Noha Gad

The startup world is witnessing a quiet revolution. While venture capital and bootstrapping dominate headlines, a lesser-known model, search funds, has been delivering outsized results for founders and investors alike. 

Unlike traditional venture capital, search funds empower founders to acquire and scale existing companies with investor-backed capital and mentorship, significantly de-risking the entrepreneurial journey. But why are search funds gaining traction, and how can they transform your startup’s future? 

What are search funds?

Search funds are an innovative investment model where aspiring entrepreneurs (called "searchers") raise capital from investors to systematically acquire and operate an existing small-to-midsize business. 

The process comprises two phases: first, the searcher raises an initial "search fund" (typically ranging between $500,000 to $1 million) to cover 12–24 months of operational costs while identifying and evaluating potential acquisition targets. They analyze hundreds of businesses, leveraging investor networks and industry expertise to find undervalued companies with strong growth potential.

Once a searcher identifies and acquires a target business, the operational transformation phase begins. In this phase, the searcher steps in as CEO, using additional investor capital and mentorship to scale the business.

This stage plays a critical role in de-risking entrepreneurship as it helps searchers avoid the 90% failure rate of early-stage startups by building on a proven foundation. Additionally, it increases the investor's return on investment (ROI) by 4.5 times.

Why do search funds matter?

Unlike traditional venture capital, search funds focus on proven businesses, offering a unique blend of entrepreneurial opportunity and reduced risk. Investors, often high-net-worth individuals or institutional players, provide not just capital but hands-on guidance, forming a partnership with the searcher. 

This symbiotic approach has made search funds particularly attractive for founders seeking a "middle path", avoiding the grind of starting from scratch while sidestepping the equity dilution common in VC-backed startups.

Why are search funds critical for startups?

Search funds offer various benefits for startups, such as:

• Access to capital without extreme dilution. Search funds enable searchers to raise acquisition capital without giving up ownership upfront.
• Built-in traction and market validation. Search funds target already revenue-generating companies with existing customers, eliminating guesswork.
• Accelerated growth with expert backing. Unlike passive VC investors, search fund backers often provide industry-specific mentorship.
• Risk mitigation in volatile markets. Search funds usually target recession-proof sectors, such as B2B services, healthcare, and IT.

How to leverage search funds?

Search funds provide a unique opportunity for ambitious operators to acquire and scale established businesses while mitigating startup risks. Entrepreneurs should focus on securing investors with industry expertise, targeting stable companies in recession-resistant sectors, and executing post-acquisition growth through operational improvements and strategic add-ons. 

On the other hand, investors must focus on sector expertise and aligning incentives to capitalize on search funds’ unique advantages: lower risk than traditional VC, higher involvement than PE, and typical returns upon exit.

Finally, search funds represent a transformative model that provides entrepreneurs a proven path to leadership without the volatility of starting from scratch. Meanwhile, these funds offer investors a hands-on, high-reward asset class grounded in real businesses. By merging operational expertise with strategic capital, this model transforms undervalued companies into growth engines while producing exceptional returns. 

Tamer El Bahay, serial entrepreneur and Managing Partner- Moonbase 

Egyptians have long been active investors in international real estate markets, particularly those earning in foreign currencies like exporters. My family, involved in food exports, has followed this path for decades, investing in properties across Europe and the U.S. to preserve wealth and enable global mobility. 

However, as the investment landscape evolves, I’ve come to realize that while real estate remains valuable, it’s not the only option. Search funds - an innovative and increasingly popular asset class - are a compelling alternative for Egyptian investors seeking to diversify their portfolios.

What Are Search Funds?

Search funds are private equity vehicles created by entrepreneurs to acquire and manage small-to-medium-sized businesses. Simply put: investors provide capital for the search phase, where entrepreneurs identify businesses - typically valued between $5 million and $30 million - in stable industries like healthcare, education, and light manufacturing. After acquisition, these businesses generate active cash flow and experience growth under the entrepreneur's management. 

Search funds have delivered impressive returns, with an average internal rate of return (IRR) of 35.1% and a return on investment (ROI) of 4.5x as of 2024.

Why Search Funds Are a Smart Alternative for Egyptian Investors

For Egyptian investors accustomed to foreign real estate markets, search funds offer several advantages:

1. Comparable Investment Size, Higher Returns

A typical search fund investment is around $500,000, similar to the amount needed for a Golden Visa property in Europe or a high-end apartment in Dubai. However, search funds have the potential for significantly higher returns. While real estate provides stable, but modest, appreciation and rental income, search funds historically offer an average IRR of 35% and a 4.5x ROI, according to Stanford University’s Search Fund Study. These returns make search funds an attractive alternative for investors seeking higher growth.

2. Active Cash Flow vs. Passive Income

Real estate investments can often generate inconsistent or passive rental income, with properties sitting idle or needing maintenance. In contrast, businesses acquired through search funds generate active cash flow almost immediately. These companies have established revenue streams, providing regular distributions alongside equity growth. For exporters used to steady income from trade, this active cash flow is an appealing feature that aligns well with their financial expectations.

3. Aligned Time Horizons

Real estate investments typically have a medium- to long-term horizon of 5-10 years before realizing substantial gains. Similarly, search funds operate on a timeline that aligns with this expectation: 1-2 years to identify and acquire a business, followed by 3-7 years with an average of 5 years for operational growth before an exit. This timing matches the investment strategy of Egyptian investors familiar with waiting for long-term returns.

4. Global Diversification Without the Hassles of Property Management

Managing properties abroad comes with challenges, including maintenance, tenant management, and local regulations. Search funds eliminate these operational headaches by focusing on well-managed SMEs across various industries and geographies. Investors gain global diversification without the complexities associated with property ownership, making it a convenient way to expand one’s portfolio internationally.

A Call for Strategic Diversification

As Egypt’s export sector continues to grow, driven by government incentives and rising global demand, exporters have more opportunities than ever to leverage their foreign currency earnings into high-yield investments. While real estate remains a reliable option, by allocating part of your portfolio to search funds, you can achieve higher returns, enjoy active cash flow, and benefit from global diversification without the burdens of property management.