In the ever-evolving landscape of entrepreneurship, the concept of search funds has gained prominence as a compelling avenue for aspiring business leaders seeking ownership, flexibility, and financial rewards. For those embarking on this journey, the allure of steering a company towards success while reaping substantial financial benefits is undeniable. However, as with any entrepreneurial endeavor, the road to prosperity is not without its twists and turns. Let's dive into the nuances and potential returns that come with becoming a search fund entrepreneur.
The Search Fund Model: A Brief Overview
Before delving into the potential earnings of a search fund entrepreneur, it's crucial to grasp the essence of the search fund model itself. At its core, a search fund is a unique vehicle that allows an individual, often with an MBA or relevant business experience, to raise capital and acquire a business with the intention of managing it. The objective is to uncover, purchase, and subsequently lead a promising enterprise towards growth and success.
The Compensation Conundrum
For many prospective searchers, a pressing concern is how their financial compensation compares to what they could potentially earn in traditional corporate roles. During the search phase, searchers typically take a median salary of approximately $120,000 per year. This might seem like a significant reduction compared to what they could expect to earn post-MBA in a corporate position. However, it's important to recognize that this initial salary enables search fund entrepreneurs to sustain themselves financially during the search for a suitable acquisition target. This security is a crucial element of the search fund model.
Post-Acquisition Prosperity
Once the search fund entrepreneur successfully acquires a business, the compensation trajectory takes a positive turn. Median searcher-CEO compensation, including both base salary and bonuses, increases over time post-acquisition. It starts at approximately $200,000 within the first year and can grow to $270,000 for those who have been at the helm for 4-5 years. While this may still be less than what a top-tier MBA holder might earn at renowned corporations like Bain or Goldman Sachs, it's a respectable figure given the entrepreneurial nature of the endeavor.
The Lucrative Carried Interest (Carry)
The real financial promise for search fund entrepreneurs lies in the carried interest, often referred to as the "carry." This represents the share of the profits generated by the acquired business that the searcher can earn over time. The 2022 Stanford Search Fund Study sheds light on the potential wealth creation through search funds.
Search funds have cumulatively generated around $2.4 billion in value for entrepreneurs. On average, a search fund entrepreneur currently operating a business has accrued $6.38 million in equity, equating to an impressive $2 million per year of operation. For those who have successfully exited their search fund ventures, the numbers remain compelling. An average exited search fund entrepreneur has earned $7.57 million in equity, or $1.45 million per year of operation.
The Financial Upside
To illustrate the financial upside, consider a hypothetical scenario: Assuming an initial compensation package worth $175,000 with a 20% annual increase, a search fund entrepreneur stands to earn substantially more than their corporate counterparts in the long run. This financial attractiveness not only appeals to prospective searchers but also catches the attention of investors.
Investor Expectations
Investors in search funds are keen to see that searchers have the potential to earn substantial equity value, typically around $5 million or more, throughout the investment period. This ensures that the searcher is fully motivated to perform and committed to the success of the acquired business.
The Uncertain Path
It's essential to acknowledge that not every search fund journey follows the same trajectory. The above-mentioned figures represent medians, and individual outcomes can vary significantly. Moreover, the search fund model is not devoid of risks. Approximately 27% of acquisitions result in a negative return, meaning the equity value for the searcher remains at nil. Furthermore, about 34% of searchers fail to acquire a business. These challenges underscore the need for dedication, resilience, and a willingness to navigate a dynamic and occasionally uncertain path to success.
Conclusion
In the world of entrepreneurship, becoming a search fund entrepreneur offers the opportunity for financial rewards and personal fulfillment. The potential earnings, as revealed by the 2022 Stanford Search Fund Study, underscore the attractiveness of this path. While it may involve initial sacrifices in terms of compensation, the carried interest and long-term equity gains present a compelling case for those with the vision, determination, and dedication to take on the role of a search fund entrepreneur. The financial promise and personal fulfillment that come with steering your own ship in the business world make the journey truly worthwhile.
