A traditional search fund is capital one or two people raise from investors to find, buy, and run a private company, usually for six to ten years. A self-funded search is separate: the searcher pays the search costs and typically keeps a larger share of a smaller company.
A traditional search fund is an investment vehicle one or two entrepreneurs raise from a small group of investors. Some of those investors also mentor. The searchers then look for a private company, buy it, and lead it for a medium to long term, often six to ten years. H. Irving Grousbeck pioneered the model in 1984. Stanford's 2022 study describes four stages: raise initial capital (about 2 to 6 months), search and acquire (about 12 to 24 months), operate (4 to 7 or more years), and exit.
Capital comes in two rounds. Search capital covers a modest salary and the costs of looking. Acquisition capital buys the company. Search capital usually converts into the acquisition securities at a step-up, often 150 percent. Fundraising starts with a private placement memorandum. The May 2021 Stanford primer is the practical guide to fit, fundraising, screens, the letter of intent, diligence, and the first months as CEO. It describes a search that averages 23 months, equity of about 20 to 25 percent for a solo principal, and about one in three funds that never buy a company.
The 2022 Stanford study counts 526 traditional first-time funds in the United States and Canada through December 31, 2021. Aggregate pre-tax returns were a 35.3 percent IRR and a 5.2x return on investment. In 2020 and 2021 the median purchase price was $16.5 million.
A self-funded search is a different model. The searcher pays the search costs, often buys a smaller company with more debt, and commonly keeps a larger equity stake. The 2022 study leaves self-funded searches out of its return totals. The 2023 Self-Funded Search Study, 279 responses, found about 83 percent of those closed deals priced under 5.0x EBITDA.