Search Funds: The Boys Club You've Never Even Heard Of
Want to run your own company, but don’t have any entrepreneurial ideas? Maybe you should consider a search fund. Never heard of it? That’s not surprising.
In the 28 years since H. Irving Grousbeck developed the entrepreneurship model cum investment vehicle known as a “search fund,” it has gained relatively little popularity outside of MBA programs like the Stanford Graduate School of Business and Harvard Business School.
Here’s how it works: An aspiring entrepreneur sets out to find a company he can acquire and run. The searcher raises initial capital from investors to fund his search (average length: 18 months) and then returns to those investors seeking additional capital for an acquisition once he finds a suitable target. If the acquisition is successful, the searcher takes over as CEO and runs the acquired company.
I’ve chosen my pronouns carefully when explaining the model: Of the over 150 aspiring entrepreneurs who have pursued search funds since 1984, almost none have been women.
In fact, when pushed to identify women who have attempted the search fund model, leaders in the niche investment community are hard-pressed to name anyone other than Karen Moriarty, CEO of Carillon Assisted Living, the company she decided to start herself rather than acquire another through her search fund.
“It’s ridiculous,” says one successful searcher of the lack of women entrepreneurs. He jokes that the search fund community is “like the Bohemian Club without the redwoods.” David Dodson, a 15-year veteran of the search fund community, agrees. He describes the gender imbalance among search funders as “a source of embarrassment and discomfort” for the search fund community at large.
It got me curious: Why are women so woefully underrepresented among search fund entrepreneurs? What’s driving this enormous gender imbalance?
I started by exploring structural issues that might be excluding women—realities of the search fund ecosystem that, knowingly or not, lead to a gender imbalance.
Few Female Role Models
When I asked Harvard Business School professor Jim Sharp why he thinks so few women pursued search funds, his answer was simple: “No role models.” I’ve written here before about the you-can’t-be-what-you-can’t-see phenomenon as it applies to women in tech, and with a dearth of female role models and mentors for aspiring search fund entrepreneurs, that notion may apply here, as well.
Discrimination From the Industry
Some have pointed to a more insidious barrier: discrimination, particularly from the owners of the acquired companies, whom one former searcher describes as “salty old dogs.” Executing a search fund acquisition involves convincing owners to sell to you, but it’s not necessarily just on price—there’s a personal sell. “Sellers tend to be 50-70 year old males who come from a generation that may not be giving credibility to a woman to take over their business,” explains Sharp. Successful search fund entrepreneur Jim Ellis warns that, “Sometimes the owner wants to see a younger version of himself.”
But it’s not just business owners that see search fund entrepreneurs as the next generation—the investors do, too. The community of search fund investors is a tight-knit circle starring many successful former search fund raisers. Might they be perpetuating the boys club? Definitely not, says Dodson: “I know with certainty that [women] are not being discriminated against by investors.” Ellis also asserts that investors would like to fund more women, but with so few women attempting to launch search funds, there aren’t many opportunities for investors to reveal their preferences. So maybe the question isn’t “what do investors want?” but “why aren’t more women picking this path?”
If the issue isn’t structural, perhaps the gender imbalance reflects personal choices—something innate about women that dissuades them from pursuing entrepreneurship through acquisition.
The Arrogance Factor
It takes a certain amount of confidence (dare I say, bravado) to convince seasoned investors that despite your relative inexperience, you’re capable of running a company. Even more so than in traditional entrepreneurship, search funds require entrepreneurs to project confidence about their abilities in the face of uncertainty. Studies have shown that men tend to overestimate their abilities, while women underestimate theirs. If women need to be more confident in their ability to do a job before they’ll agree to do it, its possible that the uncertainty of a search fund tends not to appeal to women.
When Sharp lists “credibility” as the first quality he looks for in a successful search fund entrepreneur, it makes me wonder if male confidence in the face of uncertainty may be skewing the pool. Dodson disagrees, however, naming selling skills as the most important quality he looks for in a candidate. “Bravado would be a negative,” he stresses.
Family Planning Challenges
Others suggest that the time horizon of executing a search fund and operating the acquired business doesn’t fit with many women’s family planning timeline. From raising the fund to operating the acquired business, a search fund can take 10 or more years of professional dedication. “Search funds are a big time commitment,” explains Dodson, “and that can interfere with plans to start a family.” That said, it’s not clear that raising a search fund requires a substantially larger time commitment than traditional entrepreneurship. Although women are still underrepresented as founders of start-ups, their numbers in the ranks of traditional entrepreneurship still trounce those of search funds.
Unlocking the Secret
So maybe the challenge is that the search fund path to entrepreneurship is still largely a secret. The niche community builds its ranks primarily through word of mouth and specialized courses at elite MBA programs, with very little recruiting or publicity for the model. “Only recently has the search fund community begun to have ‘second generation’ funders of a ‘younger age,’” explains Sharp.
It appears that there’s no simple answer to the question, “Why don’t women do search funds?” The structural and personal explanations don’t seem to explain the imbalance fully, so maybe female entrepreneurs just need to be introduced to the model.
So here you go: If you’re a woman with entrepreneurial ambitions, maybe a search fund is right for you. The Center for Entrepreneurial Studies has excellent resources for those considering a search fund, with annual reports on search fund performance and detailed documents to help you get started.