My guest today is Greg Geronemus. Greg and his partner David Rosner founded a search fund named Footbridge Partners after their time at Harvard Business School and acquired a tour operating company called smarTours. Four years later they sold smarTours to a private equity firm and raised a fund to invest in other searchers. Greg and David take a more concentrated approach and aim to invest in 8-10 searchers, rather than dozens, to spend more time and energy with each individual searcher.
Greg and I discuss their search fund days, investing in search funds, and how the model has evolved and may continue to change. I hope you enjoy the episode as much as I did.
Do you want to start by walking through your background and how you got into the idea of doing a search fund, and then your actual search fund, and what you’ve been up to now?
My experience with search funds started in 2011 in the middle of my time at Harvard Business School. Prior to Harvard Business School I had worked in finance in a private equity arm or one of the private equity arms of Goldman Sachs really learned a lot, had a great experience. But always had a desire to do something more entrepreneurial. That was the impetus for my going to business school and while I was at business school I played around with a few different startup ideas of the more traditional variety, none of them excited me all that much. And then I stumbled upon the search fund concept towards the end of my first year of school and the beginning of my second year at around the same time that my section mate friend, eventual and current business partner David Rosner also learned of the search fund concept. We started exploring it together as just an idea and ultimately decided that not only did we love the idea of doing a search, but we also love the idea of partnering together.
And mind you… I know you’ve covered the search fund model in other episodes of the podcast, but this is approximately nine years ago and the search fund model was very different then. Certainly, significantly less popular. If you pulled my MBA class just nine years ago, I imagined only a small fraction would have even known what a search fund was. Now if you pull a current class at any number of business schools across the country in the US at least the overwhelming majority would be familiar and probably quite familiar with the search fund concept. So during our second year of business school we started exploring raising search capital, which is basically the seed capital that you use to fund up to two years of searching for a business to buy, then operate and then ultimately exit.
We decided to start with the raising capital from our network. So we went to people we had worked with before, old bosses, people just part of our broader network from HBS, from college, and from our time growing up in New York City for me and Philadelphia for David. We were able to put together a really strong investor group to support us in our search, that we launched pretty much the day we graduated in late May, 2012. I would say we were either lucky or well-prepared or some combination of the two, but we saw a substantial amount of deal flow from the outset. Our sourcing strategies range from heavy direct proprietary outreach to broker outreach. By broker, I mean business brokers or any form of business intermediary also called M&A advisors, investment bankers. There are a couple of other names as well.
And then I think the third category was just old fashioned networking. Which I think is often overlooked or seen as inefficient or suboptimal for a lot of people that are looking to buy us a small business, whether through a search fund model or not. But I still think there’s something to be said for just sitting down with people and developing relationships with accountants and lawyers and commercial bankers and insurance brokers, wealth managers. Just getting to know them and developing a rapport and ultimately being top of mind for any clients of theirs that they have that might be thinking about selling a business. So we had a robust pipeline from the very beginning. We were fairly open from an industry perspective. We were pursuing certain themes but also we’re committed to being relatively opportunistic.
It was through a networking event in Midtown Manhattan where we met a commercial banker from Capital One at the time. This commercial banker was, I think he must’ve been in his 70s and he told us that his high school buddy now high school, if he’s in the 70s high school was you know, 50 some odd years before. Was representing or was the accountant for I should say a company called smarTours that was interested in potentially selling. smarTours is a tour operator company that provides a value oriented vacation packages to exotic destinations all over the world. Think bus tours, group tours were you’ve got 25, 30 unrelated people traveling together, seeing the sites and hopping on and hopping off a bus as you’re guided around by an experience guide. Really a model of travel that’s pretty old fashioned, but also still resonates particularly with the baby boomer and active senior demographic.
So at first glance travel was not something that we were necessarily interested in. In fact, it was explicitly something that we did not want to pursue. But the commercial banker made a case for us to at least take a meeting with the accountant and it was easy enough to do so. A couple of days after that event in Midtown Manhattan, we sat down with the accountant for smarTours. He gave us his pitch on the business, mind you, he was not formally engaged to sell the business in any way. He was just a favor for his long time client, the founder and CEO of smarTours. He explained that he had developed an idea for what the deal should look like. So he basically concocted this purchase price that he thought was reasonable and this valuation structure that he thought was, or his transaction structure I should say that he thought was optimal and he presented it to us without the consent of his client.
We decided to take it under consideration and that the proposed transaction structure was interesting enough for us to take the next step, which was a meeting with the seller. That took place in a coffee shop in Midtown Manhattan, a few blocks from where is smarTours Headquarters was then located. That was the beginning of a several month courtship, eventual exclusivity, diligence, and ultimately closing process. Where we did become pretty enamored with the company, saw a lot of strengths that we didn’t sort of necessarily think of from the outside looking in. It turned out that the business, despite being B2C travel had been incredibly resilient during post 9/11 as well as during the 2009 downturn. It had just this sort of fierce cult following of customers that just kept coming back almost automatically on repeat it seemed. It operated in this large growing highly fragmented industry with a lot of opportunities to take share.
It also had some incredible cashflow characteristics that are really hard to replicate or find elsewhere, namely negative working capital and no capex. So we were able to get the deal done. We closed the deal in October, 2013 which was a year and change after we had launched our search. Just following graduation from business school. We spent the first year or so really focused on the transition. The business was really sort of operated. It was a great team in place, but it was a small team and most decisions really funneled through the founder and seller. So we needed to make sure that we could soak up as much information from him as possible before he transitioned on to spend most of his time quite literally on the beach. So we did that and did that successfully. We then focused on what does the business need to really scale and accelerate?
There was clear to us that that was systems and people in order to really take it to the next level, we needed to improve both. So we took a business that was paper and Microsoft Excel based and turned it into a business powered by a real code based software system that could just give us much more insight into the company and our customers and allow us to do everything more efficiently and more effectively. And then we started expanding the team and bringing on some really good new people that could help us grow. Following that, we really put our foot on the gas and started to see some significant acceleration and then ultimately received an unsolicited offer from a private equity buyer. This was in early 2017 we thought it was an attractive offer, but we were committed to not just negotiating with one party.
So we took the offer, showed it to a few investment bankers that we knew who had covered the space and decided to work with one of them. A group named five as partners to run a sale process that really sort of kicked off in May, June, 2017. We ultimately sold to a private equity firm by the name of Summit Park in October, 2017. So more or less exactly four years after we acquired the business. Part of the sale was an agreement that we would stay for two years and help transition the business to our replacements and help them just put them in the best possible position to be successful. We ended up leaving the business formally in July, 2019. But during our transition out of the company, we started investing personally in search deals and in other searchers we had long mentored and coached and just loved helping searchers in any way we could. But we didn’t have the capital to really invest and support them in that capacity.
Both David and I loved the opportunity to invest behind such incredible entrepreneurs and in opportunities that were so interesting. And still it was clear to us that there was tremendous inefficiency I should say in the lower, lower middle market where searchers operate. As we invested more and more in different searches in a personal capacity, I think we noticed that there was less of an intimate relationship between, by and large, and this is a generalization, there are exceptions to every rule. But by and large, less of an intimate relationship between searchers and their investors. Just given the growth of the category and how big most investors portfolios have gotten. So many investors and funds, family offices, individuals have 30, 40, 50 plus portfolio companies, some with many more than that. And 30, 40, 50 plus active searchers and nationally your ability to be engaged with dozens and dozens and dozens of entrepreneurs simultaneously is limited.
So David and I became convinced that there was an opportunity for us to develop a more focused search fund investing model where we could work with a smaller number of searchers each year, three or four searchers or search teams. And ended up with a portfolio of eight, nine or 10 portfolio companies. Just as a general rule, have much more bandwidth to be much more engaged than would be possible if you had a portfolio many multiples of that size. When we left smarTours, we approached prior investors as well as other people that we knew who might be interested in investing in both the search fund world or simply the lower, lower middle market.
We were really encouraged by the initial response. There was a tremendous amount of interest in both the search fund asset class. And even more broadly than that the idea of just going further and further down market in the private equity landscape where a lot of people see just simply better risk adjusted opportunities to invest capital because it’s just so much less efficient than the traditional private equity landscape. So we started our fundraising process formally in September, raised enough capital to last us several years worth of investing and we started backing searchers. We acquired our first company with the searcher a few months ago and we’re really off to the races.
Since you did your search, how did you think about doing the traditional model versus the self-funded model? And then since that search in 2011 up till today, how has a search fund model evolved and is there further evolution that you would like to see the search fund model take?
I think I had heard of, back in 2011, I had heard of just one person who had done the self-funded model and it was this guy, I think his name was Pat Dickinson. I’m pretty sure it was. He was this cowboy that I think he took his McKinsey signing bonus and rolled it into… And just used it to fund the first couple of months of his search. Not sure what happened there. Although, with respect to McKinsey, although I know that he had a wildly successful outcome. Needless to say, I didn’t think of myself quite in the same sort of cowboy category and didn’t even think of going sell-funded. It wasn’t really a path that that was widely considered. So perhaps would have come to a different decision if I had graduated from business school within the last couple of years.
But there really were just fewer options. There was less awareness about search. There were fewer variations of search back in 2011. I think one of the biggest, you asked me about changes, one of the biggest changes is just the greater number of opportunities to pursue entrepreneurship through acquisition broadly. So it’s not just self-funded versus traditionally funded. There are variations on traditionally funded. There are accelerators, there are hybrid models like the one that Footbridge has that somewhere between traditional and accelerator. They’re family offices that will be the sole source of capital. I’m sure I’m missing a few, but the broader point is that there are more flavors of entrepreneurship through acquisition, which is great because it allows more people to go down the path. Another massive change in the last nine years is greater access to information, greater awareness of access to information broadly. I guess that’s a global trend.
But also certainly with respect to search funds and greater awareness by virtue of more and more business school programs offering search fund classes. I think there used to be, until 2012 there was one at Stanford and now there are probably close to 10 across the country and a few internationally as well, which is wonderful. I’d say one of the biggest challenges today versus almost 10 years ago is just… I mentioned this earlier with investors portfolio is getting larger and larger. There is certainly less intimacy in the relationship between searchers and investors. I think less of a partnership feel by and large of course with exceptions.
So I do think that’s why there are alternative models like the Footbridge model accelerators that have emerged in response to that. Are there other types of models that it would be nice to see over time? Yes. I don’t know what those future models entail, but I’m confident that there will be continued innovation in the search space and I think that’s wonderful. That will attract more people to come into the category because I’m sure others will find some unmet need or some void in the search fund ecosystem where they can create an opportunity to bring more people into the fold.
In terms of the new models, is there something that you wish perhaps had been different about your search fund back in 2011 that is perhaps more possible to change today than it was then?
There are a lot of things that are more possible today. One facet of our search that I didn’t mention was, we were geographically constrained. We had to, for family reasons, had to buy something in the New York, New Jersey, Connecticut are and that was a bit of an uphill battle in terms of raising search capital at the time. There’s a conventional wisdom and search that exists today as well, that better to do a nationwide search than to focus on a particular geography. Although there has been some movement in that view and there’s certainly more openness today than there was in 2011, 2012 for geographic searches. I think that’s a positive thing because they’re a conversation for another podcast. But there are a lot of advantages to being somewhat regionally focused in your sourcing efforts.
I think there’s more openness today in terms of… Relative to 2011, 2012, 2013 in terms of the industries that searchers can target, that investors will back. The business that we bought, smarTours is a good example of that. It was very outside of the box from a search perspective. A B2C travel company and that presented a challenge in terms of raising investor capital. We were able to get it done but it was certainly a roadblock. I think today there’s just more openness in terms of businesses that are outside of the very traditional B2B services, recurring revenue type companies. Not to mention that there’s…
I think there’s much more of an interest in backing searchers to acquire SaaS businesses. Software businesses and pay up for those types of assets. Because they typically require a pretty healthy often a multiple of revenue, not even of cashflow. There’s a split within the community as to whether or not that’s a good idea. But there are a lot of people that are interested in backing those types of deals. So they’re just a lot more options today. I think some of the resistance that we face both with respect to the geographic focus and then ultimately a B2C business, it would be much more limited in this environment.
Are there certain industries or business models that you at Footbridge encourage your searchers to pursue?
We’d like for searchers to find an industry and a business that is really well suited to them. It doesn’t mean we don’t have our own biases and even though we bought something in B2C, we love B2B recurring revenue services businesses. We love health care services, but we’re open to less traditional industries. We’re open to businesses that have a consumer element and we try to impress upon the searchers that we work with to keep an open mind and to be opportunistic. We also believe that having some industry themes that you go after is really helpful. But at the same time, don’t close your eyes to an opportunity. That might be interesting even if it falls outside of your specific area of focus.
Are you seeing more searchers try direct outreach versus brokers? Or how does that mix usually come about and then what sorts of success rates are you seeing in both?
The split that everybody at least says they’re going to pursue is 80% proprietary, 20% broker. That seems to make its way into every PPM that I see. Not sure how that was arrived at, but I do think that that does seem to play out in practice as well, not just as part of the initial marketing materials. But I think that’s a reasonable description of how people allocate their time. I will say that we see success through both channels. There are some people that feel they have to find a purely proprietary deal and there’s something wrong if they’re not able to do that or if they have to buy something through a broker. But what we say all the time at Footbridge is that there can be phenomenal opportunities through brokers. There are many brokers out there that are not necessarily in the business of running really robust competitive auction processes.
There’re some brokers that are really just in the volume game and they’ll take a business, they’ll slap a listing, purchase price on it, and whoever comes in and gets it, gets it. There are definitely are people in a search fund world who under-appreciate some of the opportunity that you can find through the broker channel. Particularly, if a seller is engaged a broker, that means that they’re actually interested in selling. Whereas when you reach out to on a proprietary basis, it’s really a shot in the dark and maybe one in a couple of hundred of people that you actually reach out to is remotely interested in selling. Perhaps that’s different in this coronavirus environment, but by and large, I think that’s true. It’s not just… I mentioned with respect to our search, with the first iteration of Footbridge back in 2012, 2013 but we also did a lot of old fashion networking and saw a lot of deal flow that way. So I would put that into a… Maybe you can put that under the proprietary category. I think it deserves its own mention and its own category as sort of a networking approach to sourcing.
So on the outreach side, what are some unique or creative ways you’ve seen searchers go with the direct outreach? Have you seen direct mailers and other different ideas?
There’s so much creativity, which is great. Yes. You see some direct mail, you see some old fashioned cold calling, you see a lot of email outreach and increasing sophistication in terms of the nature of email outreach. Really leveraging some of the tools out there where you can create really sophisticated automated marketing campaigns. And utilize some of the best practices of real businesses I would say, in the context of a search. So that’s great. I think there’s been a lot of creativity recently.
Five or six weeks of coronavirus era where searchers are having to rethink, how do you source today given in some ways the countries both shutdown and almost on a war footing. It seems a little bit tone deaf to just reach out and pretend like nothing’s on and just say, “I want to buy your business.” A lot of searchers had taken a more consultative approach to sourcing and by that I mean reach out, offer resources to be helpful to small business owners, offer to chat. And advise and guide them through this difficult time as a way to build a relationship as opposed to sending a transactional mailer or email taking an interesting in different tact to ultimately building a pipeline. But starting with building a relationship. I think some of the tactics that people are coming up with during this really bizarre and tragic time period is I think will actually inform some sourcing efforts going forward. I think people will use some of these strategies even when we’re on the other side of this coronavirus mess.
How do you see some of those strategies hanging on once this mess is settled?
I think this idea of your initial outreach being a bit more consultative as opposed to transactional. I think I could see that sticking. If you think about… If you’ve got a two year window and maybe even two and a half years, a lot of searchers will budget for some extra time. If you have two and a half years to search, you could argue that you’re better off starting your sourcing efforts with more sort of tactful, graceful relationship building. As opposed to more of the blunt force, whack somebody over the head and say, “I want to buy your business.”
I think you sort of need to do it that way in this environment. I just think it’s, again, I think it’s tone deaf not to. But I think there’s an argument for continuing that type of strategy early in search, develop a relationship. Yeah, don’t hide the ball. Don’t pretend you’re not ultimately interested in buying their business, but sort of table that for the first interaction. Just to try to develop a little bit of a rapport. Yeah, there’s some… You have to be careful with that because that can be a real time suck. But I think there’s some elements of that strategy that could be carried forward to a more normal environment.
You said your model is kind of a hybrid between the traditional and accelerator model. So at Footbridge, what resources and help can you provide searchers?
That’s a great question. Really sort of the off… We consider it and see it as a full service offering. It starts even during the fundraising process, so the searchers that we’ve backed, we often get to know them well before they’ve put together their PPM, while before they start to fundraise. We develop a really strong rapport and relationship. Typically, agree to partner where Footbridge is a large sort of anchor investor before they, quote unquote “go to market and send around their PPM to a bunch of investors.” Our collaboration starts with feedback on their PPM, to talking through investor composition to which industries to focus on, navigating different elements of the fundraise through getting set up for the search. Selecting a CRM, setting up that CRM, developing company lists.
We’ve got some resources on our end that we share, some less that we’ve developed and cultivated that we share was with searchers. We continue to source deals in our own right. We send those… The deals are not for us, for our consumption. Everything we do is for our searchers. So we’ll send deals to searchers as well. Given that we have relatively few searchers at a time, we’re able to actually distribute a decent number of deals to each search team. We spend a lot of time with searchers on prioritizing within a pipeline. So searchers will do their outreach and they’ll develop a bunch of interesting prospects. But a lot of times searchers will sort of evaluate those prospects and do the initial screens, make those no go decisions on whether or not to spend more time sort of in a vacuum.
A lot of times they won’t bring in investors during that phase. One of the areas where I think we’re most helpful is working with a searcher and saying, “Hey, that opportunity that you’re about to dive in on, it has these red flags. It seems like a dead end to us. Just a heads up for your consideration.” On the flip side, there’s also a question of or I think a phenomenon pretty widely known and seen in search where searchers will have this unrealistic pursuit of perfection during their first year of searching. They’ll turn down a lot of opportunities that are really, really good but not perfect. Because of that they miss out on some opportunities that they would kill to do in their second year of searching. Because they realize that it’s just a great opportunity. It’s not going to check every box, but nothing checks every box.
Giving searchers earlier on in their search, the encouragement to pursue an opportunity that might be really attractive or be it not absolutely perfect. From their support and guidance around when to submit an indication of interest, what to put in their valuation range, other information. When to really dive in and act to real work, leading up to an LOI. What to put in the LOI, how to structure the offer, negotiate, et cetera. And then post LOI, just to try a ton of extra muscle on the diligence process management, selecting vendors, reaching out to lender introductions, negotiating with those lenders. Other introductions to other equity investors to the extent that there’s a likely or potential equity gap. Just providing a ton of leverage all the way through close, leading up to the real fun, which is post-close and the operating of the business.
Because of our focus model, we’re able to commit to being on the board of every company that we invest in. And not just being on the board and engaging sporadically or on a quarterly basis, but really being actively engaged in a very meaningful way. Chatting with a searcher about what do you do on the first day, what do you say to the staff to put them at ease and get them excited. To working through the 100 day plan using our networks to make introductions for the searcher in their industry that they’re in all likelihood new. They’re completely new to, to spending an inordinate amount of time with the CEO during a moment of crisis as we’re doing now in the coronavirus era. Just that sort of spirit of really active engagement continuing all the way through the sale of the company.
Do you encourage your searchers to not only talk to you but the other searchers within your portfolio just to share ideas back and forth or is it mostly a relationship with you and the searchers are kind of independent?
No, I mean that’s… And thanks for raising that. Yeah, that’s absolutely encouraged. In some ways it sort of just happens. It happens naturally. But we are also working on ways as we build out our sort of searcher group ways to facilitate more regular and formal sharing of best practices. There’s so much to be gained from talking to other searchers and searchers are great about tapping into what other searchers are doing just naturally. But creating a little bit more structure around it I think could only be beneficial.
Are you ever the sole sponsor for a searcher or do you think it’s important to have other equity investors alongside your investment in a searcher?
Our intent is not to be the sole sponsor. Our intent is not even to be the majority. It’s to be a lead investor. The whole idea there, it’s not about… For us it’s not about control. It’s strictly a matter of being able to invest enough in each company, each search and then in each company to allow us to have a more focused portfolio. So if we’re going to have a model where we spend all this time with each searcher and end each portfolio company. In order to do that we need to have a smaller number then just naturally we need to invest more in each. So we love collaborating with other investors. We love working with the traditional search fund community. If there was some reason why a searcher was intent on only having a single source of capital, I can’t imagine why that would be the case. But if that was of interest we would consider it. But that’s certainly not our goal and not what we set out to do.
And then you mentioned helping some of your CEO’s and searchers today. How are some of the portfolio companies handling things? You said you only have… You said one portfolio company at this point?
So we have our personal investments that we made before we launched Footbridge II. We’ve acquired one portfolio company through the Footbridge II vehicle. The company is currently closed because it’s a chain of med spas. But as in a really healthy position, has a really strong cast position, limited leverage, and should be receiving the PPP money from the government any day now. So that forgivable loan, so that will help. But now the company is in a interestingly… Despite being closed for the time being is in a really strong position to ride this out for a long time if needed. But the general theme… I mean there are very few businesses that aren’t really struggling as a result of this. It’s tough. I don’t know if Wall Street has a great appreciation for what’s going on, on main street at this moment in time.
How do you think this changes, what kinds of companies searchers look for, from here on out?
It may be too early to know exactly. My initial inclination is that it shouldn’t change much because whether you think that this is a V-shaped recovery or a U-shaped recovery or some other letters shaped recovery. Business that was fundamentally strong in 2019 will eventually be fundamentally strong again when things pick back up. Now if you’re closing on a company tomorrow or over the next couple of months, you really want to stress test it and be prepared for continued pain in a really sluggish economy. I think for perhaps an extended period of time. But I think the answer there is don’t buy that company. It’s maybe get a little bit more creative in your structuring. Perhaps there’s more of the purchase price that’s moved into a contingent payment earn out or hold back that’s tied to business performance more shifted into a seller note and probably a purchase price reduction.
But if you say, oh, everyone’s working from home now I’m going to go buy some competitor to something to do with remote work or distance learning or you’re probably not going to find a business like that at a remotely reasonable evaluation. So I wouldn’t suggest shifting in that direction. It does raise the question about… Or at least I think focus the mind a little bit on the importance of recurring revenue, which is a real focus of most search fund investors. But by and large, I don’t think it fundamentally changes over the longterm what search fund deals get done.
If you could teach a class in college about any subject you wanted, business or not, what would you teach?
I think I would teach about civics, the importance of participating in our democracy. Maybe that belongs in middle school or high school, but not enough young people vote. So I would probably teach something about the importance of staying engaged and being involved in our democracy.
What’s a belief you had early on your career that perhaps you held really strongly that you’ve since changed your mind on?
I think I thought that… This is so cliche, but I think I thought all those people who said it’s the soft skills that matter. It’s the soft stuff, the culture, the team dynamic that that’s what was really sort of the driver of the business success or failure. I thought that was sort of baloney, but I like most people with a little bit more experience and perspective realize that that’s at the heart of most businesses and the success and does drive the success and failure of many, many companies.
What’s the best business you’ve come across?
Does Amazon count?
They basically control the world, so. Yeah, that would be my top pick.
Any other ones that you’ve seen in the search model that maybe aren’t the best but are really good models?
I think the business called the 280 Group that was acquired by a searcher, Rina Vernovskaya in summer of 2018 that’s a corporate training business that has really high repeat customer rates. Also, has an eCommerce sort of online training component that’s incredibly scalable and fast growing and it’s a great one, two punch in terms of the two business lines and she was able to… It was Inc 5,000 business before she bought it and she’s been able to… She’s done a wonderful job with it.
Thank you very much for sharing your time. This was a really, really interesting episode. It’s good to review the search funds face again and especially hear about how it’s going today.
Thanks so much for having me. I appreciate it, Alex.