Korva is a scroll of the internet’s best ideas.
Investors fund a young CEO's search
How it works
The idea is about 40 years old, and Stanford professor Irv Grousbeck was its originator. Ten to 15 investors put up a small pool of capital, typically enough to fund a full-time search for two to three years. The CEO is very early in their career, in most cases with no prior management experience, and the vast majority have been to business school. The target is a profitable, growing business with roughly $1 million to $3 million in cash flow. The deal typically uses a little leverage but isn't highly levered.
A slow-growing model
Search funds grew slowly. The original seven covered the first 12 years, fewer than one a year. Now well over 100 are raised a year, in what has become known as entrepreneurship through acquisition, or ETA.
Boards that coach
The boards are built to coach first-time CEOs. A typical board has three or four people, split evenly between former CEOs or operators and investors, and the searcher is either one person or two, about half and half. Boards stay very actively involved over the first 24 to 36 months while the searcher comes down the learning curve. Grousbeck spent amazing amounts of time on the phone answering questions from new searchers, and a pay-it-forward ethos runs through the community, since everyone benefited from the same help early on.
How do search fund investors get paid?
Search investors typically fund the search itself, and in return they get the right, but not the obligation, to invest in the acquisition the searcher finds. Their equity usually carries a step-up, meaning it converts into more ownership than the same dollars would buy later. The searcher earns equity gradually, with part vesting over time and part tied to the return investors receive. Stanford's Graduate School of Business has published periodic studies of how these terms and returns have changed.
Why buy a company instead of starting one?
Starting a company means building revenue from zero, and many new firms do not last. An existing business already has customers, employees, and cash flow, so a new CEO begins by learning to run something proven. The Bureau of Labor Statistics reports that about half of new establishments in the United States close within five years.
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