I want to share a video from my peer at Northeastern, Rashid Khamis.

Rashid has very useful thoughts on productivity, the human body and how to make the most out of one’s life. Definitely worth checking out some of his content.

An interview of Oliver Berkeman by Chris Williamson dives into the psychology of productivity maximization. Lots in here that is uncomfortable to look at first glance, but pushes one towards more introspection.

1. Why is it so Easy to Disregard Behavioural Finance?
2. FT: Crypto miners hoard bitcoin as supply cut looms
3. FT: The rise of the chief AI officer

Of all the content out there that could convince one of the value of crypto, there is no polemic quite as effective as The Sovereign Individual.

Ben Thompson writes:

The Internet removed the necessity — and inherent defensibility — of complex cost structures for media; AI has the potential to do the same for a far greater host of industries.

Wall-E erred by assuming that every human was the same, all gleefully enslaved by AUTO, the ships AI. In fact, though, I suspect humanity will be distributed bi-modally, with the vast majority of people happily wearing their Vision Pros or watching their streaming service or viewing their TikTok videos, while increasingly sovereign individuals, aided by AI, pilot the ship.

Lots more at the link.

Lessons from Richard Harris, a sales consultant, who came to speak with us about how he views the future of sales.

• Everyone is selling something… you might as well get good at it.
• Soft skills are becoming more important at the margin (relative to hard skills)
• Target the biggest skeptic; (more: this is due to the world becoming more complicated, and decisions are becoming based on committees.)

It was very interesting to hear about the effect of technology on sales. Most notably, the process is becoming increasingly analytical and “operationalized” in the sense that it requires much more support and has much more potential for optimization.

Venture capital dry powder has nowhere to go (FT)

VCs appear to be struggling to raise new funds while also having trouble finding places to invest existing funds. This could mean that the AI cycle is dying down and may imply that a lot of the value from AI will be captured internally based on access to high quality data (maybe that’s what has always been the case).

My favorite type of book. Short, to the point and “difficult to articulate until you’ve seen it” type of information.

1. 6 Reasons Why You Should Not Start a Search Fund Most importantly, this provides some cooler water against the survivorship bias that is endemic in many hot spaces.
2. Buying Your Way into Entrepreneurship A good look at some of the softer skills needed in entrpreneurship through acquisition.
3. The Worst Part of a Wall Street Career May Be Coming to an End

1. Savages! Innocents! Sages! What Do We Really Know About Early Humans? - It is always important to read between the lines.
2. Is the Boom-and-Bust Business Cycle Dead? Betteridge’s law immediately comes to mind.
3. Golf is booming
4. Vietnamese property tycoon sentenced to death over $12bn fraud

This book covers an unconventional approach towards hiring and developing knowledge-work oriented talent.

Another read that has lots of utility in the right hands…

Another post into the blogroll today. Bismarck Analysis ($) offers some of the most interesting perspectives on the future of politics, history of civilization and how to think differently about each individual’s place in the world. Lots to think about here.

Another VC-backed search/PE-like company was announced today called Splash. This follows a similar company that was created in pursuit of consolidating HVAC firms.

What is less clear is why this model (VC backing) is superior to the traditional private equity model where this has been applied many times before. As always, one should follow the incentives. It will be interesting to see if future financing of this firm requires that the managers restructure their compensation to make it more like PE.

It’s hard to put into words what Palladium is (maybe that’s why it’s such a good blog), but I wanted to add it to the blogroll as it provides coverage on news through a very unique model…

I added Marginal Revolution to the blogroll today.

Two important lessons from Marginal Revolution: first, always read between the lines; second, use writing as a forcing function for clarity of thought.

An interesting blog today from MIT discusses the usage of AI by acquired companies.

Importantly, much of what is discussed ends up being true for all technology that can improve business operations, and in this case, AI happens to be the hot new topic.

Clarion closed a fund to invest in digital transformation in the media sector.

An interesting piece of data from the article:

Private-equity firms worldwide wrapped up a total of 449 buyout funds last year, down 38% from 722 that closed in 2022 and the lowest number in a decade, according to consulting firm Bain & Co. But despite the smaller number of funds, firms raised 18% more last year, collecting $448 billion, with the average fund bringing in $1.23 billion as investors gravitated to larger, better-known asset managers, according to Bain.

We were lucky enough to host several search fund investors on campus that succeeded in acquiring and exiting their businesses and starting search funds. Interestingly, the search space is rapidly evolving and it is interesting to compare what search was like pre- and post-covid.

First, technology appears to be playing a huge role in search operations. Searchers can now target large numbers of businesses. Of course, searchers will find similar businesses, and as a result, those owners will get a lot of the same outreach from searchers. There also appears to be consensus growing around a ‘tech-stack’ that searchers use: Grata for prospecting, reply.io for outreach, and so on.

Second, investor PPMs are growing in specificity and length. In the past, when search was much more of a frontier, PPMs would be fairly short. It is interesting that investors are asking for more in the PPM as it implies that there is some differentiating information in PPMs that are benefiting their investment decisions.

Third, and certainly not the last, investors are becoming more like search-oriented portfolio managers. The role of a search investor used to be much more informal and based on a hunch about a searcher. Nowadays, as searchers are forced to specialize and differentiate, investors aim for diversification to improve fund performance. Factors such as searcher background, strategy and geography are just a few of metrics on which investors are basing their portfolios on.

All of this is to say that the world of search is evolving rapidly. Just five years ago, the world of search was much less accessible. Now, with the cat of the bag so to speak, the industry is becoming professionalized, and the implications are worth considering for prospective searchers.

I added a new tab to the blog under “blogroll”. It will contain links to my favorite sites online. Enjoy!!!

In our Private Equity Finance course, we learned about how PE firms are uniquely equipped to create value for their portfolio firms. Importantly, these levers have direct parallels to the world of search, and as the M&A space becomes more crowded, it will become more important for entrepreneurs to differentiate themselves along operational expertise. On the other hand, assistance in financial and governance value creation will become less valuable to investors (who will be able to handle those levers on their own).

In this blog, we will analyze the financial, governance and operational levers and consider how searchers may think about utilizing them in their own search and management of a business.

Financial

At a high level, financial value creation involves adding debt to a firm in order to impose discipline onto management. By reducing access to free cash flows, managers have less discretion over their decision-making and effort, and are prompted to follow along with the board’s recommendations. Overall, PE firms cultivate connections to financing partners to raise debt as part of the bundle of value they provide LPs.

In the world of search, debt plays an important role, and many investors are experts in evaluating how much leverage makes sense for a manager to handle with a company. As a result, entrepreneurs seeking uncorrelated skillsets to their board do not need to worry as much about understanding this aspect of value creation. In fact, doing things like worrying about capital structure is the last thing a small business CEO should be doing anyways.

Governance

Similar to financial levers to creating value, governance levers are widely accessible to investors. Typically governence value creation involves updating management incentives and upgrading the team. When combined with the right operational levers, this can be very lucrative for the PE firm and managers alike.

Again, with respect to searchers, this is not something to worry about. Most tradtiional search funds are structured the same way: they all require a certain amount of performance for the CEO to succeed so the new manager has plenty of incentive to grow the business. Again, this means there is not much for a searcher to differentiate on.

Operational

Finally, operational levers refer to the manager’s skill in running the business. For PE firms, this is just one of the many things they bundle on behalf LPs. In this case, bringing providing otherwise inaccessible expertise to portfolio companies can be tremendously valuable. Over time, this has become the differentiating characteristic of PE firms. Another factor is that operating expertise lends reputational capital to the PE firm, making deals more amenable to managers.

For searches, this is likely to be even more important. Between the importance of connecting with owners (likely to only be possible with the right background) and operational skill playing a key role in actually growing the company, managers stand the most to gain by developing a strong thesis around how they can run the operations of a business smoothly.

Concluding thoughts

It is widely known that the M&A space is becoming increasingly crowded as technology brings the world closer together and reduces barriers to information. What remains rare is tacit (operational) skill. In turn, searchers should think long and hard about what operational ability they can provide to a business.

A different kind of search is being disrupted by advances in technology, a shifting legal landscape and climate change.

Advances in technology have made this search more accessible than ever:

Technology, they say, has made it easier and less expensive to scan the ocean floor, opening up the hunt to amateurs and professionals alike.

And searcher preferences are changing with the times as well:

Shipwreck hunters are also looking for wrecks for their historical value, rather than for sunken treasure.

Interestingly, the increase in shipwreck discoveries is being driven by ocean exploration for other purposes such as surveying for oil or gas.

Mr. Weirich said that more shipwrecks have been found over the years in large part because of private companies surveying for oil and gas leases, cables and pipelines.

Parallels abound to the world of entrepreneurship through acquisition…

I recently attended two entrepreneurship through acquisition conferences (ETA) at MIT and Wharton. As usual, the search community at these events was friendly and engaging. For me, these conferences are great opportunities to push to the frontier of my knowledge. In converstations with investors and searchers, I noticed certain conflicting advice which struck me as interesting. I documented a few examples below:

For students: starting a search now vs. waiitng to graduate

There are two camps on the matter of whether to start a search or not during an MBA program. On one hand, waiting to graduate allows the searcher to explore other facets of the program, network with peers and avoid making mistakes that come from inexperience. Moreover, it gives them the chance to intern for existing searchers and learn the process through another search.

Conversely, starting immediately saves time on the search, and allows for a partially funded search. It is also easier to connect to owners when using a .edu email address, and universities often have access to databases that are very useful for putting together investment theses.

In this case, there is plenty of middle-ground between the two camps. For example, one can stick to ‘waiting’ by interning for other searchers while also creating a compelling narrative behind why their search is successful.

The opportunity set: it’s huge and growing vs. owners getting spammed by searchers

One interesting anecdote I kept hearing at the conferences is how crowded the lower-market and search M&A space is becoming, and how small business owners (especially of great businesses) are getting the same email pitched to them. Furthermore, investment in searches is recursive: successful searchers inevitably want to back future searchers in the hopes of realizing the high performance that searchers to date have provided investors. This feedback loop naturally leads to more supply (searchers) than demand (businesses needing takeover).

This is in stark contrast to the demongraphic models that suggest that the amount of businesses with retiring owners is set to explode in what is known as the “silver tsunami”. Furthermore, not everyone has the expertise to invest in search, leading to constraints on how many “real” searches get formed.

In total, both supply and demand for searchers is growing. As a result, it makes sense that capital can be “institutionalized” and that search has become more of a job over time and less of a frontier.

Industry agnostic vs. thesis driven searches

The case for an industry agnostic search makes sense: it avoids preempting good opportunities due to a bias that a searcher may hold. Furthermore, if you believe the M&A space is crowded, you should avoid ruling out opportunities before you see them.

In contrast, it’s also possible to flip the crowded M&A space argument on its head: search requires connecting with owners, and thesis-driven, specialized searchers will be more successful in connecting with owners because they will be able to have better conversations with them. It is worth paying attention to the data on this going forward, and watching how searchers adjust their strategy to new information about this topic.

On software deals

Understandbly, there is a lot of interest in software and IT service businesses. This interest has translated into these businesses selling at much higher multiples. The result has been investors either explaining that one should be skeptical of nature of those deals (is it search or more like growth equity?) or one should lean in, good businesses in good industries command a premium for a good reason.

Overall, software has a lot of systematic tailwinds behind it: the 4th industrial revolution is certainly not going away and there are still massive skill gaps popping up within the software labor market all the time. All of this indicates that opportunities in software, IT services and tech-enabled services abound, and if one has expertise in the space, it is a great time to dive in.

Concluding thoughts

Many of these conflicting perspectives have merit. As a result, it is important to think about them in terms of the tradeoffs they present. Furthermore, these conflicts highlight the manner in which conferences can be useful: groupthink rapidly proliferates in conferences, and yet, there is disagreement on these grounds. A closer look at why disagreement shines through can reveal insights into how to proceed.

1. More coverage from the media on search funds, this time from Marketplace
2. The search fund coverage model expands to Ireland…

I-House had the pleasure of hosting Steven Rattner as part of its distinguished series of speakers a few nights ago. The talk provided excellent insight into what a highly creative, impactful and agency-oriented career looks like, especially considering that Steven’s career occurred at a time when the economy was much less flexible.

Takeaways from Steven

1. Yes, times are tough now, but there are incredible opportunities out there and it is a great time to be an American. There is a systemic shortage of talent right now, and it is up to individuals to be creative to make the most of that fact.
2. In general, the economy is becoming more flexible over time. Depsite the labor shortage, people are able to change career tracks now more than ever before.
3. AI will not reduce the role of bankers and white-collar workers. Instead, it will amplify their productivity and make their services more prominent. For example, services that were previously high-touch and required highly skilled bankers will now be extended to smaller firms in the market. If anything, we may see a proliferation in the number of bankers out there.
4. On Gamestop: retail investors need to learn their lesson. We should not regulate craziness out of markets.
5. Skills that translated well out of journalism: writing skill, asking good questions (and having a BS detector), and building trust with strangers quickly.

Overall, Steven had a very fascinating, wide-ranging career and it was great to hear his perspective on global markets and America.

1. Digital transformation drives gains for IT and software groups (FT)
2. Former Nextdoor exec raises $25 million for PipeDreams, a startup rolling up HVAC companies
3. On Tech Debt: My Rust Library is now a CDO
4. Tacit Expertise Extraction, Software Engineering Edition

Robert Caro is the author of “The Years of Lyndon Johnson”, a series on the life of the 36th President of the United States. Caro uses the biography of LBJ to explore human nature and understand how political power manifests and influences our daily lives.

By highlighting the most striking manifestations of power, Caro guides readers towards a deeper understaning of politics and sheds light on how power directly affects our quality of life and freedoms. Furthermore, because LBJ’s rise to power coincided with the proliferation of two mass-media channels, radio and television, Caro is also able to illustrate how technology plays a critical role in the attainment of power.

Caro’s works also bring out common attributes in the personalities of those that rise to power: ambition, grit and energy combine to drive great people to take unimaginable risks, all in the service of ends that are difficult to understand without narrative.

Overall, Robert Caro’s LBJ series is one of my favorite works of history and biography.

I am now one year into the MBA program at Columbia Business School. It’s been a great experience meeting interesting people, developing new skills, and exploring career options.

As the first year comes to an end, I thought it would be interesting to share some learnings from my first year.

Advice I Would Have Given to Me

First, as soon as possible, set a goal for what you want to do over the summer and prioritize achieving that goal. Until every option is slammed shut, pursue the goal.

This might be the most important point! People want to talk with you and hear what you are thinking about. Articulate a message with structure and concision and go find the right people to talk to.

Lastly, develop comfort with asking for things. Ask for 10% off on coffee. Ask for a resume review. Ask people if they’d like to grab a meal. And ask even when it feels a bit uncomfortable.

Concluding Thoughts

Business school has been a fascinating experience. It has pushed me well outside of my comfort zone and I’ve learned a lot in my first year.

Overall, I’m very grateful for the people I’ve met and the opportunity to explore what to do next with my career.

Diligencing Software

My favorite panel at Wharton’s ETA Conference this Friday covered the topic of diligencing and building software-based businesses. All three panelists shared great insights. A few highlights are listed below:

Steve Divitkos - Mineola Search Partners

• Technical issues manifest as business problems. Another reading: improper product management (i.e., translating of business problems into engineering tasks) leads to technical debt and vice versa.
• Be wary of availability bias when dealing with techical debt. In other words, measuring the ROI on addressing technical debt is difficult. And in other words again, it is not clear how to measure value created from risk mitigation.
• Software deals after 2019 are more like growth equity than they are like search deals (i.e., these deals are not profitable and on multiples of revenue rather than profit)!

Promise Okeke - NovoPath

• It is critical that you reinterpret due diligence reports on your own terms.
• Get out there are speak with the developers writing code. Product and team managers have all sorts of incentives to tell you nice things; to find out what’s really going on, one must talk to the programmers and get into the code.
• Niche productts that require domain expertise will have high retention and low churn. It is no different for software products.

Scott Barstow - Pacific Lake Partners

• A critical red flag that may not show up on due diligence reports: does the engineering team love their craft? And do they care about the product?
• And more red flags from Scott: long implementation cycles, lots of client-specific work, missed commitments, infrequent releases, quality assurance processes
• Great founders will be in love with a problem, not the solution; in this case, managers need to embrace the world of software and the challenges that come with building software.

Overall, while there’s plenty of truth to “all software tastes like chicken”, managers would be well-advised to get their hands dirty and really understand how software is built.

In software development, magic numbers are unexplained values that are “hard-coded” into code. Magic numbers are anti-patterns because they make it harder to understanding the underlying meaning of the code. By analyzing magic numbers, we can get a better understanding of what the designers of the application intended.

Once you hear about magic numbers, you start to see them all over the place. The world of search funds is no exception. Below, I wrote down a few examples of magic numbers I have noticed in search and some ways to think about them differently.

The Magic Numbers

The Search Period of 2 Years

The notion of a 2 year search is a very common magic number in the world of search.

One reason the search can take 2 years is due to the nature of assembling the pipeline and taking a deal to completion. Setting up the deal flow pipeline can take 6 months to start, and it can take anywhere from 6 months to a year to close out a deal.

Given these facts, an efficient entrepreneur would try to find ways to “avoid reinventing the wheel” by working for a searcher and gaining skill in pipeline development prior to raising funds. This would save the entrepreneur time and money that goes into the search. Furthermore, acknowledging the 2 year bias helps searchers avoid any Parkinson’s Law bias associated with the search period.

Ultimately, while entrepreneur and investor incentives are aligned by the fact that excess search funds are rolled into the investment as the searcher’s equity, it is still interesting that the community has settled on an equilibrium of 2 years despite the broadly known information about how to run a search.

Vesting in 3 Chunks of 8.33%¹

The vesting schedule for a searcher typically involves three chunks of 8.33%. Like the 2 year funding window, this number has become common practice in the industry.

These three chunks all involve different types of work and value creation: one comes from buying the company, the other from operating it for a certain period of time, and the final one from selling the firm.

Given how vastly different these three events are, it would be interesting to consider other vesting schedules. For example, if investors have an extremely confident entrepreneur (which they almost always do), they may consider backloading the equity to the sale of the acquired firm.

Again, taking a closer look at the arbitrarily equal vesting split reveals interesting tradeoffs for searchers and investors to consider.

The Structure of Cap Tables: Raising $400k-500k from 6-10 Investors ²

Finally, search funds have converged on a common model for structuring the cap table of the fund. This makes sense: it is very risky to experiment on different models of incorporation.

In the case of putting together a cap table, searchers are advised to seek a diverse set of backers that can help with a broad variety of topics. This provides entrepreneurs with resources to successfully transition into becoming a first-time CEO. However, what is less discussed is what those broader sets of skills are. What are the highest leverage skills a board member can help with? Are they common or different across searchers?

Maybe we should think backwards here: instead of looking for 6-10 investors, searchers may be better off listing their distinct weaknesses and building a board around where they will need the most help.

Furthermore, investors may also consider how much money searchers need. Again, thinking backwards helps: do searchers need the $400-500k upfront? Or is there a way to fund searchers in stages?

Concluding Thoughts

Examing magic numbers reveals ways one can be more efficient about allocating their resources prior to and during a search. Magic numbers are an unintentional effect of incomplete design, whether in software or otherwise, and reveal opportunities for more thoughtful and deliberate exploration.

Going forward, it will be interesting to learn about ways in which investors and searchers structure their funds around magic numbers to achieve stronger incentive alignment.

Sources

1. https://www.youtube.com/watch?v=0lg8Gh_uAPU&t=595s&ab_channel=AcquiringMinds
2. https://www.pacificlake.com/intro-to-search-funds#stage-one

This inaugural post pays homage to the classic program written by beginners called “Hello World”.

Hello world!