A search fund is an investment vehicle that enables an entrepreneur to raise capital from investors in order to search for, acquire, and personally operate an existing, privately held company. The model was developed in 1984 by Professor H. Irving Grousbeck at the Stanford Graduate School of Business.[1]
Typically, the process involves two distinct rounds of financing. In the first stage, a small group of investors finances the "search," covering the entrepreneur's (or "searcher's") expenses and a modest salary for a period of up to two years. In the second stage, the searcher, upon the successful identification of their target company, returns to the initial investors and often other new investors to raise the significantly larger amount of acquisition capital required to complete the purchase.[2] Following the acquisition, the searcher takes on the role of chief executive officer (CEO) of the acquired business, with the goal of growing the company and providing a return to investors and themselves.[3]
While the traditional investor-backed model is most common, variations exist, including accelerator-led and self-funded searches.[4]
Origin
The concept of search funds started in 1984 at Stanford University Graduate School of Business. It was pioneered by Professor Irving Grousbeck, the Director of the Center for Entrepreneurial Studies. Since then, over 681 traditional funds have been formed, with Stanford University documenting more than 177 search funds from alumni of its elite MBA program. The majority of the successful search funds were started by entrepreneurial, book-smart graduates who lacked experience in managing a business.[1]
Process
In the first stage, a small group of investors back operating managers to search for a target company to acquire. A fund may or may not find a target acquisition company. Investors are able to invest a pro-rata share in the target company, subject to their individual liking. In the second stage, the general managers of the search fund take operating roles in the acquired company, such as CEO and President.
Traditional search funds typically target companies in the $5 million to $50 million price range, requiring $2 million to $10 million of equity capital, in fragmented industries with sustainable market positions, histories of stable cash flows, and long-term opportunities for improvement and growth. Self funded search funds generally target businesses less than $5 million. Service and light manufacturing companies outside high-tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Most search funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
References
1 2 "Search Funds". Stanford Graduate School of Business. Retrieved 2025-07-14.
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