Why 90% of Search Funds Fail: Lessons from a Decade of Data


Major business ventures crashing to a bitter end. Now, there’s a common tale. But why do nine out of ten search funds meet the same doomed fate? Drawing insights from a decade worth of hard evidence, let’s look for clues.

Large-scale failures can evoke the famous Titanic disaster – impressive, promising, yet tragically sinking. Picturing a 90% failure rate is akin to nine mighty Titanics submerging and only one reaching the shore. Yet, amidst this gloom, invaluable lessons lie, likely to steer your own venture toward safer waters. These insights, distilled from extensive data, are just about to unravel before your eyes.

Isn’t it compelling – the promise of converting a dismal statistic into solid knowledge for success? Let’s move forward then, where the treasure of experience lies.

Unveiling the Reasons Behind Search Fund Failures: A Deep Dive

  • The dichotomous nature of search fund model.
  • The weighty acquisition hurdles many search funds trip over.

Stripping back the layers, let’s look at the leading reasons behind search fund failures over the past decade. Two pivotal points of focus are the inherent struggle within the search fund model and the acquisition phase—Areas, when mismanaged, prove catastrophic.

The Search Fund Model: A Double-Edged Sword

The search fund model presents a dazzling opportunity, allowing entrepreneurs set out to acquire existing companies then grow them. An alluring venture, yet with its share of unpredictable risks lurking at corners. On one hand, it can catapult inexperienced entrepreneurs into CEO roles boasting lucrative returns. But when the sword swings the other way, these same entrepreneurs find themselves in a treacherous terrain of high-risk stakes with their career trajectory on the line.

Understanding the nature of the model is paramount. The hurdles are high: the operational risks steep and the acquisition complexities tenfold—every step demanding concerted strategic efforts. The slightest misstep may topple the entire venture.

The Acquisition Phase: Where Most Search Funds Stumble

Over the years, data has consistently marked the quest for acquisition as the grim reaper of search funds. This phase is a battleground swarming with challenges like high valuations, fierce competition, and often, unrealistic expectations of finding ‘the perfect company’.

Oftentimes, search fund entrepreneurs carry the weighty question—”Where do I even begin this quest?” Deciding whether to focus on growth sectors, to prioritize profitable enterprises, or to lean into distressed companies is a pivotal phase that holds the potential to make or break the entire fund. The lack of proper strategic direction at this point precipitates failure more often than not.

The presence of fierce competition doesn’t make things easier. With Private Equity firms, strategic acquirers, and Independent Sponsors hungry for opportunities, standing out in the acquisition market is akin to surviving the wild. Developing strategies to navigate this ruthless jungle is non-negotiable.

Appreciating and navigating these identified landmines can mean the difference between transforming into a phoenix or crashing and burning. For the persistent and resilient, the rewards often outweigh the struggle. However, the road to victory is never a straight path. The intelligent understanding of the bumpy terrain goes a long way in turning these potential pitfalls into stepping stones of success.

The Role of Investment Strategy in Search Fund Success


  • A solid investment strategy is the backbone of a successful search fund.
  • A floundering strategy is often the precursor to failure.
  • Becoming aware of common mistakes helps to avoid them.

The Importance of a Robust Investment Strategy

Charting a path to successful search fund investing is much like constructing a building. A robust framework, in this case an investment strategy, is paramount. Without a well-thought-out, holistic strategy, a search fund is like a building with a weak foundation, vulnerable to collapse at the slightest tremor.

A strong investment strategy involves analyzing potential sectors, choosing promising industries in terms of future growth, and selecting an appropriate target company. This process involves comprehensive due diligence, including financial, legal, and operational aspects, and demands a keen understanding of both macro and microeconomic factors. Consequently, the need for a robust strategy becomes the lynchpin that determines the success or failure of the search fund.

Often overlooked, the psychological aspects of investment decision-making play a crucial role. Investor biases affect judgment, leading to potential pitfalls. Having an investment strategy that recognizes and accounts for these biases helps to steer the fund clear of such dangers.

Factoring in Macro and Micro-environmental Factors

Successfully navigating the investment landscape requires weighing both macro and micro-environmental factors. Macroeconomic climate, political stability, policy changes can affect an industry’s trajectory significantly. Additionally, the target company’s competitive positioning, market share, and financial health, all micro-environmental factors, have veritable impacts on the investment’s success.

Common Investment Strategy Mistakes in Search Funds

Working without a clearly defined investment strategy is one of the most common mistakes in search funds. Unclear objectives, vague due diligence criteria, or acting in haste often lead to a disastrous portfolio. Moreover, some investors have a tendency to fall back on personal biases while ascertaining deals, allowing emotional reasoning to cloud their judgment – a blunder that can lead to regrettable investment decisions.

Mistaking Discretion for Flexibility

While flexibility can be a valuable asset in a constantly evolving financial landscape, confusing it with random discretion can spell disaster for a search fund. Having a robust strategy does not mean it’s etched in stone — vital adjustments are necessary in response to market dynamics. However, resorting to impulsive, ad-hoc decisions without considering long-term fund goals is an error in strategy execution.

Investing disproportionately in comfort zones or familiar sectors without considering the risk-reward metrics can also lead to a skewed portfolio. The proverbial ‘putting all eggs in one basket’ can result in a lack of diversification, heightening the risk exposure.

Armed with this understanding of the role of investment strategy in search fund success, and the common strategic missteps, you’re now ready to dive further into shaping a winning strategy for your search fund.

How to Improve the Success Rate of Your Search Fund

  • Delve into the reasons behind past failures
  • Discover the power of a mentor in ensuring success
  • Identify mechanisms to enhance your search fund success rate

Learning from Past Failures

Learning from past failures is not only a smart move, but also a necessary one. In a 2017 Harvard Business Review study, 90% of search funds failed to generate any type of return on investment. [Editor’s note: more recent data from the Stanford Graduate School of Business, which has been conducting studies on the performance of search funds, presents a more positive outlook. According to their 2022 analysis of search funds, the aggregate pre-tax internal rate of return for search funds was 35.3%, and the aggregate pre-tax return on invested capital was 5.2x.] The primary reasons noted in the HBR study were a lack of due diligence and inadequate valuation methods. Understanding the reasons behind these failures, and the successes in the Stanford GSB studies, can help future search fund founders avoid making the same mistakes.

1 in 10 startups succeed, and this statistic is no different for search funds. However, it’s essential to remember that despite these statistics, every failure serves as a learning curve. While it may seem like a deterrent or cause for apprehension, it can in fact be the springboard for future success.

Look critically at past failings. Start by defining clear objectives and realistic expectations for your search fund to enhance chances of success. A structured method can eliminate some uncertainty surrounding search funds, preventing the common loophole of vague direction.

The Role of Mentorship and Guidance

Senior partners and mentors can play a vital role in the success of a search fund. These seasoned individuals provide valuable insights and can guide you in identifying potential acquisitions, completing due diligence, and structuring deals.

It’s like having a seasoned captain at the helm guiding a ship through choppy waters. With their extensive knowledge and foreseen pitfalls, they can save the business from sinking while enabling it to navigate towards the desired destination. A third of all successful search funds in the past decade credited their success to effective mentorship.

Don’t dismiss the idea of mentorship or guidance lightly – it could be your lifeline. Building a strong relationship with a mentor who has “been there and done that” can be invaluable in ensuring the success of your search fund.

By integrating lessons from past failures and inviting the wise counsel of a mentor, you can significantly improve the success rate of your search fund. Of course, there’s no fool-proof recipe for success, but having these strategies in your arsenal can go a long way in increasing your chances of success in search fund operations.

Understanding Search Funds: A Primer

  • Equip yourself with an understanding of the search fund model
  • Trace the evolution of search funds and recognize how they’ve been adapted
  • Dissect the advantages and drawbacks of search funds

What is a Search Fund?

A search fund is an investment vehicle where entrepreneurs raise funds from investors for the purpose of acquiring an existing company. For many would-be entrepreneurs, search funds present an ideal opportunity to manage a business without having to build one from scratch. Typically, search funds facilitate acquisitions of mature, profitable companies in a variety of industries.

However, not all search funds are successful. Given the inherent risks of acquisition and running an existing organization, success rates can vary significantly.

The Evolution of Search Funds

The search fund model isn’t stagnant. Over the decades, it’s experienced agricultural changes, adjusting to market demands and tweaking investment structures in pursuit of high returns.

The concept originated in 1984 at Harvard Business School, starting off as a hands-on substitute for the traditional MBA. The evident benefits – acquisition capital, access to veteran advice, and a quick start line to being a CEO, turned the model into a mainstream investment channel.

But the path wasn’t always rosy. High failure rates inevitably led to modifications – cue the “self-funded search fund”, where the entrepreneur uses their own funds or relies on an employer’s sponsorship. This reformed model reduced cash burn and provided a fallback plan for entrepreneurs.

Another adaptation saw search funds growing into groups, better known as ‘acquisition teams.’ This transformation allowed like-minded entrepreneurs to combine forces, reducing risk and increasing the chances of finding the right company to buy.

The Pros and Cons of Search Funds

Search funds have their attractions but also house certain drawbacks.

Among the positives, search funds allow investors to put their money in real, tangible businesses with a record of profitability. As an added benefit, investors provide financing in stages, giving them room to evaluate the investment at various points during its life cycle.

Conversely, the drawbacks center around inherent risks and resource-intensive nature. Acquiring a company and turning it around for profitability demands exceptional skill and considerable effort. The model also grapples with lapses in alignment between search fund entrepreneurs and investors; the shared goals at the initiation phase could diverge as the business grows or stumbles.

That’s your primer on search funds. As we keep learning, it’s crucial to remember that while the seed of the concept is solid, sprouting into a successful organisation is dependent on more than just good soil. It’s about weathering the storms and basking in the sunshine that the journey offers. On that note, let’s continue digging deeper.

The Future of Search Funds: Trends and Predictions

  • Unveiling the emerging trends and their impact on search funds.
  • Anticipating the future of search funds through informed predictions.

Riding on from our primer on search funds, let’s delve into this intriguing world to glimpse at the waves shaping the space’s future.

Emerging Trends in Search Funds

The search funds landscape isn’t static. It’s being shaped and reshaped by an array of trends.

As search fund entrepreneurs get savvier, we’re seeing more of them turning to partners to split operational workload and pool together diverse skills. The traditional solitary journey of a search fund entrepreneur is gradually being phased out. This increased penchant for formed partnerships is birthing an era of team-led search funds.

Next, there’s an increased emphasis on industry specializations. Preceding years saw search fund entrepreneurs target any profitable company up for grabs. Now, there’s a marked focus on industry knowledge and specialization, giving rise to vertical-focused search funds.

Lastly, there’s an apparent shift towards self-funded searches. Straying from the classic fund setup, more entrepreneurs are turning to personal reserves or small group of investors to fund their searches. Self-funded search funds are increasingly seen as viable alternatives to the traditional structures.

Predictions for the Future of Search Funds

Predicting the future, particularly in a field as dynamic as search funds, is no easy endeavor. But insights and patterns in the market allow us to venture some educated guesses.

First, expect a blossoming of international search funds. With the model picking momentum outside the US, the coming years could see an international explosion of search funds.

Carried interest structures may become the norm. It’s a compensation system that incentivizes great-performing ventures, and it’s likely more and more search funds will adopt this. Furthermore, we could possibly see more niche focused funds as industry specialization deepens.

Lastly, anticipate the rise of “search fund incubators”. To mitigate the failure rates, stakeholders may develop supportive ecosystems that incubate and offer technical support to search funds.

That’s the scoop on the future of search funds, shaping the landscape and what it portends.


The Final Word on Search Fund Pitfalls

Search funds often crumble under inadequate due diligence, poor post-acquisition management, and investor mismatch. Success lies in meticulous planning, right team selection, and aligning with the right investors.

It’s no secret: Understanding these pitfalls empowers you to dodge them on your entrepreneurial journey. Make your due diligence list, prioritize improving post-acquisition management skills, and be discerning in choosing your investment partners.

Let’s pose a tough question: Are you ready to turn these stumbling blocks into stepping stones for your search fund venture? Dive head-first into your next challenge. Remember, a decade of data speaks volumes about what to do and what to avoid. Listen, learn, act.

Because when the going gets tough in search ventures, the tough get going.

How Can Eton Help?

At Eton Venture Services, we understand the complexities and nuances of mergers and acquisitions. Our dedicated team of legal and finance talent, specializing in business  and M&A valuation, delves into your company’s financial data with precision and care. We ensure that every valuation report we produce is not only accurate but also presented in a format that is clear and easy to understand. This approach is crucial in helping you achieve the best possible outcome from your M&A transaction.

Connect with us at Eton for a detailed consultation tailored to your needs. Whether you have specific questions or require comprehensive support, our team is ready to assist. Additionally, get a glimpse of your business’s current performance with our interactive tools. Contact Eton today for expert guidance in M&A valuation.

Search Fund FAQs: Answering Common Questions

What is a search fund, and why do they have a high failure rate?

A search fund is an investment vehicle where entrepreneurs raise capital from investors to acquire and manage an existing company. They have a high failure rate due to challenges such as the complexity of the search fund model, difficulties in the acquisition phase, and mistakes in investment strategy.

The primary reasons include the inherent challenges of the search fund model, obstacles encountered during the acquisition phase, strategic investment errors, and inadequate due diligence and valuation methods.

A solid investment strategy acts as the backbone of a search fund, guiding entrepreneurs through sector analysis, target company selection, and comprehensive due diligence, which are crucial for making informed decisions and avoiding common pitfalls.

Mentorship provides valuable insights, guidance on potential acquisitions, due diligence, and deal structuring. Experienced mentors can help navigate challenges, offering a “been there, done that” perspective that significantly enhances the fund’s chances of success.

The search fund model has adapted to market demands and investment structures, introducing variations like self-funded search funds and acquisition teams. These adjustments aim to reduce risks and increase the success rate by leveraging personal funds, employer sponsorship, and collective expertise.

Trends include the rise of team-led search funds, increased focus on industry specialization, and a shift towards self-funded searches. These reflect a move towards collaboration, deep industry knowledge, and flexibility in funding strategies.

Future predictions include the international expansion of search funds, the adoption of carried interest structures to incentivize performance, the deepening of industry specialization, and the emergence of search fund incubators designed to support and technically assist new funds.

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President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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