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Mon May 5, 2014
Seeking A Fortune Through Search Funds
Originally published on Mon May 5, 2014 10:54 am
Alex Livingston graduated from Harvard Business School last year. He was offered a pretty sweet job at a startup, but he turned that down in favor of something a lot more ambitious.
He's 27 years old, and he wants to be a CEO, not in 15 years but now. He and his business school classmate, Eddie Santillan, knew they wanted to run a company together. They just didn't know which company. So they went to investors and asked them to be their partners — to give them some money so they could find a company to buy. If the company did well, the investors would, too.
Their pitch worked. The guys raised a few hundred thousand dollars. It's money they're using to live on while they hunt down a company to buy.
Believe it or not, this is a real corner of the investing world, and it's growing. These investments are called search funds, and there are investors out there looking for young people to invest in. Investors like Rich Kelley, of the firm Search Fund Partners.
Why would anyone invest in a couple of recent graduates who don't even have a company in mind yet?
Kelley says it gives him the option to look at deals he wouldn't know about otherwise.
Here's how it works: These young guys (and they are nearly all guys) are called searchers. They look for solid companies with good earnings potential. Kelley says eight or 10 investors like him each hand over about $30,000. Added up, that covers a salary and travel expenses for up to two years while the person hunts. Kelley says it's less than he'd pay a full-time employee to scout for juicy deals.
Jim Sharpe of Harvard Business School also invests in search funds. He admits this route to entrepreneurship can sound incredible to the uninitiated. He knew one young man who became a searcher, then tried to explain what he was doing to his parents.
"His father told him, 'Son, this is a scam. This can't be true. People are giving you money to go not work for two years? There's got to be a catch here.' "
The catch is that young searcher is going to do all the work. And if the searcher is successful, the investor gets a cut and an opportunity to invest even more.
The risk for the investors is that the person never finds a company and burns through their money.
Alex and Eddie, the Harvard Business School graduates, are now 10 months into their search.
They've learned it can be a stomach-wrenching process. They came really close to a deal once, only to have the seller pull back at the last moment.
Eddie says they remain optimistic. Still, it can be tough for some business owners to see the two of them as credible buyers. Convincing them, he says, is the toughest part of all. Until they can pull that off, their search continues.