Seek and you shall find

Seek and you shall find

August 30, 2011 by Mike Southon

While many aspiring entrepreneurs are looking to set up lifestyle businesses, I suspect many readers of this column have ambitions towards something much more substantial, especially those looking to make the leap from corporate life.

For them, writing a business plan is not the major challenge, rather the lengthy and often dispiriting process of raising money. Few people who do the rounds of venture capital and private equity speak fondly about the experience afterwards.

When I meet these more experienced corporate entrepreneurs they are usually fixated on their business idea, something that is not only going to change the world but also make everyone involved very wealthy in the process. I have to explain that good ideas grow on trees; what make the difference is the team involved, specifically their ability to execute, often under swiftly changing market conditions.

I have always thought that a better approach is to form the team first and then look for the right idea later. Many successful entrepreneurs attribute their success to starting with a minor passion or obsession, discovering later that they were the right people at the right time.

I was therefore very interested to learn about search funds, an idea originated by Professor H. Irving Grousbeck at Stanford University in 1984. In this model a small group of investors back particular operating managers to search for a target company to acquire. Then these managers take operating roles in the company, restructure where necessary, and finally grow the organisation to achieve a successful return on the original investment.

Target companies are typically within the £5M to £30M price range, requiring £2M to £10M of equity capital. They are often in fragmented markets but should demonstrate a respectable market share, a history of stable cash flow, and a good, but limited management team already in place.

Simon Webster is a European authority in search funds. He started his career in sales for IBM, before studying for an MBA at London Business School. He later built and sold RSL, a prosthetics business before being introduced to the search fund concept.

Webster now advises five different search fund organisations and has set up the European Search Fund Association (ESFA) to disseminate information on the model to entrepreneurs, business professionals, academics and investors.

He explains that the major benefit of the search fund model is that the risk for the investor is reduced while the learning curve for the entrepreneur is accelerated. The entrepreneur has first to persuade a number of investors to part with around £20K each, but no money is invested until all the units have been sold.

The search for an acquisition then begins.  Investors have the option to participate in the acquisition by which time they will have had several meetings with the entrepreneur and can judge their ability to grow a company at first hand. Finally, some of the investors will sit on the board of the acquired company to mentor and monitor progress.

So my advice for an experienced corporate executive looking for a new challenge is not to agonise over the potential business idea, but instead to build a small virtual team and start looking for opportunities in particular industries that excite them.

There are many companies that are fundamentally sound but where the challenges of taking it to the next level may be too much for the current management. If you can come up with an exciting plan that allows them an honourable and lucrative exit as well as a potential significant upside for a new set of investors, then everyone’s search for personal fulfilment will be over.

The European Search Fund Association can be found at http://www.esfa.eu

Originally published in The Financial Times. Copyright ©Mike Southon 2011. All Rights Reserved. Not to be reproduced without permission in writing. Mike Southon is the co-author of The Beermat Entrepreneur and a business speaker.

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