What happens if you don’t find a company during search?

March 20, 2022

by a searcher from IESE Business School in Toronto, ON, Canada

I’m new to Search Funds and I’m considering setting one up. If you don’t find the right target, what happens to the money spent that was invested by your backers? Is it expected to be paid back?

thanks!

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Reply by a searcher
from Northwestern University in Atlanta, GA, USA

I'm new at this as well Shaun but from what I've gathered investing in a traditional search fund has more risk/reward than supporting a self-funded searcher who has identified a business. Under the traditional model you are really investing in the entrepreneur and accept the very real risk of zero return (something like a third of searchers don't find a business, in which case the investors lose their money). In exchange you get a bigger equity stake. The other path is to invest in an entrepreneur who has funded his or her own search and has already identified a target company. The plus with this model is that you can evaluate the company you are investing in and there is no risk of losing your money since your investment will be contingent on the deal going through. The downside from an investor standpoint is less equity.
I don't fully understand the difference in equity but in a traditional search the equity split is typically 25%/75% for the entrepreneur/investor and that split reverses for self-funded searches. So it is meaningful.

Reply by a searcher
from London Business School in London, UK

Hi Shaun - I see you went to IESE. They just published a really nice new book on Searchfunds - the author is Jan Simon (https://www.iese.edu/faculty-research/faculty/jan-simon/). I would certainly recommend it, and I imagine as an alumni he might be willing to give a bit of help?

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