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.