The start-up is a leap of faith into a sea of unknown unknowns…

“Think of yourself as walking in the desert. Entrepreneurs are optimists by nature. We will walk into a desert with half as much water as we need to cross it, knowing that we will find more water on the way. And it’s not always true. You always think you can do it with less money than you really need. When it comes to Venture Capital, that’s their business model! They know you are an optimist, in fact they cater to it. They have water, and you don’t.”

Shai Agassi – The Physics of Start-ups, Stanford E-Corner.

Consequently, entrepreneurs can find themselves at the mercy of aggressive venture capital funding terms in an attempt to keep their entrepreneurial dream alive.

But what if there was another way? How can the budding entrepreneur improve their chances of success, whilst diminishing reliance on venture capital’s Hail-Mary style funding tactics?

Simple, buy an existing successful business and build on it.

A far less discussed and little-known path for entrepreneurs – entrepreneurship through acquisition.

“There's only one real way to achieve massive growth literally overnight, and that's by buying somebody else's company."

Entrepreneur.com

The central issue in the acquisition of an existing business is similar to that in the startup ecosystem, access to capital. However, funding an existing business with proven cash flow returns can be significantly easier than funding a start-up.

…enter the Search Fund Model

The Search Fund – what is it?

Search funds are an investment vehicle used by entrepreneurs to obtain commitments from investors interested in making micro middle-market investments. The purpose is to acquire a single privately owned business in which the entrepreneur becomes the new CEO, runs and grows the business, delivering strong cash flow returns on the road toward a liquidity event for investors. The search fund is a long term, two stage investment for which stage one provides funding for the search, and stage two equity and debt financing for the acquisition.

Search funds are exploding in popularity across the global stage, and proving itself to be a very lucrative model. Average returns to investors across the US are 8.4x the initial investment (Stanford, 2016).

It combines the liquidity of seasoned investors with the skill and energy of young entrepreneurs and deploys it into proven, solid businesses with the promise of immediate cash flow returns, significantly improving the chances of ongoing success. The model also surrounds the entrepreneur with experienced investors who occupy a Board seat, further de-risking an already successful business.

As can be seen in Figure 1 below, search funds are skyrocketing in popularity around the world.

Figure 1: Search Fund Activity by Year (Stanford, 2016)

Why Australia?

There is a growing community of investors looking for search fund opportunities in Australia. Why? Australia attracts investors by its inherent economic maturity and political stability, strong regulatory frameworks with efficient and transparent processes, robust equity markets, rule of law, and quality resource assets. Australia is:

Ranked 13th globally on the Corruption index (Transparency International, 2016)
Ranked 15th in ease of doing business (The World Bank Group, 2016)
Mid-market has increased 85% in value and 72% in volume since 2011 (Pitcher Partners, 2016)

Figure 2: Global corruption index (Transparency International, 2016)

The Asian Opportunity

More than half the world’s 7 billion population sits directly above Australia on the map, meaning we are uniquely positioned to tap into the Asian markets. With an estimated 1.7 billion people living directly within the GMT+8 time zone (roughly 24% of the world’s population), Perth, Western Australia resides amongst the most populous time zone on the planet (StartupWA, 2016).

Projected Market Growth

Figure 3: StartupWA, 2016

Figure 4: Number of consumers 2009 vs 2030 (Kharas & Gertz, 2010)

"According to research by Kharas & Gertz (2010), the potential increase in the global consumerclass is associated with a significant geographical redistribution, as almost all the new members of the global middle class will reside in Asia."

Lower Buy-Side Competition

Competition for the acquisition of privately held businesses in Australia is far lower than other developed economies. Consequently, businesses tend to sell for lower multiples when compared to global benchmarking data.

Contact Octavian Group today if you're interested in learning more about the Search Fund community and how you can get involved, either as an investor or an entrepreneur.

Australian SME Statistics:

The Private/family owned businesses account for around 70% of all Australian businesses (KPMG, 2009). They average a turnover of $12 million per annum (MGI, 2006), and 23 employees (MGI, 2013).
There is an estimated $4.3 trillion in wealth in the sector, with 81% of owners intending to retire in the next 10 years. That’s a generational wealth transfer of $3.5 trillion (MGI, 2006).
The average age of private businesses in the sector is 34 years, with the average age of the owner being 58 years (MGI, 2013).
64% of family businesses owners would seriously consider selling if approached (MGI, 2013).
44% of business owners are currently planning to sell their business (KPMG, 2009).

References:

Kharas & Gertz, 2010. The new global middle class: A cross-over from West to East. Wolfensohn Center for Development at Brookings, pp.1-14.

KPMG, 2009. KPMG and family business Australia survey of family businesses 2009, Bond University, Australia.

MGI, 2013. The MGI Australian Family and Private Business Survey 2013. RMIT University, Australia.

MGI, 2006. The MGI Australian Family and Private Business Survey 2006. RMIT University, Australia.