Jeff Oldenburg, MBA 18, is a “searcher.” As co-founder of The Tusker Fund, he’s in the process of finding a business to buy with the help of financial backers. The model is called a search fund, and it’s gaining ground among entrepreneurs eager to own and run businesses. Jeff’s network at Berkeley Haas has helped him explore search funds and soft skill classes prepared him to make that move. Now the school’s Full-Time MBA program is developing coursework to prepare future searchers.
Give us the thumbnail description of a search fund.
A search fund is a vehicle formed to enable an entrepreneur to acquire and operate a single business.
So, it’s like a private equity fund?
Sort of. Think of private equity funds as investors - a private equity fund would manage a portfolio of companies, however, they’re not actually running them – not getting their hands dirty.
Search funds, on the other hand, are run by operators who have been backed by investors with the objective of funding a single business to run full time. The crux of the model is that entrepreneurs, the “searchers,” are operators looking for a home.
In our case, a year and a half ago my partner and I raised $650,000 from 11 investors. That money covers our expenses: an office, salaries, travel, software tools, and such. The goal is to conduct a thoughtful search lasting 18 to 24 months to find a business that we get excited about running and our investors can be excited about funding. Once we find that business, our investors provide more funds to buy the business, which we then operate.
And the ownership?
A typical solo search fund entrepreneur can earn a 25 percent ownership in a company over several years. Typically you receive one-third of that 25 percent upon completing the acquisition, an additional third over four years, and the final third depending on the internal rate of return you deliver to your investors.
Why wouldn’t entrepreneurs simply start their own companies?
Because the odds of success are much higher this way. We’re looking for businesses that are already profitable, have long-term customers, and have a proven product market fit in a growing industry. This gives you a lot of tailwinds. Once you find a business – and about 60-70 percent of searchers do find a business -- your odds of success are just higher because you are buying a successful business.
Did you decide to get an MBA in order to explore the concept of search funds?
No, not really. I’d been a bond trader for 10 years and didn’t really know what I wanted to do next. I had never really wanted to get an MBA but changed my mind when I realized it was a great platform for experimentation. Berkeley gave me access to different industries, to VCs and start-ups, and to other ideas. I did an internship with a search fund, attended conferences on the subject, and met folks in the industry who ended up investing with us through the alumni network.
The cool thing about the search fund space is that fundamentally it’s a model built on mentorship. While a lot of the finance world can be defensive toward new entrants, the search fund world is the opposite. I’ve heard it described as the “hippie commune of investing.” Everyone’s just so supportive, helpful, and sharing. One person introduces you to three others and so on. It became really easy to meet people who wanted to be helpful.
What about the coursework at Berkeley? Was that helpful?
Yes. After my first year, I had crystalized that raising a search fund was what I wanted to do. I talked to investors and asked them what would be most helpful. They said something surprising: double down on soft-skill classes. They said you might think you’re mostly going to do strategic planning and analysis, but really you end up dealing with personal conflicts and complicated interpersonal dynamics. So I took Mike Katz’s class on People Development; Arina Isaacson’s Storytelling for Leadership; Cameron Anderson’s Power and Politics in Organizations. That plus, of course, classes on private equity, LBOs, managerial accounting, etc.
What kind of companies is a searcher looking for?
We start with the industry first. We look for industries that are fragmented and growing quickly, so it has really nice tailwinds and no one player dominates.
As for the specific company, we want one with a strong competitive position and a high percentage of recurring revenue. Nothing capital-intensive, so we’re not looking at sectors like manufacturing. We want well-managed businesses that can grow quickly and profitably. One way to think about these characteristics is we’re looking for businesses that run themselves.
Well, wouldn’t everyone want a business like this?
Yes, everyone would. That’s why the search is so challenging. There’s lots of competition, particularly in this economy. For us, often our target is an owner who is at least 60 years old, looking to retire and doesn’t have a succession plan. They may have their entire net worth invested in their business and aren’t paying themselves much. Or, maybe they like building companies and just want to cash out. Usually it’s serendipitous circumstances. Hopefully, the company is small enough to be under the radar of PE firms. Our message to the founder is the search fund mantra: We’re not investors. We’re operators looking for our next home. We don’t want to come in and gut your company. We’re here to preserve – and build on – the legacy you’ve built.
What industries are you looking at?
Tusker is focused on education. It’s fast growing. And, related to cyclicality, we don’t think education will be hit hard in a downturn. We look cradle-to-grave: early childhood education or daycare centers all the way to corporate learning. It could be anything from K12 services, educational content, or tools for university campuses to operate more efficiently.
Why is your fund named Tusker?
My partner, Rohit Agarwal, is Hindu and wanted a name that would reference Lord Ganesha, the elephant, the god of beginnings, and the remover of obstacles. Since you have to register your company name you have to find a name that hasn’t been used. It’s hard to find elephant names that haven’t been taken.