not quite. Identifying and buying the business is perhaps 20% of the battle. Creating value for yourself and investors is the real challenge and test. If you did the wrong deal, creating value becomes incredibly hard to do. A deal might be the “wrong deal” for any of the following reasons:
Unfavorable price and terms
Material operational or market risks not easily mitigated by the searcher
Suboptimal sources of capital, either on the equity side or the debt side
Misalignment with the searcher’s personal/lifestyle needs or preferences
When you do the wrong deal, you’re likely to wallow in a zombie company for years to come, failing to create material value for investors or yourself. Your board may even decide to move you to a different role and hire a new CEO. And then when you finally exit, you’ll have little to show for the last 5-10 years in the prime of your career, other than perhaps some good stories. Your investors, while sympathetic, will be less than thrilled with your performance, and your family and friends will feel a bit sorry for you.
If this picture appears gloomy and doomy, it should. Contrast that to the failure to buy a company, in which case you’ve lost 2 years of career progression, have learned a lot, and can reinsert yourself back into the workforce about where you left off. It’s clear to me, and to your investors, that this is the better outcome for all involved.
Nonetheless, searchers almost universally have one goal in mind: buy a company. Too often they lose objectivity when all they want to do is be done with the search and start running a business, and they lower the bar, especially when time is running out.
And here’s the real danger: even for a “wrong deal”, you’re likely to raise the capital! Especially in today’s economic climate, capital is looking for a home, and if you put together a great deck and are a good salesperson, you have a better chance of finding capital than you might think. While some investors will do more diligence on your deal than others, they simply don’t have the time or resources to spend nearly as much time on the deal as you have, so to some degree they have to trust your diligence and your word, as well as the opinion of their fellow investors. In a traditional search, this means you are at times the only real filter to getting a deal done, and when that filter is less than objective and has less than a wealth of relevant experience, bad deals can happen.
An effective accelerator can help you tighten and maintain that filter, providing a check on your objectivity. By getting intimately involved in the diligence, an accelerator can provide real-time guidance, bring in the right advisors when appropriate, and help you gain confidence in the deal you’re doing before committing the next 5-10 years of your life to it. Alternatively, the accelerator will help you eliminate the deal quickly and focus on more attractive opportunities in your pipeline.
Depending on the structure of the accelerator, its interests are aligned with yours as well; the accelerator will make a lot more money if you do the right deal than if you do the wrong deal. The accelerator should be your partner who comes with experience and an objective lens to protect you from making the mother of all search fund mistakes - doing the wrong deal.
LESS MISERY
When speaking with searchers about the search process, the most common word you’ll hear is “grind”, as in “the search is a real grind.” Indeed, you’re effectively doing the same mundane tasks, having the same conversations, day in, day out for 80% of the time. Your friends and family ask you how it’s going, and you can only really say either that you’re working on a deal or that you’re still looking for a deal, oscillating between the two. This 2-year project doesn’t have your typical milestones that allow you to track percent completion. It’s more of a hamster wheel that occasionally breaks and punches you in the face.
Searchers in an accelerator will also use this word, but less frequently. And despite the cocktail of tools, resources, and coaching provided by the accelerator, and despite everything I’ve just told you above, they’ll often say that the greatest value provided by the accelerator is the cohort of other searchers they’re working alongside.
At SFA it was exhilarating to watch each cohort of searchers bond. Each group comprised vastly different personalities and skill sets, but the common goal united them and they benefited from their differences. They co-innovated, often identifying opportunities for process improvement, they chatted daily about new learnings, they celebrated victories, and they commiserated together when deals went sideways.
This too improved the searchers’ probability of success. Whereas the traditional searcher might lose momentum after a dead deal and start to believe that there is no end in sight, searchers in a cohort have the opportunity to lift each other up; when one is down, the other is up, and that optimism is contagious. Greater momentum means greater productivity, and high productivity during the search is required to maximize the searcher’s probability of success.
This collegiate support continues post-acquisition as well. Being a CEO is also a lonely job, and often the only people who can empathize with you and from whom you can readily take advice are other CEOs. As luck would have it, those same people you were searching alongside in the accelerator will also be CEOs of businesses not entirely dissimilar from your own. You will have a lot to discuss for years to come.
In summary, an effective accelerator can make you less miserable than you would have been in a traditional search fund process. This enhanced happiness has merit on its own, but it also can translate to higher productivity and efficiency, as well as a reduced likelihood of throwing in the towel, all of which will correlate with your success.
Truth is, you’ll never know.
Regardless of the path you choose, you will likely never truly know what the other path would have been like. You will never fully appreciate the relative costs and benefits of one model over the other, and there are very few people on this planet who have experienced both.
People have succeeded in every path, and I am certainly not saying that any path will lead to failure. We’re simply talking in terms of probability. And from what I’ve seen, for the aspiring searcher who wants to maximize the probability of a successful outcome, an accelerator can help the searcher achieve that objective.
Action Items
Take inventory of what’s important to you at each stage of this journey, and compare that list to what is offered by each model or path.
Speak to searchers to learn from their experiences, keeping in mind that each searcher you speak with has likely experienced only one model.
