Search funds

Idea of funding startups is old school. VCs and Angels fund startups for 10x returns. Everything about it is all over the internet. High risk High rewards strategy.

At Eximius 09 Prof Das NarayanDas introduced an interesting concept called search funds. It seems to be very popular in US. He was keen on bringing this concept to India. The basic principle of search funds is simple, Low risk, moderate returns (something around 5x to 6x), everybody goes home happy! This is how it works.

• A team of experts from different domains approach a funder to raise money for the search. He seemed to stress on the word “experts”, since it is supposed to be low risk. A minimum 15years of aggregated experience among the team members is essential. The initial funding is for 1 to 2 year period, during which the team looks for companies to invest in.
• The team then looks for traditional businesses, SMEs that are already in the market, making good enough profits, that are stable and stagnant. Companies which need help to grow.
• The team offers expertise in return for equities. The investor provides next round of money. The team takes over management.
• Exit option varies, buyouts, IPO or even no exit at all, just the quarterly returns to investors.

The concept seems interesting, bringing this to India is even more interesting. But getting this to work in India ? There are huge number of challenges. Most SMEs are run by families. Brothers,sons, son-in-laws and so on. None of them will want the management to be taken over by strangers. Secondly the exit will be the most difficult part. They are all emotionally attached to the companies and probably don’t want to sell it. It will be interesting to see how somebody will handle these issues in India.  But as Prof Das said, it has to start somewhere.