What makes an entrepreneur acquire a company versus starting one?
There is an awesome short interview from Stanford GSB in which Coley Andrews from Pacific Lake (a top firm in the search fund space) answers this question:
Some people just say “you know what I have to be passionate about the idea and the product that I want to create and therefore you know I’m going to go start my own business” and that’s just a certain type of personality. There are those out there though who’ll say “you know I’m not really concerned so much about the product; I just love the idea of managing. I want to be in charge, I want to make decisions, I want this proportion of responsibility earlier in my career”. Those are the folks that end up going to search one path not necessarily the startup path.
There’s also a risk difference. The odds of success in the search fund world are materially higher than starting your own business. They come in two phases: you raise money to go out and find a company you have about a 75-percent chance during a two-year period of actually finding and buying. Thereafter once you buy the company you have about a two-thirds chance (67% chance) to actually be successful and make money. And there are investors out there that have skewed the odds on both of those situations farther up to the positive so when you walk it all through you have a greater than fifty percent chance of being successful becoming a CEO, building a company and having a financial outcome, and a life experience outcome that you want. That’s very different than the startup risk where it´s much more boom or bust.
This is a very effective summary of what comes to my mind when comparing startups and entrepreneurship-through-acquisition.
First, you want to manage more than you want to be proud of a product. I think that a startup entrepreneur is more likely to hate a corporate job: the environment, the culture, the rules, etc. However, the searcher is more likely to enjoy a corporate job and starting a search fund could be a way of climbing the ladder much faster that it would normally be by naturally getting promoted.
Second, you want to have risk under control even if that means putting a ceiling to the reward. There is more than a 50% chance to close on an acquisition and it is fairly difficult to really fail in running the company due to investment criteria of search funds.
There is also a hidden key advice to startup entrepreneur in the answer from Coley Andrews: you better love your product.
Startups go through tough times, often involving long periods of time with no revenue in which you have to sell your product to everybody: users, investors, customers, etc. Even your friends and family. In a way, your love of the product and your trust in it justifies all the effort. Founders that love more the idea of getting rich than their product have a hard time staying motivated through rough times in which investors are not calling and user are not engaged.
This is the complete interview: