Yesterday I attended another fantastic event at the London Business School, “Venture Capital for Private Investors“, organised by our private investors alumni club. Speakers included former Apax Partners Chief Investment Officer Adrian Beecroft, founder of the first European Search Fund (more on this later) and serial entrepreneur Simon Webster and Alex Hoye, a fantastically successful entrepreneur and angel investor.
My main question was how to get started in angel investing, particularly if you lack startup experience and have nothing to offer but a little capital. Alex’s advice was great: you have to get started to build up experience and connections, and since you are likely to screw up at the beginning, just get started with an amount that you can afford to lose! On a more serious note, he added that it’s important to team up with more experienced angels through consortia and learn that way.
Simon Webster started Europe’s first Search Fund and it was the first time I heard about the concept. It started in the US, at Stanford University, and in a study of all the Search Funds started by Stanford Grads, the annual returns over the years was an impressive 37% (20% when the top 3 funds were excluded), and 100% of search fund founders were men! So it is time for a high flying lady to step up and get into the field….
which is why I need to elaborate on what a search fund is, for those of you who don’t know. The concept of a search fund is that an MBA seeks investors who will fund him to spend a year or two finding a suitable acquisition target, with the aim of buying the company. Once a target is found, there is an additional financing round, the company is bought, the search fund founder takes over the company and runs it, with the aim of growing it substantially and then preparing it for exit.
According to Stanford GSB, “the search fund is an investment vehicle in which investors financially support an entrepreneur’s efforts to locate, acquire, manage and grow a privately held company. The model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position”.
You have to have a lot of guts to convince investors you are going to be a CEO of a company (typical size of the targets is $3-10 million in revenue), but apparently some seasoned investors are ready to back ambitious MBAs. The initial investment is small as the salary is generally very low, until a target is found. I had never heard of the concept but was intrigued to hear about this short cut to the CEO role.
If this interests you, check out the excellent info on search funds provided by Stanford GSB. Or if you want lighter reading, this article in growth business magazine on the secret of search funds is very useful.