For aspiring CEOs, being a buyer rather than a founder is an increasingly attractive path

While new small business starts are booming, the startup field itself isn’t experiencing the same growth. In 2022, investors put more than $242 billion into startups. Last year, that number sunk to $170 billion, marking a 30% decrease year-on-year.

So for new MBA grads, there may be a more attractive path to owning a company than starting a new one: finding one to buy.

While it’s still a niche option, the practice of starting a “search fund” to find the right business to acquire is growing in popularity and is even taught in top business schools.

Nell Gallogly is a reporter with the New York Times where she’s been digging into these search funds. She joined Marketplace’s Kai Ryssdal to talk about this alternative path to the CEO seat. A transcript of their conversation is below.

Kai Ryssdal: How do these things work? Because, you know, I’ve been doing this a while, and I’ve yet to really hear of them.

Nell Gallogly: Yeah, you know, I sort of had the same conclusion. I was on LinkedIn a couple of weeks ago, as one does who’s sort of a business nerd like myself, and I had seen that someone had launched something that seemed sort of like an investment fund, but wasn’t exactly that. And as I did some digging, I uncovered that what I was reading about was a “search fund,” which is basically a pool of money that an entrepreneur can raise from investors in order for that entrepreneur to spend a couple of months to a couple of years looking for a company, and then acquiring that company and ultimately running it as CEO. But the kind of funny thing is that they often don’t have a long track record in running a company or a business. Oftentimes, they’ve only had a few years of experience.

Ryssdal: You know, it’s funny: you use the word entrepreneur, which, to my mind, and I imagine the minds of many, sort of implies somebody who has an idea, scratches together some money, starts a company, and does it that way. So this is not that.

Gallogly: This is not that. This is sort of the shortcut to that. It’s the idea of taking somebody else’s really good idea and identifying that and then, if you can cobble the money together, taking over the company from there.

Ryssdal: When the producer on this piece, Sarah, brought this up in our morning editorial meeting a week or two ago, my gut reaction was, “Man, this sounds really bro-y.” Right? Because business schools are kind of bro-y and that sort of is what this smacks of. So what you have is a bunch of young, mostly male, masters-of-the-universe business school students going out and convincing people to give them money to let them buy companies, right? That’s what this is.

Gallogly: Yeah, I mean, you’re not wrong that it takes a certain amount of kind of confidence and perhaps a bit of “bro”iness, to be able to say, “Hey, I don’t have a lot of experience running a business; maybe I’ve spent a few years doing some work before my MBA, but I believe I have the capacity to be a real leader. So, hey, investors, pick me to do this.”

Ryssdal: And in some cases, they do. What kinds of companies are usually the target of acquisition, as it were?

Gallogly: Yeah. So the companies they’re looking for are already profitable, have recurring revenue, often in sort of the $5 to $10 million range. So you can think about the landscaping business or waste management business or HVAC, in not necessarily a big city. It could be, you know, Toledo, Ohio as an example. So that’s sort of the typical acquisition target.

Ryssdal: I don’t want to falsely romanticize this, but it does seem a little bit like not wanting to do the work of entrepreneurship, right? They just want to run something, and, as you said early on, are sort of taking a shortcut.

Gallogly: You know, I think that the shortcut is certainly a shortcut to the CEO seat. But I will say, we have, at this point, a sort of generation of, quote-unquote, baby boomers who are nearing retirement or already at the stage of retirement, many of whom might not have a next of kin or an heir for their company. And so what these searchers are doing is saying, “Hey, we want to promote that longevity of those companies, and give those owners a chance to retire with a good sum of money that they can exit with.” So that rather than a shorter shortcut to a CEO position, they’re really providing kind of the next hand-off to this generation of small businesses that are, in many ways, the bedrock of today’s economy.

Ryssdal: Yeah, and these searchers, as you call them, which totally fits, it’s okay with them that they don’t have the passion. They just want to run something. They want to be CEO, and that’s what they’re gonna do.

Gallogly: Correct, and if you were to talk to them about kind of, “Where your passion is,” they’ll say the passion is really in the leadership and the ability to sort of take on a company and be able to grow it with a more sort of organic growth year-over-year.

Ryssdal:  Right, and it’s not about building a better mousetrap. It’s just about running a company, right?

Gallogly: Exactly.