My guests on this episode are Lui Pangiarella and Akram Sabbagh from Second Squared, an emerging search fund accelerator looking to bring the search fund model to Australia for the first time. The three of us discussed educating the marketplace, the mindsets of investors and owners in Australia compared to other countries, how they view themselves compared to counterparts in the U.S., and more.
As they’ll describe, Australia does not have a M&A market that is nearly as developed as the U.S. and a large part of their role is education. I had a great time learning about the challenges with introducing search concepts and acquiring companies in Australia and I hope you enjoy it as well.
I’ve been looking forward to this. I remember chatting many, many months ago about search funds in Australia and how you were looking at inserting an accelerator and obviously you’ve made progress since then. So can you talk a little bit about, from our phone call to now, what has been the evolution of your accelerator Second Squared and then what is that program looking like for Australia?
Lui: Yeah, it’s interesting. I think we first connected on the phone as we were going to the Harbor Conference in 2018, so it’s probably 10 months ago now, in the lead up to it or straight after it. One of the things that we learned is we probably shouldn’t use the word accelerator because it means something very specific in the U.S, that it doesn’t so much mean in Australia. So in the U.S very clearly it means a sole source of capital as well as an enabling program to help the searcher, and the searcher is captive to the accelerator. The model that we have in Australia is probably a little bit different. Here we have some searches that we work with to get them going and help them start their search, but we’re not a sole source of capital and they’re not captive to us either.
Probably a better way for us to describe what we’re doing in Australia is really spreading the message that search funds and entrepreneurship through acquisition more importantly, so it’s not only the search funds but also for self funded searches, the importance that it has for Australia and how it can work in Australia because Australia does have some interesting dynamics that really make it right for an entrepreneur.
So describe some of the activities that you’re looking to do with searchers then.
Ak: I guess it’s way the term accelerator means something different to us in the sense of a searcher coming in with a concept of where they’d like to search or what kind of business they might like to look for. In other jurisdictions, searchers generally come from an MBA program where there is a program that’s specifically helping them through this process of thinking through what they will search for. That doesn’t exist anywhere in Australia, so in essence Second Squared is about helping searchers from that very first point of conversation in their own mind around, “Hey, I think I’d like to buy a business and take it somewhere, but not really sure where that might be or what kind of business that might look like.”
So Second Squared is there to help them get clarity and accelerate the process of them understanding where they want to search and what kind of business they might be looking for, right through to helping them through the process of setting up, acquiring funds to start the search fund, the process of working right through the research, how to get support, where to get support from, right through to that point of finding the business, closing the deal and becoming the operator, becoming the CEO.
So a lot of that infrastructure isn’t formalized anywhere, but what we’re doing is we’re building a network around each searcher that allows and enables them to get to where they wanted to go much faster. In essence, if you looked at it visually and you had the searcher in the center of the universe, then what do we need to surround that searcher with to accelerate his or her process through that couple of years of searching from inception through to completion and then on into operating the business?
Lui: I think Ak raised a really interesting question, a point, which really goes back to the start, is there’s nowhere in Australia where a searcher can even become aware of search. Prior to 15 months ago when we decided to set up Second Squared, the only people who had started a search and also fund it were people who had become aware of it through an overseas MBA program. There’s no university in Australia still that offers ETA or realizing entrepreneurial potential or training in what is a search or a search fund in Australia. That’s something that we’ve been trying to change through engaging with universities and hoping that they… and kind of educating them as well as some of the students on this is a really viable model in Australia.
How are you imagining Second Squared from the business perspective? So the financial incentive for Second Squared to help these searchers. So where does that align with them?
Lui: Yeah, in the longterm it’s really clear what Second Squared becomes. It becomes a funder of search funds or a fund of funds, however you want to term it. In the short term, it’s less clear. It’s clear to us that what we need to do is find the sections and that means almost evangelizing that entrepreneurship through acquisition is a viable model in Australia and we do a lot of that. We’ve run public workshops, we’ve got stuff into media, we engage with investors, we engage with universities. We also engage one-on-one with searches so there is quite a community now of people including the existing searches in Australia who, when someone talks about, “What do I need to do to search in Australia”, we all meet them and we educate them on what it takes to search in Australia and why Australia is a good place to search and what the differences are. You may want to take into account searching in Australia versus section somewhere else.
We do run programs, we don’t do that full time and so if someone is interested in becoming a searcher but hasn’t trained in it and wants to shortcut in essence their pathway to searching in Australia, we can help them with a workshop that, A, gets them ready to search, but also gives them the base systems and processes they need in order to get searching in Australia. As well as introducing them to a group of, I’d say, qualified intermediaries because intermediaries is one of the issues in Australia that we don’t have the number and the quality that potentially exist elsewhere and that’s no disrespect to the intermediaries who are here. We just don’t have the same market for intermediaries here at a level where the acquisitions make sense, in that above $3 million in value range. By the same token, we also don’t have the same competition for deals in that space, so there’s a bit of hit both ways.
Do you think that’s a factor of just the attitude towards business and entrepreneurship in Australia just being different than that of the U.S?
Ak: Fundamentally that’s very true. There are a number of factors that play. First of all, volume. Demographically Australia is not as big as the U.S in any state. There’s a difference just to there in terms of sheer volume of opportunity. If you look at the sweet spot where a searcher might look at, we’re talking about 85 to maybe 120,000 businesses across the country. So it’s not like there are millions of these things out there. I think the other piece is around that whole context of what does entrepreneurship mean and there’s some things that are very deeply embedded in the Australian psyche, which are different to, say, the United States. A psyche of entrepreneurship, and some of those things include probably a little bit of what we would call Aussie humility. When we’re talking to entrepreneurs and we call them entrepreneurs, they deny it. They say, “I’m not an entrepreneur, I’m just somebody getting on with doing stuff.”
Yet the term entrepreneur is broadly understood. That jurisdictions as somebody who takes an organization, whether it be startup or non startup and add significant value to that. Louie and I work with a lot of entrepreneurs every day that just are probably too shy to call themselves entrepreneur. Part of the reason for that is that the context of entrepreneur in Australia tends to sit in that space of the startup, the person with a new idea who’s going to save a planet or a new app or a new fintech or medtech that’s out there looking for seed capital to start something up. That’s what entrepreneur means generically in Australia. We’re working on broadening that conversation to anyone who’s not just a business person, but somebody who takes a business to the next level. Somebody who’s keen to put energy in and not just run a shop or run a business. They’re there to grow to scale, to do something more. So there’s some of the, I guess, cultural differences that we have that we’re working not so much against, but we’re working towards educating and building a broader definition.
Lui: Australia has lagged behind the U.S by, pick a number, but five to 10, probably a lot more than five years on the venture capital side and the startup side. It is very topical at the moment and has been for probably the last five years. So there’s a lot of public policy or government policy around promoting startup and entrepreneurship as startups. So we’re seeing more and more incubators starting every day, more accelerators in that space starting every day. That, to some extent, dominates the conversation around entrepreneurship here. What we see is the other side, which is the businesses that we’ve worked with probably the last, for me, 10 years in fact 20 years, those great small to medium businesses that do need revitalization. Revitalization through a new entrepreneur coming in and doing something quite different with them. That conversation isn’t happening to the extent yet in Australia, although the generational transition issue is becoming well understood.
Ak: I think Alex, what what Lui just mentioned is really important. First of all, that transitional element of a generation of business owners who have worked their businesses well, they’ve grown it to a certain extent, but they’re getting tired. The average age of a, a business owner in the search fund target area in Australia is probably between 65 to 67 years of age. So if they’re not, themselves, feeling tired or exhausted, and if they indeed have the energy, what they’re finding is that their next generation, their kids are not interested in coming into the business. And they might actually have a partner or a better half, a wife or a spouse who’s not well, or is aging not so well.
So what happens is that there are life issues that take control, that kind of forced them into thinking about a succession point. And so we deal with a lot of businesses where succession is being forced upon, as opposed to being strategically thought through and worked on in a strategic and, I guess economically beneficial way for all concerned. So that’s one of those demographic pieces that we’re seeing not only in Australia, but pretty much around the whole Western world.
Is there an active private equity market within Australia that tends to buy some of the larger ones and you’re helping to kind of spur that same mentality for the smaller end, or is there broadly a a lack of young entrepreneurial buyers of these businesses?
Lui: Right now it’s more the latter. Private equity is an interesting space in Australia. And we have a really interesting mix of both global players that are here, as well as Australian born and bred PE. If you go back to where most of them started, many of them started operating at this 10 to $30 million in enterprise value range. And I can think of a couple who are based here in WA, in west Australia, that started in that space.
What’s happened though from afar, as played out in America as well many years ago, is the deal size that they chase has increased. So they’ve geared up to do bigger deals, which means that they have to do bigger deals to justify the expense that they’re going through to do those deals. And what’s left is a lack of PE players that play in this sub $30 million space.
There are some, they tend to want to do more growth capital than a full takeout, which doesn’t really suit the owner, who really does want to exit. PE in straight, it’s a vibrant space. What you notice in Australia, if you look at transaction multiples though, there is a direct correlation between transaction size and the multiple. So at this below $30 million range, you’re still seeing transactions, at least in the last two years, in the two to five times the entire range. Whereas once they get above it, it’s a much more competitive market and the PE firms will compete for it, as well others. And you’re starting to see that four to eight. And then if you go again into the listed space, they’re equivalent to what you’d see elsewhere in the world.
In your end of the space then, what’s your message to entrepreneurs and when you go to the university to talk or you give these events, what’s your broad message to some of these entrepreneurs who you’re encouraging to consider this space?
Ak: There’s many, many key messages, Alex. I think the broader one when we’re talking to the entrepreneur, is to be quite cheeky about it, is that there’s a third pathway to being the CEO. The first pathway is that pathway which is around earning your stripes in a corporate world and working up the corporate ladder to get to your achievement of wanting to be the leader, to be the CEO.
The second one is to be the startup, to be the CEO with a great idea. We talk about the third pathway being the CEO with no idea, tongue in cheek. It’s the, “I don’t have that great idea that’s going to change the world, but I do have a passion and an eye to go into a business and see the opportunity that’s just been left on the shelf, and to take that opportunity to the next level. That’s my passion. That’s where I want to go.” If you’re that kind of person, if you’re that kind of entrepreneur, then Search is an absolutely hand-in-glove fit for you.
Lui: In those first conversations with those university students, and not only the university students, the university professors that we talk to, many of them are hearing about entrepreneurship through acquisition for the first time. And so we don’t tend to use that term until we’ve had a conversation around where it fits, and who it’s for. It is for that talented entrepreneur who doesn’t want to do a startup or may have already done a startup, but doesn’t want to do another one. Or has been in a corporate role and doesn’t want to be in a corporate role again, and also doesn’t want you to do a startup.
Once we sat that conversation and then we get over the the definitional aspect in Australia of what an entrepreneur is, then we find the conversation evolves pretty quickly to, “Oh, there’s possibly something of interest here.”
And so what’s been the reception so far, from the people you’ve talked to about it?
Ak: Interesting receptions, initial reception is one of doubt. But once they start to understand the model, and they start to see that it’s actually a very viable alternative and has had a really fast global growth and footprint over the last 35 years, not only in the United States but certainly through Europe and parts of Southeast Asia and even South American and Africa, they start to see that there’s, “Gee, there’s something in this that could be really, really beneficial.” And we’re not only seeing that from the perspective of potential Searchers, we’re also having these conversations with potential investors who, initially, probably two years ago, would laugh us out of the office and say, “Well, that’s never going to work.” To people now understanding that it’s about backing the person and not the deal.
A very simple conversation is, “Well, if you back the deal with the wrong leader, how’s that going to work out, versus if you backed an average deal with a great leader, that’s got a better chance of working out really well for you.” So it’s not actually about the deal because Louis and I see deals daily that we lose count of the deals that we see. And most of the people in the investment community probably would.
But when you find that talent which is special, that’s hard to come by. But if you put that at the front and you say, once you’ve found that, once you found that Searcher, that CEO of the future, who you think you’ll back, then persons like Lui and I will find those people and we’ll go, “Well, we’ll back this person. We think this is the right person for wherever they’re going.” Then it’s far easier to go and talk to investors and other aspects of the community with that hand on heart, this is the right person mentality, than just going with the deal.
So we’re now getting investors coming back to us, asking us, “When are you going to show us somebody we can invest in?” Which is a very different conversation to, “Where’s the next deal that I can look at.” So it’s nice to see, it’s taken about two years, but we’re starting to get that conversation shift from the deal to the person.
Lui: It’s a cliche, but timing is everything. Some of the people that we spoke to 15 months ago, are now likely to be searching next year. And it takes that long for them to come to that point where… because literally, hearing it for the first time, and then doing all of their own internal machinations of, “Is this right for me?” Researching it themselves, and then understanding it more and then coming back again.
So I know there’s three or four, that between Ak and I, we would have had five to seven conversations with before they say, “Yes, I think this is right for me.” And one of the things that we set out to do right at the very beginning, is not convince anyone. It’s a bit counterintuitive, but people have to come to Search of their own accord. They can’t be convinced to do it. And they’ll either want the ownership, the CEO role, the risk and the reward that goes with that. You can’t bestow that upon someone.
So some of the people that we spoke to 15 months ago, we would have had three or four conversations and there’s a couple we thought would make excellent Searches, but it’s not for them. As in they don’t have the profile for themselves, that they want to go and do that. They’d rather take a corporate role or, in some cases, do a startup, which is great. They are living their dream.
Without the university involvement, it is reliant on just spreading the word. Once the universities come on board, we actually think Australia will change quite significantly, because there will be a group of a group of say kids, but a group of people finding out about the model in a academic way and then being able to assess it as well. And then, two years down the track, they’ll then come to it.
And are there a few key universities you’re trying to target specifically?
Lui: Yep. And it’s a bit early to talk about them right now. It’s an approach, they are building a relationship with the university four days ago, talking to them about their program and what it would take to add something to their program without it being specific to ETA. But just how long does a change to a MBA program take. And we were a bit shocked by the duration, but 13 months if there are no revisions required. 13 months from go to whoa, before you actually… That’s to get it approved before you write the content. Which we found a bit surprising, but it’s understandable. So, that’s just going to take time. There’s potentially some other things that we’re working on with a couple of universities, where it won’t be to that extent, the profile of ETA can be lifted, and people can see another pathway to being an entrepreneur.
What goes into finding those new relationships and trying to build them with schools and intermediaries as well? What are your steps to introduce the concept and then figuring out how they can be helpful in advancing that idea? How do you go about doing that and building those relationships?
Ak: The fundamental essence of it is relationships and building those relationships, and leveraging off the relationships you already have that are strong. And there’s that old adage of relationship currency and if you’ve built strong relationships over your career, you’ve built currency where you can go and ask for a little bit of exchange on and a few introductions where and when required. But both Lui and I’ve worked hard on our relationships, and I think part of that is the passion that we’ve got for Search has led the way. Just even last night over dinner, somebody was asking me how things were going, and she was very quick to say gosh she’s so passionate about this. And I think that passion really enables us to express where we’d like to see it, where we’d like to see Search in Australia, and what it could look like in a few years time.
And that passion actually opens doors for us, I think. We’ve spoken to so many people, and how we started it was we really sat in the space of, if we were the searcher who would we want around us? And not in terms of individuals, but in terms of thematics, in terms of intermediaries, what kind of intermediaries would we want to be working with, what kind of relationship we want with them? What kind of researchers would we want? What kind of accountants, lawyers. Some we set up our own, in our minds, ecosystem of who are the kinds of people and organizations we’d want around us, and then we’ve gone out to those organizations and our contacts and networks within those areas and just begun conversations. We’ve run a number of open public workshops, initially without our networks, our relationships, to explain the model. Just to start sharing.
So initially we’ve seen the first 15 months of the business as being one of educating and sharing a concept with the market that we know. And it took about the first 12 months of working through our list if you like, before their list started to contact us. And so now what we have is, is people contacting us who are interested in search, who we don’t know, where they’ve come from until you’ve gone and asked them. And it’s now a second or third time removed to the source of our relationship that started 15 months ago. So the word is spreading slowly and it’s probably spreading faster than now than it was 15 months ago. But I can’t understate the importance of building those relationships and maintaining them over the time that we’ve worked through.
Lui: When I talk about the Australian community, I really think of it, at it’s core, the three searches that I’ve concentrated acquisitions. The one traditional fund that’s been raised in addition to that and two self-funded partnerships that are currently going. So what we have in that group of six search style acquisition, only one of those playing traditional, is also a group that talks to each other and us quite frequently. We don’t talk to each other every day, and there’s some that we’re closer to than others. But when someone wants to know something about Search, we generally know someone who we can have them talk to that’s in their home state.
By the same token, if someone’s found them, they kind of get flicked our way, so there is that collaboration amongst the community already. On top of that, there’s people who are starting to talk more broadly around Search, and we adopted essentially the same process that a searcher does. Which is we built a list of people that we wanted to know and that we wanted to build a relationship with, and we went out and built relationships with them. And not all of them are embedded yet, but quite a number of them are now where are comfortable to send them an email, or pick up the phone and talk about searching and the community is searches. So it is an organic relationship built for us. Yes, we’re active on social media and we’re active with our website, and if someone Googles search funds in Australia, or entrepreneurship through acquisition in Australia, would probably be on the in the top three listings there. Very little is coming from that though, a lot of the relationships we built have come from outreach.
I know you’ve gone to a few conferences in the US, what are your objectives when you’re in the US? Are you there to get advice on how to grow the Search Fund Community? Are you looking for investors or other are there a few others that I’m missing that you’re looking to hopefully learn about while you’re there?
Ak: We initially went last year to immerse ourselves in the community and really understand what the culture and the community is about, and to learn. Going back again this year, so last year we went to Harvard, this year we went to Stanford. The big pieces we learnt was just the language around search is very different between Harvard and Stanford. And what they mean by search is slightly different, there are nuances. But more importantly, to immerse ourselves in the community and just learn, A, through osmosis, and secondly, through structured questioning and talking to people we were seeking out about their experiences of search and how they started up in their community. So we’ve talked to a lot of investors. We’re touched at the incredible, and we’re very grateful for the incredible amount of time that they’ve invested in us, and given us for no benefit to them, but for sharing their experience. So the gratitude goes out to them for that in droves.
We’ve spoken to many searchers and learned about their journey. We spoken to a lot of academics in the different schools who run ETA programs, and that’s helped us understand and structure what we’re providing in Australia. The other thing, Alex, which has been fascinating to talk to people who are now investors, who are actually business owners who were bought out by searchers. And listening to their stories with very unique flavor, of very, very bright people who have built awesome businesses but didn’t want to sell to VC. And listening to their stories as to why, and why did they sell to search versus other options that they could have exited through.
It’s just been a fascinating learning curve for us, because it allows us to come back to Australia and talk to a lot of business owners who might see a succession as a very black and white, very in or out kind of conversation. Whereas the rainbow of opportunities that sitting in exiting, are not as clearly articulated here as they are in the US, certainly after the conversations we’ve had. So what we’re finding is we’re able to put a lot more depth into our conversations, purely by talking to the experience that people had in the US and abroad.
Lui: To picked it on that that is this is still very new in Australia. Even though we’ve been going for pretty close to 15 months, and I’ll come back to the piece. Talking to anyone that would listen around entrepreneurship through acquisition, and many that wouldn’t listen. We love the concept, we love the model, we think it has real merit here. Logically it makes sense, but logic doesn’t always prevail. So one of the questions we had last year, going to the Harvard conference is just how did this model propagate through the world? Because it’s a great idea, but how does it actually go from something that was born at Harvard, popularized at Stanford, to now being prevalent throughout the world, and not so much in Australia? And it was interesting to hear the responses both from searchers and investors, also just interested community parties that did propagate throughout the world, primarily first by searcher going back to their own countries, but being funded partly by US investors and local investors.
Which is, to some extent, the experience that started here, and then from that success, or initial successes, having universities coming on-board to embrace the program. And then eventually local searchers, trained in their country, raising funds eventually from local sources only, but with potentially some offshore support. But we understand that, and that can be a five, six, seven year journey. We just want it to happen in Australia sooner, is the short version. So we would love to see that whole journey, just be done in a good way. You’re not rushing it, but have it kind of transpire and have there be 10 searchers a year, starting a fund in Australia. Because, that’s what we think Australia can support. Given what we know about the local demographics.
Obviously talked to lots of perspective searchers. What have your conversations been like with Australian business owners, on the other side of that transaction? What has been their reception?
Lui: So Ak and I are both, are also coaches, business and executive coaches. And generally we work in the business coaching side, and we what we do is we work with the owner. And we’ve had owners go through exits and that’s part of what we have both been involved in, for many years. With the existing owners, that I work with, and there’s a small, a couple of handfuls. They’re captivated by the idea. Many of them don’t see the large party, that can take them out, that can give them their exit when they’re ready. What they’re captivated by is selling to an individual, where the individual will protect their legacy and grow their legacy. They, most of the owners that I work with today, have a really strong focus on both their customers and their employees. And they just want to see the organization continue to provide value for both.
When they’re of that mindset, they love Search. They love the concept of an individual building a relationship with them. And taking their baby. Their business. One of my clients talks about, it’ll be when we do, do a podcast at some point, he talks about this concept of his business, bang there, at the birth of his baby. He was on the phone while his partner was in Hobart. And he’s on the phone because his business was demanding stuff from him. So he sees it as is. In fact, they both see it as their first child. It was the first thing that they created together. It was the first thing that they grew up together. They don’t want to hand that on to someone that will take it, and then take that identity and turn it into something else. They want to say that identity continue to thrive.
Ak: I think it’s ubiquitous, in the sense that those kinds of owners also want to ensure that the family, that word is used deliberately, that they’ve built around their business, in terms of key staff, key people, even their suppliers and clients. Are still kept and looked after, as the business grows beyond them. And I’ve had one case in particular, where the two owners, and one’s 15 years older than the other, and has exited earlier than the other. Wasn’t keen to let go until he felt absolutely certain that the business was in the right hands. And that was a management buy-in. And that was managers buying into the business. But it took him a good three or four years before he felt very comfortable, that they could take his baby and grow it up. And at that point in time he fully retired from the business. So there’s a real attachment, at the level of business we’re talking to, to the business as something that’s beyond just a P and L.
What details do you usually explain to a business owner about search fund transactions specifically?
Lui: I think you’ve hit an interesting point, which is, and it’s not just related to the lack of financial buyers in this size, this sub 30 million size. But also the lack of intermediaries that can explain those concepts. The third parties, Australian investors and the business owners are investors themselves, are quite risk-averse. They’re used to all cash transactions, not saying that’s all they’ll do, but the major investment class in Australia is property. And property development has been the mainstay outside of mining and mining services. Property development has been the mainstay for most individual investors in Australia. And there’s been, not just because it’s low risk, it’s also tax advantageous in Australia. So it has created a little bit of reluctance around some of the structuring that you see in the US. But it’s changing because there is, a, developing awareness that there are other terms, so vendor notes I’ve seen two in the last transactions that I’ve been involved in, not over the top, but there is that ability to structure it.
Australian business owners notoriously reluctant on clawback clauses and, as they should be in many ways, but it really just does depend on, from my perspective, whether you’ve built the relationship, where you can actually understand what the owner is trying to achieve, and why they want to get out, and what that looks like for them. And whether you can put something, in its entirety, as a package to them. It is possible to use vendor notes here and it’s more than possible, it’s absolutely doable to use vendor notes here and other forms of structuring with the owner.
One of the other differences between Australia and, in particular the US, is the banks aren’t as friendly here, from a lending perspective, and I know there’ll be people in the US saying that banks aren’t friendly in the US. But compared to here, it’s even less. So we don’t have, for example, the SBA guaranteed loans system here in Australia. We’ve got the thought around one but it hasn’t really been executed. It really looks like more the UK Business Growth Fund, but it’s not in operation yet, and there’s still debate going on as to how it will work. And if anything, it just looks like the bureaucracy will make it difficult to take advantage of.
Is there an obstacle to getting more adoption of the Search Fund model in Australia, that are particularly difficult or more difficult than maybe you expected?
Lui: In a word, awareness. That’s… Strange by their very nature, I think we’re actually quite entrepreneurial. And there’s this interesting dichotomy in Australia, where you have this huge focus on property investment. At the same time, you have a huge prospecting culture. Prospecting in terms of mining and exploration and it is, in a different way, quite entrepreneurial. You know the concept of digging a hole or drilling a hole, to see if there’s something that’s worthwhile exploring down there, and then coming up with nothing and then digging a hole a hundred meters away, and then doing that over and over and over again. While I’m not saying that those people are the best entrepreneurs, there is that understanding of risk and reward. There is that understanding of effort and doing what it takes to create value. What’s still missing in Australia, even despite heavy efforts that we’ve put in, is still the broad awareness that this is a viable model, and that will come, as the universities embrace the program in some way, shape or form.
Ak: I think in addition to that, it’s also going to come as the first line of searchers start to acquire and build their businesses, and that story starts to get out into the broader market. Again, you know Leigh mentioned earlier, that there are some people that we know, who will come to Search in the next two to three years and purely that’s a timing thing. So I think, within the next three to five years, we’re going to see quite an exciting growth in the Search side of acquisition. And then in maybe about five to six years time, you are going to start to see some these businesses, that have been acquired, looking very different to the way they are right now. And those stories will start to really promote some really exciting conversations in the Australian market.
What are the next steps or the next few years look like for Second Squared specifically? Like in the next few months, what are you hoping to do and then next year, and the year after, what does that look like for you?
Ak: Well, it’s already starting to have its effect, Alex, at a very rudimentary level, in the sense of, we’ve already run programs for perspective searchers, and as part of those programs, we get them to sit over dinner with current searchers or people who’ve searched and acquired. And we start with a question and then just sit back and watch the rest of the evening. We eat while they talk over dinner. And it’s just fascinating to watch the conversation, that does ensue from that. And in essence to searchers and now newly acquired business owners are selling it without realizing they’re talking about the ups and downs and the pitfalls and hey, it’s not easy being an entrepreneur. It’s not easy being a searcher, but hey, here’s how I did it. And in doing so what they’re doing is they’re actually selling the concept to the potential searchers out there with Watson or … Because, it’s not all pretty.
There are a number of fronts, if you like, or a number of strategic focal points for us. First of all, is continuing to engage with the university sector and to develop programs in and around the university sector. That can start to give air play research at that level, at the MBA level, at the graduate level, and the undergraduate level as well. So, that’s a key focal point.
The other one is around working with prospective searchers. Currently in our pipeline as well as ones we know that will come into that pipeline over the next 12 to 18 months and to help develop them. The third one is to continue a key focus on our investor base and the network, I guess the ecosystem around the searcher to ensure that they’re up to speed and they’re really clear as to where we’re at in process.
And ultimately we think that certainly by this time next year we’re planning that there will be at least two or three searchers that we’ve kicked off that we are invested in and they have a such fund that’s out there looking actively for their acquisition. And that that’s pretty much the next 12 months for us.
Beyond that, Lui spoke earlier about a fund to funds. You may want to talk a bit more about that Lui. But certainly within the next two to three years we see that there’ll be a fund of funds that Second Squared will be managing on behalf of a number of investors because we’ll have a ground swell of potential searchers coming through the funnel.
Lui: Yeah. I think the only thing I’d add around the fund to funds is part of the same reason that PE or financial buyers don’t play in this space well is the effort it takes to do one transaction. Those same, the investors that invest in those financial sponsors have the same issue. The effort it takes to build relationships with a range of searchers and really what they want is portfolio, the portfolio of investments rather than one investment in one searcher. So the fund to funds just gives them the ability to do that.
Having said that, I think it’s really important to kind of… Also a side of who we are is we still don’t think we’ll ever be a single source of capital for a searcher even with the fund to fund approach. We just see that being the Australian lead.
And that’s if we could do that, that allows the development of the searcher in many different ways. Firstly, it forces them to do the fundraise, which we actually think is a really critical part of their learning and development and actually how they approach that says a lot about how they’ll approach the task of finding and acquiring a business.
Everyone that we’ve seen have to go through and have those investor conversations, how they approach it just allows you to see a lot more about how they will approach the entire task of searching and how they will build their relationship with their investors. So we think that’s still really important. It also allows them to get broader mentorship and advice from more than just us. We think that’s another really strong valuable piece to the model is matching not just funds but just matching the experience that you need.
Before we continue, I want to make sure I get a few on my typical closing questions in. But my first one is about what classes you teach in college and the question seems a little redundant since I would imagine the class you’d be teaching is the same subject you’re teaching right now, which is about searchers. But I could be wrong. Is there a topic that you’d be interested? What would you teach?
Lui: The short version of the class that I would teach is culture doesn’t eat strategy for breakfast. You need both, and you need both aligned. And that would be the thing that I wish more people would focus on, the interrelationship between the two and how synergistic they are when they’re together. Not the sole focus on one or the other.
Ak: Alex, for me, I’m really struggling with this question because there are so many areas I’d love to be able to play. And I guess though if I look at my background, it’s always been around business growth and strategy. And again, it’s straddling the commercial strategic piece around positioning, building a business commercially, as well as that cultural piece.
And the really interesting piece around the culture and growth is how do you… A lot of business owners ask us the question, how do you maintain your culture as you grow? And really looking at questioning what is it that you want to maintain in your culture in that growth?
Because as you grow fundamentally things have to change. But what other… What are the ground rules? What are they… the non-negotiables in that? So to me it’s again, it’s about that cultural shift of growth and how that affects not only the owner of the business, but the people in the business, the clients, the entire ecosystem of that business. There’s some really, really cool stuff that I think could be researched in that area.
Is there a belief that you had early in your careers or perhaps in the early ideas of Second Square and that you had a strong belief around that since you’ve kind of loosened up on or flip flopped?
Ak:I think it’s like anything. We have … It’s really quite bizarre that to get search into the Australian community and search being the context of non-startup, we’ve had to do a startup. So, Second Square, it’s a startup to encourage people not to do a startup in essence.
And so we find that quite bizarre and interesting in itself. But in that, the piece around a belief that as startup people we, in this business, we’re pretty frantic and we’re pretty passionate thinking that we’re going to change the world pretty quickly, like all startups.
And the same thing has happened to us as many others and that is that the world has its own speed and certainly in the area we’re working in, we’d like to be going much faster. And there’s been a bit of belief shifting for us and awareness change for us.
And we talk about, Lui and I talk about this a lot, in the sense of where we’d like it to be and where it actually is are two very different things. And so there’s an expectation setting piece that we’re constantly holding each other to and going, okay, well yeah, we’d like it to have been there, but we’re not there yet, which is the impatience of any startup, which is always quite fun to review in your own minds when you step back from it.
But when you’re in it, it can be quite frustrating. At the end of the day we have to take pace with where the world’s going and how quickly it’s moving in its mind shift around this.
Lui: That’s right. That’s absolutely right. I vouched two years ago I wouldn’t do another startup. Here we are, two years in, well 16 months into another startup. Very different from the previous ones. The balancing act and the flip flopping is not so much now around that. It’s, we talk about this quite openly, Eric and I still run consulting practices.
We still do strategy consulting, you know, I still do business exists. Eric does growth consulting and coaching. We both coach small to medium businesses as well as executives around the country. And we love doing that work, at the same time as we’re trying to promote this thing called entrepreneurship through acquisition via Second Squared.
And it’s the juggle of that. It’s the juggling of, you know, what could be and what currently are busy practices. The family aspects of also the families that we both have and our interests. You know Eric is involved in… heavily involved in the coaching fraternity across the Asia Pacific. I’m heavily involved in a number of not-for-profits and as a board member.
It’s the, just the juggle. It’s the juggling of all of those aspects that I think we thought I will be able to keep this all good without doing too much. But the reality is the effort that we’ve put, the effort that it’s taken has been bigger and we’ll do it again in a heart beat. At the same time, it’s the managing of the energy flow. That you have to. That’s an ongoing work-in-progress.
What’s the best business that you’ve come across? Not necessarily one you’ve invested in, but it could be just any investment you’ve seen in an article or heard from a friend?
Lui: To me, it’s a business that I was on the buy side of for an existing client and we bought… We essentially bought 15% of it. What made it so interesting is they’d built a… It was a … It was actually… It had been a startup, but they were looking for growth capital.
It was a technology platform that had a mix of software and hardware. And the interesting thing was it had a recurring revenue base where it was about 92% recurring and growing and built in Australia global appeal. So it was the growth capital was going in to fund the next round of geographic expansion. So it went from Australia to Singapore to London, to now breaking into the US. Really interesting core business with amazing people in it. As good as the platform is, you couldn’t take those people out in the platform, and still continue. It had bright bits. They had built this amazing software thing and hardware thing, but the reason it worked, is because of these two very interesting guys who saw a gap and politely transformed the why that that niche works.
Ak: Lui and I see more than a handful of businesses every week, so it’s hard to actually choose. But the one that immediately comes to mind for me is an old client of mine where, it was two partners, a husband and wife who were both scientists and had left academia to start up a business and were really struggling. But the area of science they worked in, was very easily translatable to commercial business opportunity. Pretty much rot like Louie said. And what Search is are really looking for as well is, is a business where there’s a goodly portion of revenue that’s repeatable. And in the last sciences game, a lot of it is repeatable. A lot of it can be done time and time again, because you’re talking about the physical world and the physical world has a way of repeating itself.
So this business, these scientists set up a consulting house around a particular life science issue. And very quickly realized that they needed to get out of the microscope reviewing and rotting the reviews on the issue and building a team that did that, so they could go and build the business. And the business group, not only from a small two to three person business here in Perth that grew nationally, into a business that employed literally 100s of people. And the ability for it to go from a life science businesses as it’s core, to this additional ancillary services that you can build around that specific initial consulting, was really exciting.
And so we saw exponential growth in that business over a number of years, because they leveraged the initial product into secondary, third, fourth, fifth products and services that set off that initial, I guess, requests for services that clients would ring for. So to me, that was an exciting way of looking at how a scientist could take their profession and commercialize and monetize it in many, many different ways.
Thank you for taking your time today. This was phenomenal. I really enjoyed chatting and I’m really excited to see where Search goes within the next few years in Australia, this will be fun.
Ak: Yeah. It’s a wild ride and we’re really up for it and we’ve enjoyed every minute of it and we know we’re going to enjoy the next few years as well. It’s going to be great.
Lui: Yeah. It will be, we’re excited about it too.
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