Login

Sign Up

Entrepreneurship-through-Acquisition (ETA) via search funds has evolved over 40 years from a Stanford experiment into an increasingly institutionalized asset class. For investors, search funds remain one of the few ways to access founder-led, operationally driven SMB investing with consistently strong outcomes.

The 2024 Stanford Graduate School of Business Search Fund Study, now the definitive longitudinal dataset for ETA, covers 681 search funds launched in the U.S. and Canada since 1984. The study provides unique visibility into long-term performance, sector trends, and risk-return dynamics. Below, we unpack what the numbers mean for investors today.

1. Summary of Key Findings

2. The Power of Exits

Exits are the defining catalyst for value realization in search fund investing. The 2024 study shows IRR for exited funds jumped to 42.9%, up from 36.8% in 2022—an impressive leap that highlights how successful liquidity events disproportionately shape aggregate performance.

Why exits matter so much:

• Multiple arbitrage: Many acquisitions are done at 6–8× EBITDA, but exits often occur at 10–12× EBITDA once professionalization, growth, and scale are achieved.
  
• Strategic buyer premium: Strategic acquirers—often mid-market PE firms or corporates—will pay for upgraded systems, recurring revenues, and scalable operations.
  
• Compounded growth: 5–7 years of organic and inorganic growth, layered with operational improvements, creates a step-change in enterprise value.
  

👉 Investor Takeaway:

• Returns are heavily back-loaded. Patience and support for operators during the value creation grind are essential.
  
• LPs must evaluate exit optionality at the time of investment: Which buyer universe exists? Is the sector attractive for roll-ups or consolidation?
  

3. Return Dispersion: Winners vs. Losses

Search funds show a power-law distribution of returns, meaning a minority of deals drive the majority of performance.

• Big Winners: 11% of deals return >10× ROI, often via exits to strategic acquirers in tech-enabled or healthcare verticals.
  
• Solid Performers: The bulk (25–36%) deliver between 2×–10× ROI, which compounds capital meaningfully.
  
• Strugglers: ~31% lose capital, with reasons ranging from execution missteps to sector cyclicality.
  

Why the dispersion exists:

• Operator execution varies widely—ETA places heavy reliance on a first-time CEO.
  
• Sector tailwinds (healthcare, SaaS-enabled services) versus headwinds (cyclical manufacturing, consumer discretionary).
  
• Capital structure choices—too much leverage can magnify downside.
  

👉 Investor Takeaway:

• Single-deal exposure is risky. The “average” returns only materialize in diversified portfolios of 8–12 funds.
  
• Institutional investors must adopt a portfolio mindset, underwriting ETA like venture but with more emphasis on operator diligence.
  

4. Holding Periods: Medium-Term Value Creation

The average 5–7 year hold period aligns with the time it takes to implement operational upgrades and realize strategic growth.

What happens during those years:

1. Years 1–2: Stabilization, leadership transition, financial controls, and initial cultural reset.
   
2. Years 2–4: Growth initiatives (new products, pricing optimization, salesforce effectiveness, tuck-in acquisitions).
   
3. Years 4–6: Scaling and positioning for exit (professional management team, improved systems, expanded markets).
   

Why holding matters:

• Search funds aren’t “flippers.” Unlike private equity, which sometimes uses aggressive financial engineering, ETA value creation is operational and incremental.
  
• Investors should not expect early liquidity—distributions cluster around the exit event.
  

👉 Investor Takeaway: LPs need patient capital and should set expectations for back-end loaded returns. Liquidity planning must align with 5–7 year horizons.

5. Market Activity & Trends

The ecosystem is expanding rapidly: 94 new search funds launched in 2023, the highest in history.

Implications of this growth:

• Supply of operators is increasing. Many are MBAs or ex-consultants seeking entrepreneurship.
  
• Median acquisition size dropped from $16.5M to $14.4M. This reflects disciplined capital deployment amid tighter debt markets.
  
• Valuations remain disciplined at 7.0× EBITDA, well below large-cap PE averages of 11–13×.
  

Completion Rates:

• Only 63% of searchers acquire a business. Reasons for failure: mismatched investor expectations, difficulty sourcing deals, or lack of operator persistence.
  
• Among those who acquire, ~69% produce gains, showing execution risk but also strong probabilities of success.
  

👉 Investor Takeaway:

• The “searcher glut” means LPs must be highly selective in backing operators. Capital alone no longer differentiates—it’s about network, diligence, and sector insight.
  

6. Sector-Level Dynamics

The Stanford study confirms sector selection is critical.

Healthcare Services:

• Demographic tailwinds: aging population, chronic disease prevalence.
  
• Structural fragmentation: roll-up potential in dental, physical therapy, home health.
  
• Regulatory complexity: creates barriers to entry but also moats for scaled operators.
  

Tech-enabled Services:

• Recurring revenue models (SaaS, IT managed services).
  
• High switching costs and scalable unit economics.
  
• Attractive to strategic and PE buyers, fueling higher exit multiples.
  

Other Sectors:

• Business services and niche manufacturing can perform well if defensible.
  
• Retail, construction, and cyclical consumer businesses tend to underperform due to volatility.
  

👉 Investor Takeaway:

• Prioritize sectors with recurring revenue, fragmentation, and strong buyer appetite.
  
• Match operator backgrounds to sectors (e.g., ex-consultants in B2B services, MD/MPH in healthcare).
  

7. Strategic Implications for Investors

The data translates into actionable strategy for LPs:

• Diversification: Build portfolios across 8–12 funds to spread operator and sector risk.
  
• Operator Diligence: Assess not just resumes, but resilience, grit, and leadership style—ETA is a human-capital bet.
  
• Smart Structuring: Protective terms (preferred equity, board control, veto rights) mitigate downside.
  
• Exit Optionality: Invest in businesses with multiple potential buyers—PE roll-ups, strategics, or IPO optionality.
  
• Capital Efficiency: Smaller deal sizes (~$14–15M) provide room for multiple expansion at exit.
  

👉 Investor Takeaway: Search funds combine venture-like upside with private-equity-like governance. Winning strategies blend diversification with hands-on involvement.

8. How Search Funds Compare to Other Asset Classes

Search funds occupy a unique middle ground between VC, PE, and public equities.

• Versus Venture Capital:
  
  • Similar “home-run” dynamic, but failure rates are far lower (~31% vs ~65%).
    
  • Median returns are stronger and more predictable.
    
• Versus Private Equity Buyouts:
  
  • Buyouts offer steadier returns (12–16% IRR) but lower upside.
    
  • Search funds benefit from lower entry multiples and a hands-on operator model.
    
• Versus Public Equities:
  
  • Public markets rarely exceed 15–20% IRR consistently.
    
  • Search funds deliver an illiquidity premium with 2–3× higher returns.
    

👉 Investor Takeaway:

• Search funds are not a replacement for PE or VC but a complementary strategy.
  
• They provide diversification within private markets, particularly appealing for investors seeking alpha in smaller-cap, operationally complex SMBs.

Final Conclusion

The 2024 Stanford Search Fund Study provides investors with one of the clearest windows into the evolving ETA asset class. The data shows that:

• Returns remain consistently attractive, with aggregate IRRs in the mid-30% range and ROIs of ~4.5×.
  
• Successful exits deliver outsized gains, proving the value of patience, execution, and disciplined underwriting.
  
• Results follow a power-law distribution—underscoring the necessity of diversification across operators and sectors.
  
• Sector focus in healthcare and tech-enabled services has become a clear driver of above-average outcomes.
  
• Search funds remain uniquely positioned between PE and VC—offering venture-like upside with more predictable median results.
  

For investors, the lesson is clear: search funds are no longer a niche experiment but a proven model for long-term SMB wealth creation.At SMB Value Investing Group (SMB VIG), we take these lessons and translate them into action for our LPs—selecting exceptional operators, structuring protective terms, and constructing diversified portfolios designed to balance risk with enduring upside. By combining institutional rigor with a focus on founder-led SMBs, we help investors capture the very best opportunities in the ETA ecosystem.

SMB VIG is a platform built by and for value investors with a shared mission: to identify, evaluate, and invest in overlooked, high-potential small and medium-sized businesses (SMBs) across Main Street America

• vr@smbvig.com

Linkedin X-twitter

• © 2025 SMB VIG. All rights reserved.

• Privacy Policy
• Terms & Conditions

This website is intended for accredited investors only.

All content on www.smbvig.com is proprietary information of SMB Value Investing Group (“SMB VIG”) and is for informational purposes only.

SMB VIG is not a registered investment adviser, broker-dealer, law firm, or tax advisor. Nothing here constitutes financial, legal, or tax advice, or an offer or solicitation of securities. Private securities are speculative and illiquid investments that carry substantial risk, including the potential loss of all invested capital. Investors should undertake independent due diligence and consult with qualified financial, legal, and tax advisors before making any commitment. SMB VIG LLC is not affiliated with, endorsed by, or associated with any of the companies mentioned on this site. All trademarks are the property of their respective owners.

Login

Sign Up