An increasing number of business school graduates are focusing on MBA search funds as a path toward entrepreneurial leadership by acquiring existing business. As a recent Wall Street Journal article explains, though search funds have been around for decades, access to easy capital during the pandemic has made them more popular.
A search fund typically requires a would-be owner to raise funds from investors, family and/or friends. Once funding is closed, an aspiring acquirer searches for an existing business to acquire and run as the CEO and partial equity owner. These businesses are usually small to mid-size privately owned businesses whose owners are close to retirement and lack a formal succession plan. Because the chosen businesses are typically cash-flow positive with predictable earnings, the newly minted MBA CEO gains the opportunity to scale or grow the business without the risk faced by the from-scratch entrepreneur.
Historically, most MBA searchers hailed from Stanford and Harvard universities, whose MBA programs supported them with relevant coursework and well-networked professors. However, more schools and students are getting in on the action, especially in the past two years. According to Stanford’s Graduate School of Business—whose Center for Entrepreneurial Studies publishes a Search Fund Primer–51 new search funds existed in 2019, then an all-time high. GSB’s preliminary numbers show at least 70 in 2020 with even more estimated to have launched in 2021. Getting in on the search fund party, Wharton, Duke, Dartmouth and Columbia have recently launched courses on the entrepreneurship-by-acquisition model. During the pandemic, new clubs focused on search and leadership strategies at MIT, Babson College and Northwestern say they have attracted hundreds of students interested in finding out more about this path.
Business schools see search funds as a way to differentiate and offer MBA students another route to entrepreneurship. For investors, returns have been good enough – a Stanford study of nearly 400 search funds through 2019 found three-quarters of companies acquired by searchers yielded a positive return for investors and of those, 69% delivered at least double the return on investment.
For MBA students, the search-fund model is an accelerated way to become a CEO and business owner soon after graduation, without starting a business from scratch. But identifying a suitable business can be challenging: raising sufficient funds is hard and not all owners are open to selling their business. According to the Wall Street Journal, about a third of searches end without an acquisition and MBA searchers can miss out on traditional campus recruiting opportunities.