Search Funds have emerged as a standardized model for transitioning small businesses from aging founders to entrepreneurs seeking their first experience as CEO’s. The concept was first pioneered over 30 years ago in the Bay Area (Stanford) but has caught on at many top-tier MBA programs. Investors in Search Funds gain access to an attractive category of private equity but get the added bonus of engaging entrepreneurs at a very formative stage of their careers.

Search Funds are a model by which an aspiring CEO raises search capital (typically 300-500k) from a consortium of investors, which will fund the search phase for up to about 30 months. Upon finding an attractive target, the “searcher” is obligated to return to the original group, the members of which get a pro rata right (not an obligation) to invest in the follow-on opportunity, which will typically be a target in the lower middle market. If the acquisition is consummated, the “searcher” becomes the CEO of the company and is compensated largely on the basis of equity (i.e. value accretion to his investors).

Stanford publishes a report biennially on the category, the last one being current through end of 2018 (click here for the most recent white paper).