Are you fresh out of business school and looking for your next jump up the career ladder?
Consider this: You can become a CEO through raising a search fund.
On May 10, 2016, to help the MBA class at the Johns Hopkins Carey Business School understand the search fund model, the Johns Hopkins Private Equity and Venture Capital Club invited Joshua Klatzkin, Partner at Goodwin Procter, and Andy Lock, Associate at Goodwin Procter, to share more about the topic.
The search fund model is one in which MBA graduates raise a standalone fund to buy and operate a single small business. They are typically owned by founders seeking retirement. After the search fund acquires the business, the MBA graduate becomes the new CEO. It is akin to “entrepreneurship through acquisition.” Post-acquisition, the CEO will have to report to the limited partners of the search fund on progress until there is an exit for the business.
Josh and Andy emphasized that the intense search process requires discipline and perseverance as the search fund entrepreneurs have to spend many months to cold call companies, understand their business models and evaluate their growth prospects. Another often overlooked factor is the need to identify early on whether the founders of the company are really serious in selling their business. The search process can take up to a year or more as the search fund entrepreneurs need to be able to find the right business and be able to convince investors to back them.
In terms of investment returns, a Stanford Graduate School of Business Center for Entrepreneurial Studies analysis of 134 qualifying search funds found the aggregate pre-tax internal rate of return to be 34.9%, and the aggregate pre-tax return on invested capital to be 10.0x. These high returns make the search fund model especially appealing for investors.
The search fund community is a small and growing community that is very supportive of people willing to embark on the journey to becoming a CEO. For instance, Goodwin Procter has a practice that provides legal support to the search fund entrepreneurs at a nominal cost and seeks to build a relationship with the CEOs and others in the search fund community. Josh and Andy also listed out several publicly available resources on the Internet that include legal documentation on fundraising and investment memorandums.
Becoming a CEO after graduation is a fantastic way to apply and validate the business skill-set picked up from business school and the search fund model provides this opportunity to highly motivated and talented individuals. The road to raising a search fund and becoming a CEO can be a challenging but rewarding one. Josh shared that even if one does not succeed, one will be able to learn invaluable skills in fundraising, negotiation, evaluating and running business, mergers and acquisitions, investor relations and management.
The Johns Hopkins University Private Equity and Venture Capital club is among the most active of the School’s clubs. We provide a forum for students, alumni, faculty, staff and industry professionals interested in all aspects and stages of Private Equity and Venture Capital, and help them develop the skills and knowledge necessary to build careers in these sectors. Visit our website and sign up for our mailing list at http://www.jhupevc.com