Aspiring Alaskan Business Leaders Search for Opportunities

THE IDEA: creation of one or more Search Funds -- a proven two stage private equity model. This is a social venture capital business model developed by Professor Irv Grousbeck of the Stanford University Graduate School of Business’s Center for Entrepreneurial Studies.

BENEFITS:

  • attractive potential returns. The Stanford 2007 Search Fund Review calculated a 52% internal rate of return for an equal investment in each of the 61 qualifying funds.
  • the creation and retention of high quality jobs in Alaska
  • improved investment and management opportunities for Alaskan investors and young business leaders

STRUCTURE:

The typical Search Fund consists of one or more MBA graduates who spend 12 to 24 months searching for a business to acquire that met some predefined acquisition criteria.

Even though the graduates have little or no operating experience, Angel, business or corporate investors fund them for up to two years during the search process.

The Search Fund managers (MBA graduates) receive a modest salary and an expectation for an ownership and entrepreneurial management opportunity.

In return, the investors are given the right of first refusal to fund the additional capital needed for the acquisition.

A representative example of this would be:

A Search fund was initially capitalized by investors at $300,000 or $10. per share for 30,000 shares. An attractive business opportunity was identified that required an additional $3,000,000. The original investors were given a credit for $15 per share or $450,000 for their original contribution. All of the original investors would have the right, but not the obligation to come up with a pro rata share of the additional $3,000,000. Any unmet capital needs would be offered to new investors at $15. per share or higher.

THE TRACK RECORD:

Center for Entrepreneurial Studies (“CES”) at Stanford Graduate School of Business tracks the performance of these Search Funds. The most recent 2007 Search Fund Review calculated an internal rate of return of 52% per year for an investor that had invested an equal amount in each of the 61 qualifying and participating new Search Funds that started since the Stanford 2005 Search Fund Review was published.

HISTORY: The original Search Fund was started in 1984. The intent was to empower recent Stanford University Center for Entrepreneurial Studies (CES) graduates to create entrepreneurial management and ownership opportunities for themselves.

The Search Fund model has been successfully modified by many venture capitalists where an experienced entrepreneur with documented business skills provides the initial management with the venture capital firm providing the capital and support.

Frequently these experienced entrepreneurs are domiciled at the venture capital company as an Entrepreneur in Residence or are senior level executives at companies that the venture capital company previously financed. An excellent example of this would be Housatonic Partners, a venture capital company of which Professor Grousbeck is a special limited partner.

Professor Grousbeck is quoted on the Stanford Graduate School of Business CES homepage as saying:

"It's the most direct way I know for aspiring MBA entrepreneurs to get into business for themselves. And now that there are many experienced search-funders out there, those who have gone earlier are advising those who have come along more recently. Our objective is to have the search fund model grow, flourish, and be self-supporting, as one wave helps the wave behind it."

THE ALASKAN OPPORTUNITY:

In Alaska, we could modify the Search Fund concept to improve long term business and management opportunities for Alaskan Native Corporations, their shareholders, Angel Investors, and up and coming young business leaders with strong management potential. Empowering more Alaskans to create and participate in equity and entrepreneurial management opportunities will sow the seeds of innovation, leadership, and a ‘can do’ mentality that will benefit all of us.

COORDINATING SPONSOR: The Entrepreneurs and Mentors Network Inc (TEAM)

NEXT STEPS:

If you would like more information or you would like to become involved in The Entrepreneurs and Mentors Network Inc (TEAM) and the Alaska Business Plan Competition, please contact me, Allan Johnston, at:

or (907) 346-1087

UNIVERSITIES WHICH ENCOURAGE SEARCH FUNDS:

- Stanford University Graduate School of Business, Center for Entrepreneurship

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