In the evolving world of business education and entrepreneurship, there’s a fascinating trend emerging: MBA graduates are increasingly bypassing the traditional startup route and heading straight to the CEO chair. While in 2016, roughly 20-30% of MBA grads were inspired to launch their own startups, the landscape has shifted dramatically in recent years. Now, many are opting for a strategy that skips the risk-laden phase of building a company from scratch, opting instead for what’s known as a “search fund.”
The Rise of the Search Fund
The concept of a search fund isn’t entirely new, but its popularity has surged in recent years, particularly among MBA graduates from top business schools. The idea is straightforward: rather than starting a business, these ambitious individuals raise capital from investors to find and acquire an existing company. Once they’ve secured a business, they step in as the CEO, using the company’s cash flow to scale and grow the operation. This model offers a more direct route to leadership and can potentially yield substantial financial returns.
In 2023 alone, a record 94 search funds were launched, marking a significant increase in this approach. The appeal lies in the stability and potential profitability it offers compared to the traditional startup model, which is often fraught with risks and uncertainty.
The Traditional Path: Startup Challenges
Traditionally, the path for many MBA graduates with entrepreneurial ambitions involved launching a startup. This route typically requires securing venture capital, developing a product or service from the ground up, and navigating the often treacherous waters of early-stage business growth. The statistics on startup success are notoriously grim, with many failing to ever turn a profit, let alone scale to a significant size.
The startup route is not only risky but also incredibly demanding. Founders often face relentless pressure to meet milestones, pivot when necessary, and manage investor expectations—all while building a team, establishing a market presence, and refining their business model. The success stories that do emerge from this path are often the exception rather than the rule.
The Search Fund Model: A New Playbook
In contrast, the search fund model offers a different playbook. By acquiring an existing business, MBA graduates can sidestep many of the pitfalls associated with startups. These businesses often have established revenue streams, a customer base, and operational systems already in place. This allows the new CEO to focus on scaling the business, improving efficiency, and driving growth, rather than building from scratch.
Search funds typically work like this:
- Raising Capital: The aspiring CEO pitches the concept of acquiring a business to potential investors, raising the necessary funds to embark on the search for a suitable acquisition target.
- Searching for a Business: Once funded, the search begins. This involves identifying businesses that are not only for sale but also a good fit in terms of size, industry, and potential for growth.
- Acquisition: After a thorough vetting process, the search fund acquires the business. The new CEO takes the reins, implementing strategies to enhance the company’s value.
- Scaling: With a solid foundation already in place, the focus shifts to scaling the business. This might involve expanding into new markets, improving operational efficiencies, or investing in technology.
The Appeal: Why More MBAs Are Opting for Search Funds
The appeal of the search fund model lies in its blend of entrepreneurship and stability. Unlike the startup path, where the risk of failure is high, search funds offer a more measured approach. The businesses targeted by search funds are often mature and profitable, reducing the likelihood of financial loss.
Furthermore, the potential returns from a successful search fund acquisition can be substantial. According to a 2024 Stanford study, 63% of search funds successfully acquire a business. For those that do, the returns can vary, but many see a return of 1-2x their investment, with some achieving even higher returns. In comparison, the S&P 500’s average yearly return is around 10%, while search funds typically hover around 33-35%. This makes the search fund model an attractive option for investors as well as the searchers themselves.
