What is the cost of joining a search fund accelerator?

Since Search Fund Accelerator came on the scene in 2015, a number of other search fund accelerators have popped up across North America, Europe, Asia, and Oceania. (Anyone in South America yet?)

Prospective searchers have been flocking to the doors of these accelerators, and for good reason. However, searchers are advised not to equate one accelerator with another. Some are more exclusive than others, some bring different/more value than others, and some cost the searcher more than others.

As with nearly anything that creates value, an accelerator also comes at a cost to the searcher, the investor, or both. And as the diversity of models has grown, so has the variety of economic models. 

Unsurprisingly, an accelerator typically generates revenue through a combination of carried interest (“carry”) and fees, but the recipe varies by type:

The buyout shop

The structure of some accelerators is very similar to that of a traditional private equity buyout shop. They raise a fund and write the entire equity check for each deal. During the search phase, searchers are paid a salary by the management company, and post acquisition the searcher steps into the target company, which is wholly owned by the accelerator. The searcher then earns a carry, much as in the non-accelerator model. In one example I know of, the accelerator partners with a bank, sourcing most of its equity and debt capital, as well as much of its deal flow, from the bank.

Carry

The accelerator takes a carry at the fund level, much like a PE fund. This may or may not impact the searcher’s total potential carry.

Fees

While I haven’t seen typical PE-style management fees to date in search fund accelerators, they do charge a number of other fees. For example, they might charge a success fee upon acquisition or an annual support fee to each acquired company post-acquisition. In addition, they may charge fees to their LPs (investors), such as a commitment fee upon successful closing of a fund, or an ongoing management fee.

The partner

Others are more analogous to traditional search funds, in that they act as a partner to the searcher through the process of raising capital, executing the search, completing the acquisition, operating the business, and exiting. Accordingly, they are structured as a partner in each search fund, sitting alongside (or near) the searcher on the cap table in each deal. Equity capital comes not from the accelerator itself, but from a group of individual investors that will differ for each deal.

Carry

The accelerator will share in the carried interest with the searcher, with the searcher typically taking the lion’s share.

Fees

Structures vary widely here, but typically there is some form of ongoing support fee post-acquisition. Some will also charge a fee to investors to participate in the platform.

The coach

Some accelerators are more like schools, offering resources and/or skill-building workshops. 

Carry

I haven’t yet heard of this type of accelerator taking any carry in the deals. Given that search fund accelerators were originally modeled on the likes of Y Combinator, which takes 7% of each company it supports through a time-bound accelerator program, it’s somewhat surprising that this practice hasn’t been replicated so far.

Fees

These guys charge a flat fee per workshop or resource, generally with no residual fees.

Funds of funds

Lastly, I’ve seen certain funds-of-funds be referred to in the community as accelerators, though it seems clear that they are not. This mix-up is generally not the fault of the FoFs; it’s more attributable to the understandable confusion among prospective searchers as they explore the options before them.

It’s worth noting that no accelerator that I’m aware of today requires a searcher to contribute any of his or her own cash, or imposes a cash penalty for failure. And to any accelerator, past or future, that is considering working this into its model, don’t! The searcher already has plenty of skin in the game.

A brief editorial

It has been exciting to watch the search fund model mature and diversify in recent years. We can expect this trend to continue, and we will witness some approaches succeed while others fail spectacularly.

One well-known search fund investor advises people, “don’t f*** with the model.” I hear where he’s coming from - the traditional model has done quite well for investors for a few decades now, and we should absolutely preserve the parts of it that have contributed to its success. However, the global landscape is changing, and we must evolve along with it, remaining agile at every turn.

Believe it or not, there is still plenty of room for improvement of the search fund model, especially for those who assume the most risk - the searchers themselves.