Search fund

A search fund is an entrepreneurial vehicle in which one or two individuals — "searchers," often recent MBA graduates — raise a small amount of capital from investors to find, acquire, and then run a single existing company. Rather than starting a company from scratch or joining a big firm, the searcher buys their way into the CEO seat of an established, profitable small business. The model was pioneered at Stanford in the 1980s and has grown into a recognized asset class taught at leading business schools.

How the two-stage model works

A search fund runs in two distinct capital-raising phases:

1. Search capital. The searcher raises a modest amount — commonly ~$400,000–$600,000 — from a group of investors (often 10–20) to fund a roughly two-year search: a salary plus the costs of sourcing, evaluating and diligencing targets.
2. Acquisition capital. Once the searcher finds a company — typically a stable, profitable business of about $5–30M in enterprise value — the same investors have the right (not the obligation) to fund the acquisition, alongside debt and often seller financing.

The searcher then becomes CEO and operator, aiming to grow the business over five-plus years before an eventual exit.

How the searcher and investors get paid

The searcher earns equity through a structure designed to reward both finding and growing a good company — commonly in three tranches: a portion for completing the search/acquisition, a portion that vests over time as CEO, and a portion tied to performance (hitting return hurdles for investors). Investors who funded the search typically get a step-up (e.g., their search capital converts at a premium) plus the right to invest pro-rata in the acquisition. This aligns everyone around buying a sound business at a sensible price and then operating it well.

Traditional vs self-funded

• Traditional search fund. Investors fund the search; the model above. The searcher gets a salary and support but shares more of the equity.
• Self-funded search. The searcher funds their own search (no salary), often using SBA financing for the acquisition. They keep a larger equity stake but bear more personal risk and usually target smaller deals.

Why the model exists

Search funds sit at the intersection of two forces: talented operators who want to lead a company they own, and a demographic wave of retiring baby-boomer owners of small businesses with no succession plan (see founder-led transitions and family-business M&A). Studies of the asset class (by Stanford GSB and IESE) have historically reported attractive aggregate returns, though results are highly skewed — a minority of acquisitions drive most of the gains, and many searches never result in an acquisition at all. The search fund is the best-known path within the broader category of entrepreneurship through acquisition (ETA).