Building a search fund cap table – A European perspective

There are many aspects of the search fund journey that lie outside the control of the entrepreneur. A mix of both skill and luck dealing with this uncertainty is required to succeed in the job. There are two key decisions, however, that are within the locus of control of the searcher: the industries in which the entrepreneur decides to focus the search and the initial investor group. Here I will focus on the latter.

The importance of having a strong investor group cannot be overstated. Investors play a key mentoring role through all the stages of the search and operation. Experienced investors, with their pattern recognition skills, help the searcher filter industries and avoid doing bad deals. They also assist the entrepreneur during the cumbersome negotiation process leading to the acquisition. During the operation phase, three to four of these investors will join the board and provide critical guidance to the new CEO, while ensuring proper governance of the company. Having a strong investor cap table must be positively correlated with achieving higher returns (I have no data to back this assertion). 

Building a SF cap table, however, can be overwhelming for a prospective searcher. The number of SF investors has increased dramatically over the last years. When my partner Ignacio and I started investing a few years ago, we were no more than 25 serial investors in Europe, including the US serial investors that brought the SF model. Today searchers have a list of more than 100 potential investors to choose from, and this number will continue to increase in the future. With such a young and vibrant investor community, it is not always easy for the entrepreneur to differentiate amongst the different investors and pick the right team.

Putting together a strong SF cap table in Europe presents some additional challenges:

  • Local investors play a key role in the SF model. However, with the exception of Germany and Spain, in most countries it is almost impossible for a searcher to gather a strong group of local SF investors that know and trust each other (and that are trusted by the SF investor community). 
  • Experienced SF investors from the US also play a key role, bringing the know-how and a successful track record of 20+ years helping entrepreneurs buy and grow businesses. But these US investors often lack sufficient bandwidth to support their European searchers from the distance, especially when it comes to serving in boards, which is the cornerstone of investor support. 
  • Given the early stage of development of the asset class, there are still only a handful of recently exited SF CEOs in Europe. Former searchers are a key source of investor (and board) talent in every growing search fund community. 
  • The increasing popularity of the SF model has attracted a lot of new investor faces, making it challenging for the investor community to preserve the traditional search fund ethos. Some of these new investors are also more passive and transactional, using the initial search investment as a cheap option while failing to provide the adequate level of support to the entrepreneur. 

A few things to consider when building a cap table

Searchers should think strategically about constructing their cap table. A sound approach consists of evaluating potential investors across different dimensions: investor experience (including SF experience), deep pockets, availability to support (and to respond quickly), operational experience, etc. This often leads to some investor allocation buckets based on level of experience (serial v non-serial) investor type (funds v individuals) or country of origin (local v other European and US).

Similar to VC, some investors -both individuals and funds of search funds- have built a strong brand and reputation throughout the years. Most SF entrepreneurs are eager to take these well-known investors onboard. However, these investors often require that the entrepreneur has previously secured the backing from some other value-adding investors they trust (including local investors). Building the cap table suddenly becomes like assembling a jigsaw puzzle, but without the possibility of starting with the easiest jigsaws from the edges of the puzzle.

At the same time, some (often less experienced) investors use aggressive outbound tactics to try to generate deal flow. These investors reach out directly to the entrepreneurs through Linked-in or and ask them to participate in their search fund early in the process. Since building fundraising momentum is critical for the searcher, it is hard not to say yes to these early commitments.

Below are a few tips that, if I were about to launch a search fund, I would take into account to build a solid investor group:

Do your homework: Searchers should have a clear fundraising strategy and do their own due diligence on investors before taking any commitments. They should try to talk to at least 25 to 30 searchers before starting fundraising and ask them for advice and references about specific investor names. Searchers, and especially CEOs that have worked with investors for a longer period of time, are a key source of input to qualify investors and prioritize them in the cap table.

Spend sufficient time with investors and ask lots of questions: There is an inevitable element of speed-dating in the way that fundraising takes place today in the SF ecosystem. Still, both entrepreneurs and investors should try to resist this inertia and spend some time getting to know each other, since they’re building a partnership that could last for many years.

Investor bandwidth and board capacity: Investor bandwidth is the scarcest resource nowadays in the SF investor community, and in particular board capacity. Searchers should think about their cap table as a proxy for the future board composition and try to identify, within their search cap table, at least 6-8 suitable candidates that show both the ability and the willingness to serve as board members of the acquired business.

Lead investors: Lead investors that are trusted by the investor community also play a critical role in the SF model. These lead investors take a particularly active role at the time of the acquisition, helping the entrepreneur accomplish the most critical tasks, such as negotiating LOI and final SPA terms with seller or negotiating the SHA on behalf of investor group. There are only a few investors today in Europe with both the experience and willingness to devote a significant amount of their time (and resources) to help the searcher close a SF transaction. The distributed nature of due diligence in SFs often implies that, if a searcher has the appropriate lead investors, the overall investor group will follow their recommendations, making the life of the entrepreneur much easier.  

Operational experience: Make sure you bring some operational experience to the investor group (and to the board post-acquisition), ideally from former searchers and recently exited CEOs. Operational experience in the SME space is particularly relevant, since the challenges small businesses face are very different compared to those of bigger companies, even within the same industry. 

Active investors v. passive investorsWe sometimes hear from searchers that they deliberately intend to allocate a portion of their cap table to some “passive investors”, knowing in advance that these investors don’t plan to contribute anything to the project besides their investment capital. The reason for taking these passive investors onboard is that allegedly these investors are easier to manage for the searcher. I find this strategy quite risky, especially in Europe. It assumes that the entrepreneur has the ability to determine in advance the level of investor support that he will require at all the stages of the SF journey. It also assumes that there will not be any significant changes in the “active portion” of their cap table at the time of acquisition, which is not always the case. Experienced SF investors know when to take a more passive role and let other investors take the lead, and in fact from time to time we are happy to do so.

Don’t commit too early: As already mentioned, there is an increasing number of (often new less experienced) SF investors that, in the absence of inbound deal flow, use aggressive outbound strategies to contact and commit with SF entrepreneurs in order to secure an early spot in their cap tables. This has the advantage for the entrepreneur that it helps him/her build momentum in their fundraising, but it can backfire later in the process. Entrepreneurs should try to resist that pressure respectfully and do their due diligence on the investors before taking any commitments.

Enjoy the ride!: It doesn’t happen very often in life that you have a group of smart and experienced individuals willing to listen to your story and provide honest feedback and advice. Beyond the short term fundraising goal, I decided to approach our own fundraising process at Istria as an exercise to meet interesting people and build a network of potential partners for the future. This is something I learned from one of our LPs and it helped me reframe the way I think about fundraising.

This article first appeared on 19.06.2021 on SF Thoughts, at

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