Issue #24: Fund Idea

Last year I listened to Patrick O’Shaughnessy’s interview with Matt Clifford who runs Entrepreneur First, an investment firm that helps people leave their current jobs, find a co-founder, and start a company. I find the model fascinating and have wondered how this strategy could be applied to individuals acquiring companies rather than starting them? What would a potential fund look like?

Right away this sounds like a search investment fund that invests in funded and self-funded searchers. But I wouldn’t call every individual trying to buy a company a “search fund.” I believe there are individual investors looking for companies that don’t fall into the search fund classification. In fact, most probably don’t. I’m still thinking about where the key difference exists, but allow me to share a few examples of folks I think fall outside the search fund model.

  • I’ve gotten to know someone in the defense industry who works directly with their company’s supply chains and knows those companies well. This person has thought about acquiring a company in the industry and thinks they can acquire one of their company’s suppliers through existing relationships.

  • Another individual has an interesting idea to acquire cold storage companies in Texas for food storage, meal kits, cloud kitchens, and grocery delivery. Additionally, they know of manufacturing companies left from the oil industry with excess capacity that could be repurposed.

  • I also recently talked to two others who have acquired one or two companies each using their own capital. Eventually they may want to do a deal greater than their own capacity and will need capital partners.

These are all opportunities to invest in individuals acquiring their own companies that fall outside the search fund category. The fund wouldn’t be opposed to investing in search funds, it would just have a more open and opportunistic mandate. The spirit of the fund would be similar though. Find driven, creative, and curious entrepreneurs, support and believe in them to find great opportunities, and help them make an acquisition.

Individuals have been buying companies themselves forever, but these entrepreneurs usually raise money within their own investor networks. And since we tend to have the strongest relationships within our local region, they aren’t able to gain geographic diversity in their investments and relationships. A fund that generates its own proprietary deal flow through relationships, a content engine, scout network, and social platforms removes any geographic concentration and opens participants to professionals and investments outside their typical networks.

My thinking is still a work in progress. Here are some questions I’m still thinking about with this model and could use help thinking through.

  • What is the pitch to LPs? Not fitting neatly in a search investment fund or PE fund could make it more challenging to communicate the fund’s directive and scope. There’s a lot of creativity within the search fund world, but even more outside it where models aren’t defined and entrepreneurs have complete flexibility. But how do you build trust with an investor base that you can be a good steward of their capital if every deal is going to look very different from the next?

  • Building on the first question, how do you define your scope? To start, focus on existing businesses, not real estate or start-ups. But what about the individuals? Do you only want to back experienced operators or managers? Is the fund open to the same age/experience cohort as search funds, ie MBA grads? Is there value in developing an expertise in a particular industry and compounding learning to the benefit of future entrepreneurs in the fund?

  • The success of the fund wouldn’t depend on the fund manager’s operating or deal ability (assuming you have enough expertise and support to avoid bad deals), but on the ability to network and build deal flow. What are other drivers of success or failure not yet mentioned?

  • The fund could be run remotely from anywhere, giving the fund flexibility on operations and cost. How would geography need to be considered in the context of the fund’s investments? Does it make sense to be in Seattle if your first four investments end up on the east coast or does it not matter much?

  • What is being overlooked here that is crucial to understand? Inverting, what does failure look like and how can you avoid the decisions that lead to failure?

This is the beginning of my thought process and more similar to notes than a true article. I’d love to hear your thoughts on the idea if you’re willing to share. Is this the dumbest idea you’ve ever heard? Is there an insight I missed? Why will this work or fail spectacularly?

Just send me an email or DM me on Twitter. I’m easy to reach.

Capital Notes

  • Tim Ludwig wrote threads on Twitter about the best company culture he’s been a part of and taking on acquisition term debt. With how much I post about and learn from Tim, I should just turn the whole newsletter over to him!

  • Chenmark wrote about how they are trying to stay focused.

  • The Berkshire Hathaway annual meeting occurred last weekend. Tren Griffin wrote a great summary thread on Twitter about it.

  • Scott Miller, my favorite fund manager, wrote his Q1 letter.

  • Dan McMurtrie wrote a devil’s advocate case for a bull run in markets.

  • The Villager and The F-18 was a fascinating read about the degree of advancement in technology and UFOs.

  • I loved playing Sim City as a kid, still play it from time to time. This interview about the philosophy of designing it was fantastic.

If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff.

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