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Home / General / Management / How to run your own company without a business idea

How to run your own company without a business idea

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Here’s the biggest dilemma of a recent grad with an entrepreneurial passion: They want to run their own company, but either do not have the right entrepreneurial ideas, or the courage to let go of a steady income to pursue their ideas given the high risk of failure, not to mention their giant college debt.

Here’s a niche yet emerging solution that noone’s quite heard of yet: Search Funds

Here’s how it works: ‘Searcher(s)’, usually 1-2 recent grads from a top MBA program look for decent mid-size companies with $5-20 mn in revenues and good earning potentials to acquire and run himself. He raises roughly $300-$500k from investors to cover a salary, travel expenses, and administration costs for up to two years while he searches for ‘the’ company. So in a sense, it’s a one-man shop private equity firm. If the searcher finds the company, he goes back to his investors to see if they’ll agree to buy the business. Some say yes, some may decline. Then the searcher seeks more investors / investment for the acquisition. When ready to go, the searcher and the investors buy the business. The investors own stake in the company and might join the board of directors while the searcher becomes the CEO and runs the company.

Here’s why it’s NOT too good to be true: Investor Rich Kelley, of the firm Search Fund Partners says it not only gives him the option to look at deals he wouldn’t know about otherwise. And if the search is successful, the investor gets a cut and the opportunity to invest even more. The catch here is that the searchers, who are top MBAs with usually finance or operations background, have the credentials and the ambition to successfully find and run businesses. In that sense, investing in a bright, eager recent graduate who is more than willing to do all the work for you at a much more affordable rate than a financial advisor or a private equity firm might make sense to some investors. Hence, the numbers, albeit small, look promising. According to a 2011 study by Stanford Graduate School of Business on search funds, there have been 150 search funds formed since 1983. About 12 funds a year have been started since 2007 and the trend has been up in recent years with 10 funds successfully purchased companies in 2010. As of December 2011, 26 funds were either looking for a company or fundraising for an acquisition. This is not to say that every search fund has managed to successfully hunt a company to purchase. About 21 percent of search funds end up closing without an acquisition. Yet, compared to the infamous failure rate of startups, the odds seem pretty good!

Here’s why it matters to you: While it is true that search funds remain an elite, top MBAs only club, it is the thinking behind it that should encourage every young professional with an entrepreneurial passion. You need your ambition, skills, and connections, not necessarily a business idea to be your own boss!

 

Image source: Flickr

Can Akbulut

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