I’m joined by Sara Heston and Peter Kelly. Together at Stanford, Sara and Peter, among other projects and teaching, assemble the Stanford Search Study that has been released every year on even years. The study is widely considered the go-to resource for learning about search funds and is often the first resource shared with folks considering the path.
The first study in 1996 was only two pages long, and the 2022 study released in July is over 30 pages, reflecting both the growth in the Search Fund Model and the increased availability of data. Our conversation covers the purpose of the study, it’s evolution since 1996, a half-dozen interesting trends they have observed among Search Funds, characteristics of ideal Searchers, and data sets they want to add to the study in future years. Enjoy.
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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.
(1:32) – What’s the background and genesis behind this broad Search Fund Study?
(3:28) – How has the audience changed over time and what are the goals of those reading the data?
(6:28) – What are some decisions you’ve seen made by people utilizing the study?
(8:02) – What’s the methodology for putting together the study?
(9:48) – What are some of the most notable things you’ve added to the study over the years as it’s grown?
(13:10) – Where do you get ideas for new data sets to add?
(15:27) – What are some interesting trends you’re paying attention to based on the study?
(18:49) – Why do you think you’re seeing a spike in returns?
(21:58) – How much of the rise in multiples is due to the 10-year bull market we’ve had?
(26:59) – Is there anything else notable you’ve noticed that’s influencing Searcher equity?
(29:22) – How have you seen exits evolve over time?
(31:53) – Are there any interesting sets of characteristics that the best Searchers have?
(37:07) – Do you see Searchers who feel out of their element building teams around them to pad weaknesses?
(39:20) – What are your thoughts on Partnered Searches?
(42:14) – What are some data sets you’d be excited to add to future studies?
(45:53) – Do you have a sense of how large the self-funded Search community is?
(47:39) – How can folks in the community help make studies more robust?
(49:31) – What strongly held belief have you changed your mind on?
(53:45) – What’s the best business you’ve ever seen?
Alex Bridgeman: Well, thank you both for coming on the podcast. I’m really excited to talk about the Stanford Search Study. It’s kind of the go-to Bible for search fund data information and introductions for people. It’s often the first link that I send anyone or friends of mine send folks when they are explaining search for the very first time. But I would like to kind of start with the background of the study. What was kind of the general purpose of it? When did it come out? And just what’s the broad kind of background of this search fund study?
Peter Kelly: It started- Sara, can I take this?
Sara Heston: Go for it.
Peter Kelly: Since I was in the community, though, head down trying to run a company. It started in the mid 90s. Irve Grousbeck started it. You can still find the original one out there. If not, we can send it to you. It’s more rudimentary. But the idea was just to help investors understand what the heck this new thing was and really what the returns were from it. Were they good or not? Or what did they look like? So that’s how it started. And then we’ve done it – I say we because I contributed my data for, I don’t know, 10 or 15 years. So, then I took over- then I sort of helped run the study. And now I run it with Sarah. We just added more questions and more data along the way. But it really just started with, hey, what’s the IRR? How many MBAs are there? What’s the IRR? What’s the return on invested capital? And some basics.
Sara Heston: And to add a little more background on what we cover in this study, it’s focused on traditional searchers in the US and Canada. And we aim to include all traditional searchers. So 99% of those that have ever run a traditional search. We don’t include self-funded or single sponsor or anybody outside the US and Canada. Our partner, ESA in Barcelona, captures them in a similar study that should be out soon. So, that’s the ecosystem of search in which we focus on in this study.
Peter Kelly: By the way, the ESA study we do in collaboration with ESA. I’m in charge of that. And Sarah helps with it also, like sort of advises the person who does that at ESA with me.
Alex Bridgeman: Gotcha. That’s excellent. Looking forward to seeing that study as well. Let’s kind of outline the purpose and vision for the study and different goals for it. It sounds like it was originally for investors. But I would love to hear how has that audience, the intended audience for the study evolved or changed over time, and what are some broad goals for the study?
Sara Heston: Our intent is to report really accurate and timely information on real time trends that we’re seeing in the search community. And this is useful across the whole spectrum of those involved in search. So, for prospective searchers, they use it to help explore if search is right for them, to truly understand what it is, what’s necessary for it, and to make the decision if they want to do it. For current searchers, they use it to help negotiate terms with investors, identify trends that might help them in their search, such as changes in multiples or industries. And investors use it also to identify trends, but also to understand what’s going on in returns. And then for those that are institutional investors, to communicate to their investors. The study is used throughout the community to inform those that maybe aren’t a part of the community yet what search is all about and how it works. And so, it helps kind of bring new people into the world of search. The first study, as Peter said, was about two pages long, and it’s really evolved since then. This current study is 30 pages long. So, we’ve added a lot of content over the years. Originally, we talked a lot about how to approach a search and what is search, and some of that content we’ve now moved to our primer, which you can download from the Stanford website for free, and it has a lot of information on how to run a search. But the goal of this study is really to focus on recent trends and returns and report that out every two years. Some things we’ve added over time include information on seller demographics, which we added in 2018. This study, we added a lot more on searcher background, as well as more detail around acquisition multiples. So questions rarely get dropped from the study. We don’t like to take things out. But we do we do tend to add a few new ones each cycle.
Peter Kelly: The audience has just expanded really, I mean, to include, of course, searchers so they can- They’ve used it to raise capital to show why it’s an attractive place to invest. And lately, because a couple years ago, we started asking them how much money they were making from it themselves, they’ve used it to decide whether to do it because they can sort of see what the potential outcomes are.
Alex Bridgeman: Gotcha. So it sounds like- So talking about different decisions being made with the information, it sounds like searchers are using it to decide whether they want to search and then what are typical terms. It sounds like investors use it for the same kind of term ideas or baselines. What are some other decisions you’ve seen being made with this study information?
Peter Kelly: I mean, people try and make the decision whether to partner or not with data. Though, I think that’s really more of a personal decision. It’s based on your own style and how you want to approach this kind of entrepreneurship. They also, I think, try and decide about industries, what industries to focus on. Maybe, I mean, I think it helps set the terms, like how many investors should I have? And how much money should I raise? How much money can I raise? How much can I pay myself during the search? Just I’ll say the recipe of a median search doesn’t reflect many actual searches, but it does guide their decisions on kind of how to get started.
Sara Heston: Yeah, I’ve heard perspective searchers that use it to really understand is it right for them looking at the backgrounds of the searchers that we report on, what did they do before their search, how old are they, what type of education do they have, and figuring out that it’s a wide mix of people that get into search and helping that to determine if it’s right or wrong for them.
Alex Bridgeman: It sounds like the methodology is survey-based, sending out surveys to the traditional searchers in the Stanford network and other networks. I imagine that contributes to the every other year cadence for the study. I know it’s a ton of work to put these studies together. What’s that methodology like? And how does that influence kind of timing of the study?
Sara Heston: Yeah, it’s a lot of work. What we do is in the two-year period in between, we have an ongoing dialogue with the investor community on who they’re meeting with, what searchers they’re backing. I get lists from probably 12 different investors on everybody they’ve met with, whether they backed them or not, and work through it to figure out who launched searches. And from that, we determine who in that year launched a traditional search fund. And then when- in a study year, so in January of this year, we launched our survey. We sent it out to everybody, so the new searchers, the searchers we knew from the last cycle, the CEOs that are still operating, to collect all sorts of data. And our goal really is 100% participation. Sometimes we have one or two that don’t participate for various reasons – because of sensitive time in the cycle, they might be selling their business and not want to share certain data. But we really aim to get everybody to participate. And because we capture searchers in the very beginning, we think we avoid a kind of bias towards only including successful searchers because they’re there at the start when no one knows who’s going to buy a company or not. And we track them through the whole cycle. We really rely on the investor community to help us contact those we can’t find and identify who’s out there. That’s why it takes six months to get the whole study done. We spent a lot of time just collecting data and then scrubbing the data to make sure it’s accurate and it makes sense. And then a couple of months of analysis and writing.
Alex Bridgeman: Yeah. You mentioned going from two pages to this latest one being 30. That’s a ton of marginal work compared to that two-page study. I would love to know what are some of the most notable things you’ve been adding over the years to the study that push it up to 30 pages? There’s now a very long appendix with lots of different tables and sets of data that are really interesting to read through. It’s very easy to spend an hour or two just reading through the appendix alone. I would love to know like what has been the evolution of the data that’s included in the study?
Peter Kelly: The data actually hasn’t changed much in 20 years. We’ve added new questions the last few cycles. And we’ve taken out some questions, too. And I can’t remember, we try not to- we’re working hard to not make it longer, especially after the last- over the last six years. So, we take out some stuff and we add some stuff. For instance, we’ve added information on the demographics, on the ethnic and racial demographics of searchers. We’ve added, maybe six years ago, we added questions about board members and which board members were most helpful or not. And we saw no patterns over a couple cycles, so we don’t focus on that anymore. We’ve added questions about, as I mentioned earlier, about what the equity returns are for the searchers themselves. We didn’t have that 20 years ago. But a lot of the data in the back, age, background, industry background, has been the same. Sara think of some- will know of some others that we’ve added along the way. But I’d say the survey was 80% the same 20 years ago. We just have much more data now, so we have much better insight into what works and what doesn’t work. And then we’ve taken out some things, added some things, and I love the things we’ve added. For instance, this year we added, what was your perception of the honesty of the person you bought the company from, what we call the seller? And how long did that person stay involved with the company after the close of the acquisition? I think that’s instructive. So, we did things like that. Let me stop there.
Sara Heston: Yeah, we’ve provided a bit more clarity or detail around returns. And so, we’ve added some more charts on those, also abound industry, both what industries searchers are purchasing companies in as well as what industries they’re looking at while searching. So, we continue to try to put more clarity and share more information around that. Seller demographics was a new one we added a few years ago, the age of sellers and kind of what their background are. We shared a lot in 2018 on that, or 2020, a little less this time because it’s not really changing. So we try to share new things as we come across them. But if they’re not changing trends or things we think are really insightful to keep a chart in for, we kind of scale it back and try to put something else in to keep it fresh and insightful and share as much as we can from what we can take out of the data that we’re seeing. And as Peter said, over time as we have more and more data because there’s more and more searchers, we can start to glean some new insights and some new trends.
Alex Bridgeman: Is there one main source for new sets of data that you add or new ideas for data? Do get these ideas from investors or searchers who maybe ask you- maybe you get like a couple of questions that are around the same topic, and you think, oh, okay, maybe we’ll add that in the next study. Like where do these ideas come from for new data sets and questions and information?
Peter Kelly: We just survey say six months- six months before we start the survey, we just ask people who are deeply involved in the community, so repeat investors, frequent investors, and entrepreneurs, what do you think is interesting, what do you think is important? For the most part, for the last couple of years, we haven’t gotten a lot of new things. But we always ask that. And I guess, I’ll give you an example of that in a sec. The other thing we do is just think about we run regression analyses. Sarah is really good at this. And she tries to look for correlations in all the data from before, so that we can try and figure out what makes a successful search entrepreneur, what makes a successful search acquisition, what qualities of the company or the entrepreneur or the investors are leading to either better outcomes or bad outcomes, just so people can learn. We just want to shine a light on this. And as it turns out, the returns look attractive, and it can be a great path for people. But those are the two sources. We ask everybody who we think who’s interested and engaged, and we look for correlations, and then we dive deeper. Is that fair, Sara?
Sara Heston: Yeah, exactly. Peter and I spend a lot of time thinking about search, interacting with prospective searchers, current searchers, investors. And so, I think we always kind of have an ear open to what’s going on and what are people talking about or interested in. And then we really reach out and start asking the questions as we get close to the study launch to make sure we’re capturing kind of what’s new, what’s different, what are people asking questions about.
Alex Bridgeman: Yeah. And in regard to the what’s new, what’s different, there’s I think a half dozen trends that we’ve talked about before that are interesting to follow as the studies come out. I would love to hear from the two of you what are some interesting trends that you’ve noticed and you’re paying special attention to as you create the study and have conversations based on the study?
Sara Heston: Yeah, so one trend is searcher ethnicity and gender. And we added ethnicity for the first time this year, so we can’t report out on a trend there but are excited to track that going forward. And then amongst gender, female searchers were 13% of the searchers who launched in 2021. And we’re excited to see a positive trend there. The community has really embraced the need for increased diversity. And we’ve seen a lot of support for both women and people of color in the last few years. And so, that’s a trend where we have an eye on, and it’s moving in the right direction. And we hope to see that continue. Another trend is in industries. So, software and tech enabled services have been popular industries for a number of years. But those are really broad buckets. The actual businesses within the software category touch on a really wide range of underlying industries. Software in today’s world is kind of more like business services. Peter, do you want to add something on that?
Peter Kelly: I mean, software, sort of technology was a new category 10 or 15 years ago, and some people thought it wouldn’t – including some very smart people – thought it would not be a good place for search funds maybe because they thought it changed too fast and was too technical and there’s too much risk. And I think what we’ve realized, partly because those industries have evolved, is that it’s not really an industry. Technology’s not an industry. It’s a method of delivering things. One of those is software, and it’s a way of delivering business to business services, for instance. It’s super powerful. So, as we’ve understood what technology really means. In terms of different industries and different business models, we have looked at- we’ve been able to tease that out in the data in the questions we’ve asked and the data we’ve gotten back from searchers.
Sara Heston: One thing that a lot of these businesses all do have in common, though, even though they may touch a wide variety of industries, that makes them attractive to a searcher is that they are good industries that are growing, they have recurring or repeat revenue and stable customer bases. So, there are certain things that they do share in common, if not the same kind of headline industry. Another interesting trend that we’ve seen is returns. We saw returns in the 2022 study increase to 35.3% IRR from 32.6 in the 2020 study. This somewhat matches the broader market that has also been strong but reflects the maturity of this search model and better understanding about what makes search successful. We’re happy to see that as the search community grows, there’s still a focus on high quality businesses with good returns. And searchers are learning from past experiences, what to avoid and best practices, there’s more information out there to prepare a searcher and support them such as podcasts like this, so that we’re seeing better returns within the industry and partially because or mostly because searchers are really well prepared as they’re going into it.
Alex Bridgeman: I’d be curious, just diving into the returns question a little bit more, there’s definitely a ton more content out there about search and about what searches have worked really well and business models that work and investors have had a lot of experience investing in search. Are there any- Obviously, software was a big trend that we just talked about a little bit. Do you think that has any influence on returns as well? Or is this more of a broad kind of search refinement in terms of strategy and businesses to look for, and that’s the bulk of the driver of those increasing returns?
Peter Kelly: Our data hasn’t shown yet which is the biggest piece of the increase in returns. But I would say, in general, people are just- there are more people buying good companies, or good companies in really good industries. Software as a business model and way of delivering value is one of those that’s really, really powerful. So that for sure is driving some of them. But not some of the- well, they’re slightly higher returns now than they were in the last study. And sort of I think the one surprising trend, which isn’t- it’s just that the returns have held up even though so many more people are doing search. And I think Sarah is absolutely right. Part of that is because there’s more content, there are more classes and business schools on it, there’s lots of sharing about the best practices. We just know better what a good company to buy is. Part of it, some of the great returns you’re seeing lately, the more than 10x returns, are coming from not technology businesses but healthcare and education and business services. So, it’s not just that that’s keeping the returns high and bumping them up even a little bit from the last study. But software is a great business model if you can do it right. And unlike 20 years ago when maybe you needed coders, developers were really hard to find and hard to manage. Now, there are some software businesses or software enabled businesses or tech enabled businesses where you can get the technical talent. There’s a pool, there’s a deep pool, you can find it. The technology’s not changing that fast that you can’t base the business on it and not be a technical CEO yourself. So answers coming from different things. I’m trying to think if there’s anything else. Do you think there’s anything else besides buying better companies including healthcare, education, and software that’s been really good? Anything else that’s keeping returns up and maybe bumping them up since the last study?
0Sara Heston: No, I haven’t seen anything jump out in the data that really points to that. We’ve seen overall multiples go up across private equity and whatnot. But I think searchers are just- they’ve stayed really focused. They figured out how to use their investor networks wisely to support them as they’re building the businesses. And I think investors having been through multiple cycles have a lot more to kind of give and support, give to support searchers. So, I think the model, it’s not just understanding better companies, but kind of the whole ecosystem is refining and improving.
Alex Bridgeman: And one other trend that you pointed out was, or we pointed out in our earlier discussion, was multiples increasing. And you just mentioned it there again. I wonder how much of the multiples increasing, maybe your data says this, how much of that do you think is the broader market or a bull market for the last 10 odd years versus searchers just finding better companies and that’s higher quality companies just need higher prices to close? What do you think the multiples increasing as being driven by?
Sara Heston: We saw the price to EBITDA multiple in the current study go up to 7.3 from 6 in the previous study. And Peter and I’ve had a lot of chats about this in terms of trying to understand, trying to answer the question you just asked it. Some of it could just be better businesses being bought, and they’re going to go for higher multiples. And I think some of it is part of where we are in the cycle and that debt has been cheap, and capital has been available, and so searchers have been able to pay a bit more; they’ve been able to finance it easier. Peter, go ahead and jump in on this, too.
Peter Kelly: Those are entry multiples that you’re talking about, Sara, and that’s absolutely right. And I think those are the right reasons. The exit multiples are higher. The data doesn’t tell us, you can’t tell how much the exit multiples are higher than they used to be because of the market or whatnot. Certainly some of it’s the market. There’s a lot more private equity than there was 20 years ago say, and they’re willing to pay it for good businesses. And those businesses stay private for much, much longer. They don’t go public for a lot longer. But we look at this all the time. But really, these are just terrific companies that are getting built. And remember what’s happening is an entrepreneur is usually buying a company from an owner who has five roles in the company and is central and key to that company’s success. And then the entrepreneur is building a team, and they’re growing the business. So they’re professionalizing the management further, they’re systematizing everything, they’re making it more of a stable company, and they’re growing it a lot. So, it’s both bigger and growing more consistently, and it’s got a more reliable long-term flow of cash coming from it. That kind of business is just worth more. There are also many instances or some instances, kind of the 10x returns maybe, where entrepreneurs are finding adjacencies and adding that to the base to the business that they bought. And that just makes it a more attractive business for the next buyer. The buyers are about half private equity and half strategic buyers. And I think the entrepreneurs are just building really good businesses. So if I had to guess, Alex, and Sarah, let me know if this is what you think too, but this is just a silly, wild guess, maybe 20% of the increase in multiples upon sale from what they bought it at is just because the market’s gotten more expensive, willing to pay higher multiples. And the rest is the company’s just a better company for the reasons I mentioned.
Sara Heston: I’d agree with that. I just think- I agree that the professionalism and how much they built the business. That goes a lot to increasing the valuation. It’s always hard to break it apart. And we’ve had conversations about how to do that and assign, if you take a business from six times and you sell it at ten times, how do you break that down to just valuations have gone up versus what you’ve added? And it’s really nearly impossible to dissect that. But I think your intuition there of the majority of it being driven by the improvement in the business as opposed to just external forces is correct.
Peter Kelly: And the significance of that, Alex, I think is if let’s say multiples in the general market, say the market for private companies, maybe public companies too, went down, if those multiples went down because interest rates went higher and stayed high or debt wasn’t available or whatnot, I think you would still get outsized returns from search funds compared to say larger private equity. That’s not to say they’re a great investing class for everybody. Because don’t forget, you can only put limited capital or work in them, and it takes contributions from at least some of the investors for search funds to be successful. They have to be good board members who are good at mentoring 30-year-old new CEOs. But I do think returns probably will hold up. We just really see- and you take apart these companies that have really good returns, once they’re sold, you realize that they really have become much sort of more attractive companies to invest in for institutional capital and for strategic buyers because of what the entrepreneur did over the previous 5 to 10 years.
Alex Bridgeman: Going along with that, too, as these exit multiples have increased, so has the searcher equity. The average equity that a searcher earns for their search has gone up as well. It sounds like that’s kind of a- a lot of these factors and trends are connected, interconnected quite substantially. Anything else you’ve noticed around search equity increasing over time that’s notable or perhaps a new factor that we haven’t discussed already that’s influencing that?
Peter Kelly: The terms have been pretty stable for a long period of time. I think in the mid 2000s, maybe early 2000s, there was kind of a lack of attention. And the terms for searchers got sort of looser for a while. And then it kind of reverted back over 5 years to more kind of what it was like when search started in the 90s, or first grew in the 90s. It really started the 80s. It started in the 80s. But the terms are pretty standard and steady.
Sara Heston: Yeah, we’ve seen not a lot of change. And I’ve been actually talking to investors recently, just trying to do a survey on searcher terms and new CEO terms, and there hasn’t been a lot of change, and they are fairly consistent still. Average equity is up. So, searchers who exited their business in the 2022 study earned an average of $7.6 million, so about 1.45 million a year. And that’s certainly where searchers make most of their income. Cash compensation for a CEO is fairly consistent around I think $250,000 a year. So it’s really on the equity side. I think one thing we have seen is as you get out to years five and six, there’s more creativity around the exits, where some investors may leave, there may be a recapitalization and an opportunity for the searcher to realize some of that equity and have some liquidity event but still stay involved in an excellent business that’s growing and build it. So I think there’s more conversations being had around when you get to that exit, how is that managed? And what does that look like? Particularly if it’s a great business.
Alex Bridgeman: Yeah, I’d be curious to learn if you have seen the types of exits evolve over time. Do you see more of that recap, but searchers still stays on as CEO? Do you see that happening more often now? Or perhaps maybe just the sample size today is larger, and so we just get a wider variety. And that’s less of a trend and more of just we have more options available to study? Where do you think exits have evolved, if any?
Peter Kelly: I think more CEOs, or at least in the companies that are successful or very, very successful, I’ll say, I think you see more company- more CEOs, more the entrepreneurs continue as the CEO or maybe the general manager. I think that’s a trend. I think private equity in general has figured out how to make some private equity investors figured out how to make it attractive for both financially and sort of with a level of kind of freedom and support for these entrepreneurs to stay as CEOs. I also think there’s just been a big change in understanding of what makes a good CEO in the last say 20 or 30 years. In the 90s private equity didn’t- which was just getting started, but they didn’t hire or let young 36-year-olds be CEOs of their companies. They would go hire a much more experienced person. Now there’s an understanding that young entrepreneurs can be fantastic CEOs, and that’s part of the secret of a search fund is that someone can be a good CEO pretty quickly out of business school with the right personal characteristics, with the right business to learn in and the right kind of support from mentors and advisors. And I think more private equity investors understand that and are happy to give these guys a chance and realize how good they can be in the long run at continuing to build their companies. There have been a number of sales of companies, say five to seven years ago, that went on to make three to five to more times the equity invested by the new institutional investors, the new private equity investors. So that’s just proof that that does work.
Alex Bridgeman: I mean, yeah, the whole basis of the search fund model is that you don’t need prior CEO or substantial operating experience to go run a successful company, which is really exciting to study as well. But I’m sure over time, you’ve seen a number of interesting characteristics that broadly searchers have in common. Sarah, you mentioned this is a question you get all the time, like, who’s the perfect searcher? What’s the characteristic set for that perfect searcher? And obviously, there’s no like one set that always works. But any interesting trends, or I use the word trends a lot, but any interesting sets of characteristics or types of curiosity or focus that you’ve seen that have led to successful outcomes for folks?
Sara Heston: Yeah, Alex, you’re right, there’s no real perfect formula. And I do get asked that a lot. And I have run correlations on everything that we can and we’ve collected data on to see if there’s anything that has a meaningful positive correlation to success in either buying a company or achieving a higher return. We looked at searcher background, if they took an entrepreneurship class, entrepreneurship through acquisition class in school, the length of the search, their age, the type of search they ran, industries, expected growth rates at acquisitions. You name it, we’ve tried to find a leading thing. The only thing that’s really jumped out is partnered searches do tend to have higher returns than solo searches. But as Peter said earlier, there’s only so much you can do with that knowledge. You can’t force- forcing a bad partnership is not going to give you a good success rate. And so, it really comes down to more subjective kind of personality characteristics. I think one thing I see a lot in searchers that do well is they really want to be an entrepreneur. They really believe in this model. It’s not an easy search period. It can be a tough two years, and they’re really focused; they want it. And those that kind of drop off along the way, maybe it wasn’t the right path for them. Maybe they decided that they had a better opportunity come up, and that’s perfectly okay. And those people are successful in life and usually have learned something amazing in their search that they carry forward. But a successful searcher truly wants it and wants to be that entrepreneur, and that’s their driving force. Another thing I noticed is their adaptability. When things aren’t going right, they figure out how to how to change it. They know that everything’s not going to be perfect, and they can move within that. As well as coachability. The mentorship is a big piece of how search is structured and how it works. And being open to that input from their boards and their mentors is important.
Peter Kelly: Yeah, I mean, we put personal qualities that we think are important in the primer, and we try and change them every time we revise the primer. The last time we revised was two years ago, but I’ve revised it, I don’t know, four or five times before that. And they’re just pretty stable. So, we look at people who tend to be successful who really, really want to run a company this way. They just think, oh my gosh, this is the best way for me to do it instead of say a startup. There are people who want to make a lot of money for themselves. And they want the control, autonomy, accountability of running a company in this way, but they also want to make money doing it. The characteristics are attention to detail, perseverance, ability to build relationships and networks fast and strong, which is also known as sales, sales ability or interpersonal skills. That’s a really critical one. I always look for that in people. If people ask me, do you think I can do a search? I tell them look, do you think you’re in the top quartile of your business school cohort in that skill, ability to build relationships and networks strong and fast? If not, it’s harder, it’s going to be harder. But if you’re really good at that, you are like a lot of people have been really successful. Also, there’s sort of confidence in one’s own leadership ability, even if you haven’t really been a leader. You’ve been in say in private equity, helping execute deals and you had a little bit of leadership in college roles maybe or before that in high school. But do you really believe you can run a company even if you haven’t? Sarah mentioned ability with- kind of the willingness and ability to get advice from really smart people and listen to it and act on it quickly. That’s one. I’ve seen a couple people had all the other qualities, they didn’t have that and it led them down a bad path, or they ended up down a bad path. Flexibility, where they live, how they operate, how they can learn how to do things, new things. Modest lifestyle seems to be important in some way. And there’s this kind of humility, or maybe it’s ambition, right? It’s sort of, I really want to do something big and run a company. But I’m also humble. I know I’m kind of an idiot, and I have no right to do this, but I want to do it, and I think I can do it. But I know I’m lacking some things. I’m going to find ways to fill in those holes that I’m lacking, so that I’m likely to be successful because I don’t want to take huge risk. I want to do this, but I want to do it in a kind of a smart way, so my risks are as low as I can manage them.
Alex Bridgeman: Yeah, I wonder, do you see for those folks that perhaps feel more out of their element running a company or don’t have perhaps some of the more technical skills, do you see them being pretty effective at building teams? Like there’s lots of things that I don’t know. If I was running a company, there’s lots of places that I would rather find someone who’s really good at this task and go hire them. Do you see searchers who feel out of their element, do you see them going to build teams and effectively, kind of protecting their downsides a little bit?
Peter Kelly: Yeah, absolutely. They learn to be good at it. I mean, with those qualities I mentioned, they find ways to learn how to be good at it. And a lot of them have had chances to do that before. They maybe came from, let’s say they came from investment banking, where it’s a different kind of team. They’re a team of highly motivated people who are happy to work 80, 90 hours a week and be paid hundreds of thousands of dollars as a 24-year-old. That’s not the same kind of team you’re managing. But some of those people, many of them, played on sports teams or were in plays in college and have some team skills. It’s just not on their resume exactly from their last job. let’s see, Kevin Taweel was a very good college soccer player. He was a fantastic hockey player in high school, too, and a great soccer player. So, he’s had lots of team experience and built a great team at Asurion. David Dotson had team experience and, for instance, was a rock climber growing up and knew how to work with other people closely in intense situations. Kirk Riedinger and Jamie Turner, who had arguably the first search fund, the first pure search fund, after Jim Southern had that kind of sort of first search fund, anyway, they had sports backgrounds, so they knew how to do that. I think I’m trying to think of some new recently successful people. Yeah, people have some of those skills and they definitely learn them and develop them because they’re flexible and humble and take advice. And business school is great for that. MBA teaches you, most MBA programs, I think all of them, teach you some team building skills. And so yeah, people do build those skills. I think I’m off topic on answering your question exactly.
Alex Bridgeman: No, that’s great. Sara, you also mentioned that one interesting trend that has been fairly consistent is partnered searches having higher returns. Do you think kind of this idea of building a team and shoring up your weaknesses with the skills of other folks, do you think that partnered searches derive some of their outperformance from that, where a searcher might partner with someone who has complementary skills that they don’t have and that together makes a more effective search or more effective operation of the company? What are some driving factors you think from partnered searches?
Sara Heston: Yeah, so I think it comes through in two ways. One, during the search stage, you have a teammate with you, so you can bounce ideas off each other, you can pick each other up when you’re down, you can stay motivated. So, I think it can help in the search stage to have someone right there by your side and match step to keep them moving forward. And you have twice the manpower to get through what you’re working on. And operating the company, you have two really high achieving, smart, hopefully complimentary people at the top. So, you have your really close partner, your right hand person in leading the company. And I think that does help. I’ve heard from individual searchers or solo searchers that whether you have a partner or not, you need a really good number two when you’re running your company. So you need that partner in some ways. They might not have been your partner through the search, but bringing in a partner, whether it be somebody internally at the company when you buy it that you trust and you can promote and you can work with, but it’s really important to have that team that you trust around you, whether it was a technically partnered search or not. But having those partners in leading the company is a big key to building it and then being successful.
Peter Kelly: I think that’s right. I think if you get a tiger by the tail, if you find yourself in a really goodcompany in a great industry, and the industry is really great, two of you can make more with that if you work well together, if you can divide responsibilities and not let egos get in the way well, then you can take maybe better advantage of that. But of the four newest companies that were more than a 10x return in this last study, I think they were all single searchers. So, there’s no formula. Is that right, Sara? Were they all single searchers? Am I remembering that right?
Sara Heston: Yeah, that’s correct. We’re seeing a lot of really solid returns coming from solo searchers. So, I think if you look over the trend over time, partners have definitely been better. But we’re starting to see solo searchers had some really good homeruns here.
Alex Bridgeman: Within the 2024 study and onward, what are some datasets that you don’t currently have, but you’d be excited to add to studies in the future?
Sara Heston: Yeah, we need to- that’s what we’ll work on in the next 18 months here is thinking about what that needs to be, what did we miss this go round? Or what’s new that we could capture? One thing I am thinking about that I’d like to maybe dig into deeper is exit multiples. So we chatted about that earlier in this podcast. And I would like to see if there’s more we can put around that to better understand how that’s trending. So maybe we can add some more data. It all depends on when we break it down and do the analysis, how it looks, whether there’s some interesting takeaway that can be shared. But that’s something I’d like to dig into more. And then outside of new questions, kind of a bigger way to look at it is we only look at traditional structures. I think it’d be really difficult to go after self funded, just to identify the target group, but perhaps the single sponsor or accelerator model, we might be able to do a similar study on that just to understand how those returns are performing, how those searchers are similar or different to traditional searchers. As that path has gotten more popular and now there’s more data there, I think in the future, whether it’s 2024 or ’25, I think there’s something that we could do with that group of the search community.
Alex Bridgeman: That’d be an interesting place to go would be self-funded searchers. I think what makes the study today so interesting is that you have 20 years of data on searchers in traditional search, whereas if you were starting to dive into self funded search, maybe it takes a few years before you have a strong enough data set to draw conclusions from, or just in that first study you are asking self-funded searchers for a ton of previous return information that is more of a heavy lift for them. How do you think you would approach kind of adding a new type of searcher like the self funded searchers or accelerator searchers by also being able to gather enough data from them to draw some conclusions?
Sara Heston: I think the accelerator we can do because we have the investor network that we can work with to leverage some of that, and they’ll have all that history as well as who all of the searchers they have worked with are, so if we could work with the investor community on that, then I think that’s doable. The self-funded side, I agree, we have to start now and go forward. I don’t think we could go retroactively very easily because there will be a bias towards successful searchers. It’s going to be hard to find somebody who three years ago started a self funded search and didn’t buy something and moved on, to find them, to get data from them. And that’s my concern even going forward with doing this type of study on self-funded searchers is finding a truly representative subset of individuals and without that kind of bias towards the successful ones. So, I think that’s going to be a much harder lift to really make it a truly representative study because we have the investor involvement on both the traditional and accelerated side, we can identify a bit easier who should be in the study and then have access to them and their information.
Alex Bridgeman: Do you have a good sense for scale for how large the self funded search community is compared to the traditional one?
Sara Heston: I don’t have a really good idea. I know it’s probably multiples bigger. And within self-funded, you have full time self-funded, you have part time self-funded, so it’s a bit more amorphous in terms of putting a number on it. But based on what I’ve seen in the broader community, there certainly seems to be a lot more self-funded searchers out there. They’re looking for a bit smaller businesses, I think, and they have a bit of a different approach than the traditional. And so it’s hard to know, though. I don’t really know. I don’t know if Peter has any more insights. I mean, we focus mostly on the traditional side, but there are a lot of self-funded searchers out there for sure.
Peter Kelly: I don’t know. I would guess it’s sort of 50% bigger really if you look at people who are searching full time, but I don’t know.
Alex Bridgeman: Yeah, it’s certainly hard to tell. Because I would imagine for part time searchers, do you still count them as a full searcher? Because every traditional searcher, at least that I’ve seen, is searching full time, whereas self-funded tends to blur that line quite a bit more. So I imagine that would be more challenging the count or keep track of. And with folks who are searching part time as well, it’s easier for those folks to switch out of searching and go take a different opportunity that may be more exciting. And so, it seems like folks go in and out of searching on the self-funded side more often than traditional. So, it’ll be interesting to hear more about how you decide to tackle self funding. I think it’s an interesting space to study and would love to get more information on it. But it definitely presents a few challenges. How can folks help you? Like what kinds of help from the community is most helpful for you in assembling studies in the future or refining how you assemble and clean data? How can folks help you if they’d like to?
Sara Heston: Just participation, and we really rely on everybody within the community. So for investors, please let me know who you’re investing in and who you’re backing and what you’re seeing. That’s the starting point of how we identify people. As the search community is growing and there’s more and more investors, and more and more kind of circles out there, it’s really important that we capture everybody. And so, I really appreciate all the input and support that the investors give us. And then the searchers and CEOs, just keep filling out the surveys. Thank you so much for that, because they’re long, and they can be a heavy lift. But I really, really do appreciate it. So, it’s staying involved in the study, even though it’s not always the most convenient thing to do. But from the broader community, the support for that is hugely important for getting this as accurate and complete as possible. I’m also always open to new ideas. So we talked about what other areas could the study touch on or what can we do in future studies? And I’m always listening to the community and trying to see what new trends are coming up or what questions there are that we can’t answer but could possibly answer. So anyone’s always free to reach out to me and email me or call me and share some thoughts because I welcome that.
Alex Bridgeman: Absolutely, we can add your email to the episode description for folks to send notes to you. Moving into closing questions. What strongly held belief have you changed your mind on?
Peter Kelly: I was a communist and part of the Stanford communist club, in the Marxist club actually, so to distinguish. So that belief has changed. I do think that free private markets solve a lot of problems. So they certainly need a lot of supervision and government intervention on some things like inequality, both based on financial things and race and gender, for instance. So, that’s changed. That’s been over a long time.
Sara Heston: I think for me, it’s that being the loudest voice or most active participant in the room doesn’t necessarily make you appear to be the smartest. Over time, I’ve learned that listening is actually a really, really, really useful skill set. And in almost all environments, listening and processing can make you a much more valuable contributor than just sharing your ideas.
Alex Bridgeman: As an introvert, that was my motto, basically, in high school and college. I’m right there with you. Peter, do you have any other changed beliefs?
Peter Kelly: Just a much smaller one, but I had a great board of directors including Irve Grousbeck and Bob Austere and Dick Allon and then Kevin Taweel and Craig Bomba, who are all still involved in the community, and they were just really, really helpful through difficult times and big decisions. And I thought all boards should look like that. As I’ve come to realize and bid on kind of 20 boards since then, maybe 18 boards total since then, there can be fantastic boards that have very different approaches. And each board is a little bit different. So that was one thing that it took me a while to learn that I’ve learned over the last 10 years.
Alex Bridgeman: Any particular examples of unique strategies or structures or personalities of boards as a group that you’ve noticed?
Peter Kelly: There doesn’t have to be- yes, I mean, there’s a board structure where there’s sort of one board member who’s the lead, or maybe it’s chairman, and is kind of in most contact with the CEO and kind of coaching and mentoring the CEO. But that doesn’t have to be the only way of doing it. I think that’s a good one. It’s important to have a lead director, especially early in a board. But there are also boards where different board members mentor the CEO on different topics and different qualities, and they each kind of help him or her or them in different ways. And they’re sort of each share the load. Those both work great. And there’s no real dominant or lead investor one might serve in that role, but it can move around. Then that probably depends as much on the entrepreneur and kind of what their relationship is with each and how they want that support. I’m trying to think of other tactics and strategies. I mean, there’re definitely more formally arranged boards, including boards that during the search in Europe, it’s very common that there’s a board during the search, and the board meets monthly with the entrepreneur and gives them a lot of feedback and even direction. And there’s a lot of strong support there. And that’s not the case in the US. And I think both work actually very well. So, those are two different approaches.
Sara Heston: Alex, one thing I’ve heard from searchers recently, and I have a lot of discussions with prospective searchers and current searchers and new CEOs about boards, it’s really understanding what you need as the CEO and how you build your board and where you need the support. And putting on people who can support you in kind of each area with different expertise and managing those relationships. And the right board for one CEO is not necessarily the right one for a different person. So, it’s truly understanding what you need and who can provide that and then building those relationships.
Alex Bridgeman: What’s the best business you’ve ever seen?
Peter Kelly: I think the best business model I’ve ever seen is actually the mutual fund industry. There was a business that spun out of a great investment firm, the investment firm is called Hellman & Friedman, many people know of it, sort of the first white knight, one of the first white knight investors. And they spun out a business called Artisan which just had amazing margins and did a great job earning returns for their investors, for their customers who are institutional investors for the most part, and they just scaled incredibly fast with great margins. So, I think that’s maybe the best one I’ve ever seen. But I’d say now, software, maybe, the right kind of software that’s scalable, either buying various software companies or just a software business that can scale may be one of the best. Because a certain subset of those businesses keep their customers forever, and they grow their customer revenue, so their net revenue retention, so what a customer spends next year is more than this year. And the year after that is more than the year after that. One example of that is Snowflake, which people know about, but Snowflake is a great business, their net revenue retention, even as a huge public company now, it’s like 170%. That’s amazing. So that’s my second one.
Alex Bridgeman: That is amazing. That’s a good one.
Sara Heston: I’ve always loved the aggregates business. I know that’s a bit not in the search world, but it’s just got such a defensible moat around it. If you have a gravel company in an urban area, it only makes sense to ship your gravel so far given the price point, and it’s very defensible and everybody needs it. And it’s just a really interesting business model that you can have it on a very small scale or large scale but it’s a really defensible business with a constant stream of customers. Nobody wants it. It’s got the NIMBY going for it – not in my backyard. So not a lot of new ones or aggregate are being built, and if you’ve got one, you’ve got a really built-in steady customer base.
Peter Kelly: I love that one. That’s a great one, Sarah. We actually looked at a one of those businesses. I think it was called Rock, Sand, Gravel, Sand and Gravel, Rock, Sand, andGravel. And we tried to buy it and weren’t able to, but I agree, those can be fantastic businesses.
Alex Bridgeman: Yeah, that’s a new one for the podcast. I’ve yet to hear someone else share a gravel business as their best business. That’s fantastic. I’d love to keep chatting, but we’re out of time. But thank you both so much for coming on the podcast to share about the Stanford Search Study and a thousand topics in between. I really appreciate it. It’s been really fun.
Peter Kelly: It’s been un talking to you, Alex.
Sara Heston: Really appreciate it.
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Together at Stanford, Sara and Peter, among other projects and teaching, assemble the Stanford Search Study that has been released every year on even years.