Juan Ruiz – Student-led Search Investing

Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

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(3:32) – What models did you study for this dorm room-style fund for the VC world?

(6:52) – What kind of oversight is there from the University staff?

(8:15) – What’s the process for creating systems around the fund given the high turnover of graduating students?

(10:07) – What was the inspiration for the fund and the mission, vision, and value behind it?

(13:36) – What was your background prior to your MBA at Harvard?

(18:40) – What’s the interest level you’re seeing from students toward Search Fund Investing?

(21:50) – What do you view as the main goal of the fund?

(26:53) – What’s the involvement of students in the fundraising process?

(27:46) – What will your role be for Commune ETA going forward?

(29:06) – What are some roles and jobs for students in the Club?

(30:24) – Is there any conflict of interest with students helping to run a Fund while also pursuing Search?

(32:08) – Do you plan to expand this club to other MBA programs?

(33:22) – If this club was in 5 schools, what would the investment committee look like?

(35:08) – Do students get paid?

(35:25) – What are some of the different compensation models you look at?

(35:55) – What challenges do you foresee with growing this club across other universities?

(36:55) – How many students do you need to have quality output?

(37:59) – Evangelizing Search

(42:26) – What college class would you teach if it could be on anything?

(44:43) – What strongly held belief have you changed your mind on?

(46:52) – What’s the best business you’ve ever seen?

Alex Bridgeman: Usually, I start with background on these episodes, but one thing I’d love to hear just because your model is really interesting and student led and kind of grassroots, if you will, I want to start just by hearing about the different models you studied for this kind of dorm room style fund but in the venture capital world, because that’s what was the basis for a lot of your initial inspiration and thinking. So just I’d love to hear how does that model work on the VC side? Because it’s really interesting. There’s public market investment clubs at colleges which are fairly easy to set up because it’s all just public trading, public markets stuff, but a VC model is kind of interesting. So, I’d love to hear kind of what your findings and research in venture capital student led funds?

Juan Ruiz: Yeah, that’s a really good question. And I was very lucky to have found mentors very early on. And two of those mentors were the founders of the MBA fund, which is also a VC fund that is student led that invests in student founders. And there’s an HBS alum and then there’s Wharton alum who guided me early on in my research. So I had an idea of doing a student run fund for ETA and the people that I reached out to early were them. They guided me very early. And so their model is very simple. They raise a committed fund and then they have students do primarily the sourcing, and seed stage or pre-seed stage VC is, I don’t want to say easier, but a little more I guess transferable; the knowledge of underwriting pre-seed is more transferable. You can use a scorecard or a few set of criteria that you teach your students and they go out and they source and they raise and they do that. That’s sort of like the model of the Dorm Room fund, the MBA fund, Contrary Capital, there’s a few of them. And so immediately what they said, well, they told me, you should copy this model and implement it in search. There are a lot of differences that I learned while I was trying to put the fund together. But at a high level, it is the same concept. We raise committed capital from value-add LPs, which is also what they do. We hire students who are very interested in learning either the investing side or the operating side. So, in the VC case, they have people who want to do VC in the future or who want to launch startups. And then you find these entrepreneurs, and you try to convince them to essentially take your money. So, search being such an MBA centric community, I was surprised there was nothing like it before. And I started asking around and have a lot of faculty members at the schools that push ETA who have been investors for a long while in several funds, but on their own, and I talked to them, and they said, yeah, no one’s really thought about this, but it’s a great idea. And so that’s essentially when I decided, okay, I’m just going to go and copy the VC model and implement it in search.

Alex Bridgeman: Yeah, it’s also kind of interesting because there’s that focus on using students as a big portion of your base to run the fund. So, there’s like this strong educational component to learning how search operates and within these VC funds, learning how to invest in startups and all this other stuff. I assume there’s oversight with students, like faculty advisors and some of your stronger LPs. Is that structure present in a lot of those VC student led funds?

Juan Ruiz: Yes. The ones that I’m aware of, yes. So, there’s a lot of education that goes into it. And we’re mimicking all of that. So, if you think about the MBA, for instance, they have an onboarding process, they have a training process. And when you talk to Josh, one of the founding HBS alum, who was part of the founding team, he will tell you how much they themselves had to do in the beginning to, for lack of a better word, handhold their students as they learn the ropes of VC investing. As far as the LPs being involved, that’s a trickier card because most of these LPs are very busy with their own startups or funds or whatever. And so, what they did is they included a co-invest feature whereby the LPs could co-invest with a fund. And that way, they gain more engagement. Because if the LP is 100% delegating the decisions to the fund, then he signs on the dotted line to actually do that. But if he or she wants to invest above and beyond what the fund is investing, then there’s an incentive for that LP to become a little more involved in the deal and work with the students and transfer some knowledge that way.

Alex Bridgeman: Yeah, it feels like a model that has to become very quickly systematized both in the process in sourcing, evaluating deals, working with LPs, because if it’s all run by MBA students, your turnover is probably close to 80, 90% a year for your students who are coming in and then leaving to go do their post MBA careers. How to you or how do these funds, like what’s the typical process for creating systems around this fund such that you can plug in new students every year as students graduate and head off to their post MBA careers?

Juan Ruiz: Yeah, that’s a really good point, and it’s something that we’re working through right now. So, we started with a vision of something that was based on at least the investment process. There are two main things that the investment do- I’m sorry, the student investment partners to. And the first one is the sourcing; they’re very involved in the sourcing. And then the second one is the investment execution. At CommunEtA, which is the name of the fund we founded, the idea is to give the student investment partners all the agency in the world for them to find and execute these deals and bring them to the investment committee. And so, we’re setting up processes on project management software, so that we can combine a checklist approach with sound investment judgment. And so, there is a training process, there is a set of resources that we share with students so that they can get up to speed on what we believe a good investment is, but we pair that up with we’re using Smartsheet right now, which is a project management software, through which we create process steps for them to follow both in the sourcing and the deal execution side.

Alex Bridgeman: Gotcha. Yeah, those systems, I imagine, are really crucial immediately too. And can you talk a little bit more about kind of the origin of the idea and some of the inspiration and mission, vision, values of the fund?

Juan Ruiz: Yeah, absolutely. So, the idea came about- So I am a first year business school student here at Harvard. And I started thinking about ETA or discovered ETA maybe three years ago. And when I found it, I found all these resources out there and all these cool people that were willing to have conversations, including your podcast, which was a great resource at the time. And the first thing that sort of came out of that was me obsessing over ETA, wanting to learn everything there was about it. And so, I read every book that’s out there, I read every blog, listened to every podcast, became a student of it. And then I realized that it was a really good asset class as well, so I wanted to invest and get exposure to it. And finally, I wanted to do one entrepreneurial venture in the ETA world. And so those are three different desires – being a student, being an investor, and being an acquisition entrepreneur. And I started talking to some other people who were either in business school or about to go to business school. And they shared all three desires with me. And I said, well, what if we wrap a fund concept around this, and we create a community of people who either share these three desires or one of the three with us, and with the capital, we align incentives and create value add business relationships and long-term relationships in general. So, I started talking to the faculty here at HBS about the idea on a very high level. And then they put me in touch with former searchers who were alumni of the school, and then they put me in touch with someone else. And all around, I got a really, really good response. And at the end of the day, we said, let’s go do it. That’s sort of how the idea came about. In terms of our values, more than a fund, I’d like to think about CommunEtA as a community. And that’s where the name comes from. It’s community and ETA, a play of words between the two. And community comes before ETA for a reason – because we put community before the idea of going out and investing money. We’re putting together a community composed of successful searchers or value add LPs, passionate students who want to learn everything about ETA, and exceptional current searchers who are buying upstanding businesses. And each one of them has something to gain from each other. And so, our vision for the future is that in 5-10 years from now, we’re hoping to iterate this, raise another fund, hire more students, back more searchers. And ideally, five years from today, ten years from today, we’re going to have a community whereby most searchers that we back had some involvement with the fund at some point, either because they were students who were student investment partners several years back or some other way that they were involved with the fund. And then several of our searchers will have monetized by then or sold their companies, and so, they will become LPs. And that way you have sort of a virtuous circle where you join the community being a student, and you stay in the community through the lifecycle of your ETA venture and eventually as an LP.

Alex Bridgeman: Certainly. What was your background prior to joining Harvard for your MBA program?

Juan Ruiz: I had a relatively typical finance background. And so, I went to school in Miami and I majored in finance not knowing what it was. But luckily, I fell in love with it. So as soon as I discovered what it was, initially, I was very drawn to public markets for like the race to crack the code to public markets. And I was reading all these books on hedge funds. And I was just like very intrigued by how difficult it was to beat the market. Again, you had some people who constantly did, and I think everyone in finance goes through that phase at some point in their careers. And so, I tried my hand at public market investing while at college, had a portfolio management professor, and we built this quant model, factor based model, but it didn’t do so well. And so, it felt very out of my control. And it was very frustrating to just watch the thing go sideways and not being able to do anything. And so, I switched my focus to private side investing, and that’s how I ended up going into investment banking and eventually private equity. And to my surprise, even though public markets investing can be sexier from one perspective, private markets investing is a lot more about people. And I love that. And I fell in love with that. And I was very lucky, I worked at a fund called Blue Road Capital for five years, they invested in mostly middle market companies across the food supply chain. And I had the opportunity to be CFO of one of those companies the last 18 months I was there. And I had the chance to work with people, to lead a team, to see the impact that you can make on a leadership position. And that’s what eventually led me to come to HBS, to use it as a platform, to do things like CommunEtA, and eventually, hopefully, an acquisition venture in the future.

Alex Bridgeman: It’s funny you mentioned the hedge fund to search fund interest shift. It’s a very similar one that I had in undergrad. My goal for a long time was to run a small value hedge fund, like be the fund manager in the spare bedroom, just looking at filings and stuff all day. But like you, it’s kind of similar, where you realized that you really don’t have that much control over your performance. Like you can pick investments and you just kind of hope that they do well. There’s really nothing you can do to plod them along or push them higher. You could talk about them, but that doesn’t always mean that you’re going to get results from it. And you’re just so far removed from the actual business. You look at the business through filings, versus in search funds or running a private company, you’re talking with everyone in the company all day long, and you’re hearing information much quicker as it happens. And it’s a lot more intuitive, at least it was to me. And so that was my shift. And it’s funny to hear the same shift on your end.

Juan Ruiz: The other part of search funds and private markets investing, mostly in general, it’s that the ability to control the company or your outcomes can become a purpose at work in and of itself. So, for you, if you’re just holding a stock, the purpose is just the P&L, the daily P&L that you’re watching on a screen. Whereas when you own a company or running a company or have a say in a board at a company, then your purpose can become: How can I create an environment for these employees to thrive? How can I make sure that we turn this company around so that our end product makes it to the market, so we want to change lives, to influence outcomes. And that becomes much easier, at least for me, to relate to and something that makes me wake up in the morning and go pursue and give 100%. So I know other people have different passions, and for some people, the hedge fund world brings them that or the public markets in general. I’m a little different. I need to see people and a real purpose of why I’m going in and putting in all the hours that I put in every day.

Alex Bridgeman: Yeah, certainly that purpose of seeing that your work benefits people in the company and your customers is definitely a lot more fulfilling. That’s the sense that I was starting to get from chatting with folks who ran companies as searchers, was that they by and large, were very fulfilled and enjoyed their work. It was hard and stressful, but they felt that they were doing work that was valuable and fulfilling and helpful to other people besides themselves. Whereas I didn’t feel that in hedge funds. I didn’t feel that same kind of feeling of helping a group of people succeed versus just yourself or your LPs. So that’s pretty interesting. Is that kind of a similar sense that you’ve heard from other students who are- as you talk to students who are starting to get interested in search funds and want to be more active, is that kind of a sense that you get from a lot of folks or is there-? Like, what are some of the other driving factors that you hear from students who are trying to get more into ETA?

Juan Ruiz: Yeah, let me get to that. But before I answer that question, I want to go back to your point but answer it from the perspective of the search fund investor. Yes, when you are the searcher yourself or when you are the owner of the company yourself, you get exposed to all these people at the company. But even as a search fund investor, you’re talking to these entrepreneurs who are extremely sharp, who are putting everything they have on the line to pursue a life changing outcome, and who a lot of the times have a huge opportunity cost but have decided to put everything at stake because they want to live up to the consequences of their decisions. And I have an immense admiration for that. And I share that. And so when we’re talking to these entrepreneurs, we get on the phone, and we have these young people who are so prepared for the call who have looked through everything in the company, who have talked to a hundred people in the industry, who are experts on this thing, who have been looking for companies a year, maybe two years. And I can feel nothing but admiration for them. And so, partnering with these people, it’s a privilege that we have. And the students that work with me on this project, they all share the same. So above and beyond the actual company and the actual employees of that company, I guess a searcher becomes an employee as a CEO of that company, partnering with people like that, you can’t help but to grow. And to answer your question more specifically about other students, the answer is absolutely yes. The number one reason we hear students and non-students, so business school candidates and non-business school prospective searchers, the number one is to be sort of like they’re the owners of their own destiny, to be able to actualize a vision they have for how a business should be run. A lot of us or a lot of people who are in this space have worked for someone before and spent a lot of time thinking about ways in which they would run their company differently, and maybe even brought it up to their boss or someone else, and maybe even tried to implement some of these changes. But they bumped against the ceiling at some point where the owner or their boss or whoever was in charge said, yes, thanks but no thanks. And at the end of the day, you end up going home a little frustrated because you know that there’s a lot of value to be created, you know that there are different ways to do things. And not to say that your boss is doing them incorrectly but that you have a vision that you’re not being able to actualize. And so that is the number one reason when we talk to any prospective searcher, above and beyond the financial outcomes that can be found here, is I want to design a workplace my own way, in a way that I think can work.

Alex Bridgeman: Yeah, certainly. And in designing that workplace or designing the work within the fund, kind of back to that institutional knowledge piece, a big part of what makes search fund investors successful is that pattern recognition over time. And I would just be curious, with that kind of challenge of having new students coming into the fund all the time, it’s going to be a lot harder to establish that kind of pattern recognition over time. And so, do you view the main goal of the fund to be a return generator for LPs, or mainly an education program for students to kind of get up to speed in search and investing in search?

Juan Ruiz: I’m going to choose both, if I may. We are first and foremost a fund that’s tried to make good investments to generate good returns for our LPs. So that is our reason for existence. And if we didn’t have that upfront, we wouldn’t have LPs and the fund wouldn’t exist. That being said, the purpose of what we’re doing and the core constituent and stakeholders are students. And so, there is an education piece for sure. Here’s the way we think about it, and it all ties back to the systems and the processes, pattern recognition is certainly what you’re aiming for and what you’re looking for to develop in a prospective searcher who’s going to go out and try to find businesses. And so, we combine two things. And the first one is institutional knowledge that we gather from the resources that are out there and a lot of our advisors and LPs. So, remember, we have LPs who did this already. And we have advisors who have advised hundreds of searchers before. And we take that and we productize it. And how do we productize it? We essentially put it into our project management system. And we create processes and steps that allow students to learn by doing and sort of document their knowledge as they go. So, if we get a new business opportunity, it’s not like they’re going to have to look at a hundred companies to be able to know what to do when they get a business opportunity. We have a set of processes in there. And a lot of it is also aided by my own experience, having spent five years in private equity. And so, we put that in our project management systems. And what they do is they follow us a few steps that have live examples, and that have the reasoning behind them as to what they’re doing and why. For instance, industries, so we have an initial screen for industries, and we tell students what to look for and why. That being said, we also have stays for sound business judgment. So even if nothing checks out, none of our screens work, but you have a gut feeling or you have another reason why you want to pursue this deal, bring it up to the investment committee. Let’s have a chat about it. And maybe let’s tweak our criteria a little bit to include something that we might have missed in the first place.

Alex Bridgeman: So a new student could come in and look through the last 20, 30, 40 deals that the fund did across their investments and get some of that pattern recognition just through past deals. Is that kind of part of the education piece that you’re hoping to create?

Juan Ruiz: Yeah, it is more than people having to go manually through all these deals, we are sort of like extracting the knowledge and the principles from all the institutional knowledge that’s surrounding us and documenting it in our project management systems. So, I mean, one piece of institutional knowledge out there is, for instance, if you need to go as basic as just a Stanford study, there are some principles there on what has worked and what hasn’t worked. And having that checklist applied to several deals before and having that checklist ask you the things that you need to look at when you get a deal, that’s going to teach you why you need to look at these things, or, for instance, recurring revenue, there’s a logic behind it. And that one is perhaps pretty easy to figure out logically. But also, you can go and look at the deals that we have said no to or the ones we have looked at and the ones we have invested in, and some will be project-based revenue, some will be repeat or reoccurring revenue, and some will be recurring revenue. And so, we have our notes, and we have the reasons why those deals were attractive or not on that criteria. So if you’re a student who just joined and you’re looking at your first deal, and you’re trying to decide, number one, whether the revenue is recurring, and number two, if it is or if it’s not, what do you do, you can go and you can look back and hopefully that principle makes its way into your knowledge and your investment criteria for the future.

Alex Bridgeman: Yeah, certainly. And what’s the involvement of students in the fundraising process? So, when you come to raise a new fund, what’s the student role in that process?

Juan Ruiz: For the most part, I’ve been doing the fundraising. So thus far, they have not been involved at all. I say they, but I’m a student as well. And so, it’s because I was kind of like the first one in the fund, I’m leading the fundraising process. And honestly, my job has been more to help create an environment for the students to thrive. And part of that is raising capital and finding high quality LPs who have done this and who can contribute. So yeah, to answer your question, the short answer is, for the most part, it’s me. And I expect to be able to also set up systems so that the same LPs keep backing us into the future, and the students can focus their energy on sourcing and closing deals.

Alex Bridgeman: So, what’s your role with CommunEtA over the next few years then? Are you planning on acting as an advisor of sorts? Or do you plan to be involved on a part time or full time basis for a number of years?

Juan Ruiz: I plan to be involved in a part time basis for a number of years. We’re expecting to build a nice portfolio of nice businesses and learn a lot and create meaningful relationships as we go. And if that happens to be the case, then I see no reason why we wouldn’t create a second and third and fourth, and however many iterations in the future. As I mentioned before, me and the other students who are part of this, we all want to either be searchers or do a Holdco or do a roll up or you name it, something in the acquisition space. And when I graduate, that’s what I’m going to pursue full time. But I’m still going to be involved in CommunEtA, and the idea is to have set up processes in the next 18 months or so, so that things can perpetuate themselves, the same way the MBA fund is run. They have founders who graduated and some pursued startups and others joined VC funds, and some others did their own acquisition venture, but they still run the fund on a part time basis.

Alex Bridgeman: What are the different jobs and roles for students? Do you have members of the investment committee, analysts, interns? Like what’s the kind of role breakdown for jobs you could take with the fund?

Juan Ruiz: Yeah, right now, I’m doing everything that’s not sourcing and the actual deal execution, and the students are doing those two things. So as a student investment partner, you have essentially two jobs, sourcing which is talking to searchers, prospective searchers, but then all the school networks outside the school networks, on searchfunder.com, and making sure that we have full coverage of every self-funded deal that’s out there or every traditional deal that has a gap on their cap table. And once they find and develop those relationships with those searchers, then it’s their job to then bring those deals to the table and execute them. In the future, those roles are going to evolve as we get more institutionalized for lack of a better word. And we’re hoping to have interns in the future who help with sub tasks within those jobs. And if we are to raise a bigger fund down the line, then the idea is also to be able to hire someone part time to help with the admin work in the back office.

Alex Bridgeman: Are there any conflict of interests with running the fund or having students involved with the fund while also raising their search fund at the same time or pursuing search? Is there any sort of rules or rules on making sure that there’s some sort of objectivity with investing in a student who works for the fund in their search fund?

Juan Ruiz: Yeah, so we just don’t invest in our own students search funds. We will invest in former student investment partners, but not like- Every student is part of the investment committee, and they run point on their own deals. So, we wouldn’t have a situation where a student brings their own search fund to the investment committee and also sits on that investment committee.

Alex Bridgeman: Gotcha. Okay, that makes sense. You’re probably going to- I would imagine you would probably want some sort of separation there just to make sure LPs are in the good, or in good graces.

Juan Ruiz: Yeah. We have we have full autonomy. So, we’re very clear with our LPs that we wanted our students to be making the investment decisions themselves. But we have a process for our investment committee. And I think it’s also a rule that we have some independent advisors, so all the faculty members who have been advising us, they’re not investors, they’re independent advisors. And they also serve a role in terms of making sure that we are, quote, unquote, following or abiding by our fiduciary duty, because at the end of the day, this is a formal fund. And we have real LPs. And we are FINRA registered.

Alex Bridgeman: Yeah, absolutely. All that still works, or still counts. So this currently exists only at Harvard from what it sounds like. Are you planning on expanding to some of the other MBA programs as well?

Juan Ruiz: Absolutely. So that’s really a good point and something that perhaps a lot of people are confused with when they first hear about the concept. So, the concept was born here at Harvard, and the students who are involved in it right now are students at Harvard. But this is the idea and the vision is for this to be a multi school effort. And when I say multi school, it is that we want to hire from different schools as we grow and we need more hands. But even as of today, we are investing in students from any school, who are graduated from any school, who are finding deals, or even people without MBAs. The only requirement, the only criteria that we have for us to back a searcher is that they are passionate and talented. If you are passionate and talented, I don’t care what your background is, I don’t care where you’re based out of, we want to look into your deal. We want to partner with you. And we are going to eventually invest in you if it’s a good deal.

Alex Bridgeman: So, if you had, let’s say you had five schools, including Harvard, that are a part of the fund, what’s your investment committee look like? Do you have one representative from each school now versus all of them being at Harvard-?

Juan Ruiz: No, every single student will have a seat in the investment committee and have a vote, independent of what school they come from. So, let’s say you go to Kellogg, and you join the fund, and right now, there’s three of us here at Harvard, and you’d be one out of four. So, from that perspective, you could say that you’d be a minority, but the idea is that all the students are going to be unbiased. And we’re incentivized that way. Because every student, the way the students are compensated, is they get half the carry on every deal they source and close. But the way the carry is paid out is you get $1 share equivalent to your deal but at a fund level. What that means is that if everyone’s deals do fine, then you’re going to get the exact dollar amount of 50% of the carry that your deal generated. But if some deals do well and some don’t, which is likely to be the case, then there could be a scenario where even if your deal generated carry, you’re not going to get anything because at the fund level, there’s no carry because other deals blew up. And so that’s an incentive for students to sit on the investment committee and think about someone else’s deal, and partially because at the end of the day, that’s going to impact their own compensation. So, students have a fiduciary duty to bring good deals to the table but also to vote on good deals only and to approve good deals.

Alex Bridgeman: Do students get paid for working with the fund? Or is it unpaid except for the carry portion?

Juan Ruiz: It’s unpaid except for the carry portion. So it’s all incentive compensation. That’s a similar model that some of the student run funds adopt.

Alex Bridgeman: What are some of the different VC school fund compensation models that you looked at?

Juan Ruiz: I don’t know that I can mention specifics, but they also have a similar, I want to say we’re higher of the ones that I’ve seen. I think we’re the highest out there. But they follow a similar compensation scheme, whereby they give a percentage of the carry to the students who source and close the deals.

Alex Bridgeman: What other challenges do you foresee with this model of growing and expanding to other schools? What do you think might become more and more difficult over time?

Juan Ruiz: Yeah, the one thing, it’s that the VC model doesn’t share this, and we have to deal with it, is that underwriting search deals is more time intensive than underwriting VC deals. We are out to make 10 to 12 investments. And so, we spend a fair amount of time making these investments. So I think the number one challenge for us will be the time commitment from students. Students have full calendars. The MBA experience can be very hectic for a lot of people. And so, our challenge, or the challenge for me as the one trying to create this environment for students is to come up with a model that can be executed in the limited amount of time. And that’s where I’m trying to rely on all these processes and systems that we’re trying to implement.

Alex Bridgeman: How many students does it take to get that equivalent kind of full-time analyst at a search fund level? Do you need kind of four or five students to get the same level of just work capacity and output as a normal full-time analyst might?

Juan Ruiz: I honestly haven’t thought through that math yet. But I’d be surprised if it were more than two or three. And the reason is these are very, very capable individuals. So, the people that we’re teaming up with, they’re extremely sharp, very, very highly motivated. They sometimes have prior experience in investing. And even if they don’t, they’re very quick learners. And so, we are budgeting between 5 to 15 hours a week for each of them. So, I think between two of them, they could very easily replicate the full time equivalent for the job. It’s going to vary, again, from individual to individual, but on the average, I would think that with two, we should be covered.

Alex Bridgeman: Gotcha. That makes sense. Any other questions that we haven’t gone over that might be valuable to share before closing questions?

Juan Ruiz: I didn’t talk about this when you asked me about the idea, but a big part of our reason to exist is to, quote unquote, evangelize search. When people go to an MBA, the vast majority still don’t know what search is, and when they first hear about it, it’s like their gut reaction is like, well, I’m here to get that fancy job, like, search, really, what’s that thing? And then the few of them who go on to look into it, then they see the traditional model, which has some very well known investors, and a model that has worked for a lot of people for a long period of time, and maybe some are convinced to give that a fair chance. But eventually they hear about self-funded and they’re like, well, I thought search was sketchy. Self-funded is the sketchier version of search. We want to change that. We think that self-funded is the way to democratize search. Self-funded is a way to give everyone a fair shot of acquiring their way into financial freedom, into their own destiny, into their CEO role. We think that self-funded is a way to give everyone who’s talented and passionate about ETA, about running businesses, about buying the right businesses a fair shot at doing this within the MBA and outside the MBA community. We think that the search model has a lot to evolve into yet. For the longest time, we’ve had the traditional and the self-funded model. Then a few other options have come about including the HoldCo and including the rollup, the independent sponser model, which I guess is older than search, but has sort of like been brought into the ETA space. We think there’s a lot of room to grow. And we are initially backing self-funded searchers. But the idea is for us to evolve into the future to fill the gap between traditional and self-funded. They’re so far apart today that some people have to choose or even decide not to go into search because they’re so far apart. Like traditional works for some people beautifully, self-funded works for another set of people beautifully. But there are a lot of people who would be more comfortable with something in between, for whom there isn’t a solution just quite yet. We want to be part of that solution. And this is our first iteration to learn about what people want and hopefully be able to come up with it.

Alex Bridgeman: Yeah, is there kind of a halfway point within the two or between the two models that you think you could eventually build?

Juan Ruiz: Absolutely, yeah. So, I think that there are a few. The main difference between the self-funded and the traditional model is it’s in the name is the search round, the fact that you raise a round. And so, the tricky part there is in pricing that round appropriately. Right now, you’re getting 50% step up, that sort of gives you an indifferent expected value just on the step up itself. If two thirds of searchers don’t find an acquisition, but you’re getting a 50% step up on the- I’m sorry, one third of searchers don’t find an acquisition, but you’re getting a 50% step up on the two thirds that do, then your expected value is 100%. So, you put in 100, and you get 100 at the end, so it’s an indifferent. But then you get the option value of being able to invest in these companies that are found. And that’s the part that’s tricky to price. So as long as you get comfortable pricing that, then you can split it and make it fluid, rather than hey, you have to raise $500,000 in search for two years. What if you raise only 100? Then how do your economics change? What if you raise 50? What if you only raise diligence fees for when you find the acquisitions? And there are some iterations of this out there. Some people have diligence funds. But that’s the exercise, coming to a consensus of how much should the searcher give up for $1 of backing during the search and during the diligence processes, and making that fluid. So if you want to be fully self-funded, then be self funded and capture the most equity. If you want to be fully traditional, then be fully traditional, fully funded, and give up the most equity. But if you want to be in between, then let’s have an option for that.

Alex Bridgeman: Moving into closing questions. What college class would you teach if it could be about any subject you wanted?

Juan Ruiz: Yes, I thought about this one a bit. I’m going to give it a shot. It’s a little bit up in the air, but I’m going to give it a shot. I’d love to teach about the human experience at work. I feel like when we go to college, and we hear about all these professions and all these jobs that are out there that we start chasing, they’re sort of like in our head. And so, we think about, for me, it was thinking about the investment banker not as the analyst who was stressed out, typing away at 4am in the morning, but more as this sort of very ambiguous, very virtual idea of what it meant to be an analyst. And then the same applies for every job. And so, I’d love to teach people what it actually means to do and experience work in different professions. So, I’m a big Cal Newport fan. And I’ve read Deep Work, and I’ve read Digital Minimalism, and I’ve read some of the work that he’s quoted, including Flow and including the work rituals of high innovators and renowned contributors to society, and they all experience work very differently. And they all achieve flow differently. And a lot of it has to do with the profession they choose, but also in how they approach that work. So, I would love to teach college students what it means to work physically in the moment and how to set up rituals to get the most out of your work by achieving flow consistently.

Alex Bridgeman: That certainly would be a really interesting one. Have you seen the show Severance? It’s this new Apple TV Plus show. You should check it out. It has kind of an interesting play on what work really means. The basis is that when you’re at work, you forget all your personal memories, and vice versa when you leave to go home. And so, people in their personal lives, they like this because they don’t have to think about what their work is. They can just exist on their own and not to worry about it. But it’s kind of an interesting dystopian view of work. I think you might like it.

Juan Ruiz: I’ll check it out. Severance, right?

Alex Bridgeman: Severance, yeah, it’s awesome. We just finished it. It’s fantastic. So I’d definitely take a note and watch it. What strongly held belief have you changed your mind on?

Juan Ruiz: Yes, there are a few. But I think the top of the list is the idea that the end justifies the means. And I mean that in the good sense. So, I was always a hard worker and someone who was willing to put in everything for a goal. And so, this whole idea of the end justifies the means, it’s really just the sacrifice today is worth a benefit in the future. The problem is that that’s a treadmill. Because as soon as you receive that benefit in the future, then you have another goal in sight. And so you’re sort of on this treadmill of always just sacrificing and sacrificing and never getting anywhere. And so, I believe that there’s a mindset shift that can combine putting in a lot of hard work, but also enjoying the means. And so, my motive today, it’s all about the means themselves. It’s not about the end. So even if you’re putting in the same hard work, even if you are pursuing a goal, make sure that you enjoy your day to day, that you build a sustainable routine or sustainable work ethic that lets you enjoy your day-to-day life. And the biggest influence in that sort of change or in changing that strongly held belief was meditation. I got into meditation when I was 20 years old and have been meditating relatively frequently since. And that got me to appreciate the fact that life is right now. And yes, we can pursue goals, we can do all these things, but we should be mindful of the mindful, no pun intended, of the fact that it’s about the means and not about the destination.

Alex Bridgeman: That’s a growing thought for me, too, like how do you design work that you both enjoy doing and is going to be productive and grow into something cool, but doesn’t take your entire life? That’s an ongoing struggle I’ve had and so I’m trying to figure out how to manage that. So maybe I’ll add meditation to my routine as well. Sounds like a good idea. What’s the best business you’ve ever seen?

Juan Ruiz: This was a tough one. I’ve seen a lot of good businesses, to be quite honest. But I want to choose the Danaher Corporation. That is a publicly traded conglomerate that started as a private equity fund. So, it started as a private equity fund I believe in the 80s. And then they eventually started acquiring all these manufacturing businesses and went public, and they became an acquisition platform. And if you look at their stock performance over the past- since their IPO, it’s been incredible. It’s one of the few companies out there that has had over a 25% compounded return since, and what’s cool, it’s not really- you can find other companies that have performed that well, very few, but you can find them. What I love about them is how methodic they are about their value. They have a very specific set of steps, processes, and systems to create value. So, they know exactly, when they acquire a company, they know exactly what to do. They’re really good at one thing, and that is running specialty manufacturing. They are in some very complex manufacturing spaces. And what they do, and they don’t hide it, they borrow a lot from the Toyota system, which is a lean manufacturing type system, whereby you run the business to eliminate waste and just increase efficiency through the roof. And they have this set of steps where when they acquire a business, they send people to do what they call a Kaizen, which is a constant improvement process where they increase some yields and some outputs by several Xs, orders of magnitude. And they’ve been able to do this continuously. And they are a multibillion-dollar corporation right now that keeps spitting out great returns on equity with low leverage and very stable overall stock returns.

Alex Bridgeman: Yeah, Danaher is a fascinating one that I need to study more, and I have a few friends who are really interested in it. So perhaps this is the prodding to look into it more. But thank you, Juan, for sharing a little bit more of your time and telling us all about CommunEtA and all the work you’re doing. It sounds like a very thoughtful model. So I’m always excited to see interesting models for search come out and look at them more and get to discuss them. So thanks for sharing. This has been awesome.

Juan Ruiz: No, thanks, Alex. I really appreciate you having me. Keep up the good work. I mentioned one of our purposes was to go out and evangelize search. I think you are one of the biggest evangelizers out there. So yeah, keep the good content coming. Looking forward to more episodes.

Alex Bridgeman: Thank you. That’s very kind of you. We’ll chat soon.

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