The Specialist Search: How Hyper-Focused Search Funds Can Win in the Lower Market (2/2)
Welcome to the second post in a series where I introduce 'The Specialist Search,' a hyper-focused approach to search fund deal sourcing.
In Part I, l shared a few of my Observations on the State of Search.
Now, in Part II, I’ll argue why you should consider a Specialist Search and why this approach is materially different from an ‘industry thesis’ or ‘thematic approach’ to lower market deal sourcing.
If you have any feedback or know searchers who have done this (successfully or not), reach out!
What Is a Specialist Search?
A Specialist Search is a search fund that focuses exclusively on a single industry for the entire duration of their search, leveraging their intense focus and commitment to become a uniquely positioned and high conviction buyer.
While Specialist Searchers use some of the same language and techniques as traditional searchers (eg. “we’re looking to acquire and run a single great company..”) they differ in how:
They describe themselves (as focused on a single industry)
They assemble a team of respected industry advisors
They engage with their target industry’s leaders and associations
They have a strong “b2b influencer” social media presence
They produce industry-specific content (posts and podcasts)
They “Build In Public” to share and document industry insights
By embracing this extreme focus and openly (and strategically) sharing this focus with the world, Specialist Searchers will unlock a range of advantages:
A higher searcher yield (above the 66% from the Stanford Study)
A more enjoyable and less “directionless” search experience
A gentler learning curve as they step into the CEO seat
In Part 2 of Entrepreneurs are the New Labor Venkatesh Rao writes:
“Entrepreneurship is three things: a set of business skills, a set of political skills, and a stash of hoarded unfair advantages, held in reserve for the right opportunity. When the latter two vanish, it becomes merely a teachable generalist skill, rather than a cultivated talent for successful risk-taking.”
Most searchers have limited industry experience and lack (relevant) political connections, which often leads them to adopt a more generalized approach and target businesses that don't necessarily demand these prerequisites.
Of course, the search fund asset class has performed extraordinarily well backing “teachable generalists” (in highly leveraged acquisitions…) over the past 35 years.
A Specialist Search Fund Example
Let’s walk through an example of what a Specialist Search Fund might look like.
Allow me to introduce you to Trailblazer Fund (TF), a Specialist Search Fund focused on Salesforce ecosystem companies (ISVs and agencies).
For the next two years TF is going to become THE Salesforce marketplace investment firm. Unlike a generalist searcher, as a Specialist Search Fund, they will:
Create a unique brand and website that highlights their Salesforce focus
Recruit an advisory board of former Salesforce execs & CRM river guides to form the “Trailblazer Fund Network”
List out the different types of Salesforce businesses they’re interested in, with content tailored to the owners of each type
Start a Salesforce focused podcast and newsletter where they interview fellow Trailblazers, Founders, Investors, etc.
Attend Salesforce (and other 3rd party industry) events
Attend Dreamforce and TrailheaDX (maybe even co-sponsor a booth)
Partner with folks like Salesforce Ben and Cactusforce
Constantly hand out custom (non-trademarked) “Trailblazer” Fund swag
Experiment with running AdWords against “Salesforce Ventures” and other high volume Salesforce-related keywords
At some point in your career, you’ve probably been hit with a cold email that pitched something along the lines of “What if every single sales call was with an ideal client…?”
For the Trailblazer Fund, that’s their reality…
Unlike most generalist searchers, TF will benefit from an easily identifiable list of companies; they’ll review and engage all the right companies on the Salesforce AppExchange and Salesforce Partner Finder (among other sources).
While their target company list is obviously much smaller and less actionable than their generalist peers, they have two years to meet every single one of these companies, earn valuable street cred, build a Salesforce-focused audience, assemble an advisory council, and most importantly, gain the unfair advantages and political connections Venkatesh Rao mentioned above.
For Trailblazer Fund, their investor group is already bought into their Salesforce focus.
Their investors are already comfortable with the ‘Salesforce platform dependency’ of their targets, Salesforce’s business model, and long term outlook of SFDC.
TF (and their investors) know that outreach activities (ie. emails sent, seller calls, LOIs submitted) are not the best proxies to measure their efforts (in the short term).
TF is focused on becoming a leading authority and B2B influencer on Salesforce businesses while meeting sellers “along the way.”
Imitate The Experts
Three of the best LMM firms (Summit, Alpine, and Shore) have already adopted internal sourcing engines similar to the one I’m describing here.
According to Axial, Summit “had been in touch with a company on average for at least two years before an opportunity popped up.”
From what I’ve heard, Summit already has their own database of private companies and their associates are constantly reaching out to owners. Their struggle is more in figuring out the right areas to focus on rather than raising awareness with sellers.
For Alpine, many of their platforms act like Specialist Search Funds (Ascend for Accounting, and Orion in Field Services).
And in his recent Invest Like the Best interview, Justin Ishbia said that before pursuing a new industry, his team identifies the “Mount Rushmore of companies and executives and writes a 40-60 page whitepaper on the industry… we create a board before we buy the business and they’re required to go with us to meet sellers…”
THAT is the spirit of the Specialist Search.
Specialist Searchers Leverage The Internet
As David Perrell says, “writing online is how you make the internet work for you.”
I expect Specialist Searchers (and their investors) will be astounded by how many interesting people enter their orbit via their sharing insights online.
I wouldn’t be surprised if Specialist Searchers end up meeting potential partners, customers, lenders, and employees as a result of this approach.
To some degree, I view Specialist Searchers as “micro media companies” designed to “narrowcast” to their seller audiences.
I’m inspired by the emergence of “Solo Capitalists” in VC like Jason Lemkin of SaaStr, and Packy McCormick of Not Boring and “Guy/Miss-based” accounts on Twitter and TikTok like Yossi Levi / Car Dealership Guy and Miss Excel who have all leveraged their audiences to start businesses, raise funds, and generate deal flow.
Arguments Against The Specialist Search
The following are a few common arguments I’ve heard against the Specialist Search.
The ETA framework (or checklist as you call it) exists for a reason. Every +6x MOIC search outcome was downstream of fantastic entry metrics.
I agree that the classic search criteria should (often but not always) be in place but this argument doesn’t explain why I can’t choose to apply the checklist to one specific industry where I know most of these businesses possess these metrics.
It’s too risky to choose one industry. What happens if the industry becomes unattractive?
A Specialist Search requires doing extensive research before starting.
An industry tailwind changing direction is always a risk. I’d much rather an exogenous factor render my target industry unattractive during my search, than after I’ve sunk +$10m into my acquisition.
Search is a numbers game. You need a couple thousand targets minimum, with this extreme degree of industry focus, you’ll struggle to build actionable lists.
I agree that luck & timing play a huge role in search.
Today, generalist searchers only have about a 60% chance of buying a business and I believe this yield is declining as more searchers / fundless sponsors enter the arena & more PEGs and FOs move down market.
A searcher is practically at a coin toss probability with the traditional approach - do you think the Specialist approach could be much worse?
If a Specialist Searcher “fails to find”, they will end up as a highly regarded industry expert in an attractive industry they’re passionate about. I think this is a MUCH softer landing than most failed generalist searchers.
Instead of being gung-ho on one industry, you should do industry sprints.
I think it’s just too hard to create the type of brand, authority, and conviction I’m pursuing via industry sprints.
Sure, that might work if you’re Summit, TA, Shore et al and have the resources to pursue multiple theses and platforms in parallel, but with the resources of a search fund, you’ve got to burn the bridges and go all in.
Plenty of investors tell searchers to do a thesis driven search.
Yes, some investors train their searchers on “industry hacking” and will tell their searchers to do a thesis driven search. The reality is, few actually do.
Most of the industry-focused searchers I’ve met are (oddly) all in the medspa and multi-site healthcare space.
It’s impossible to know what to search for in advance. “There are an overwhelming number of companies operating within an overwhelming number of industries that you & I still don’t know exist.”
I agree that there are countless niches I’d never heard of and that I wouldn’t discover them as a Specialist Searcher with a narrow aperture.
Can we agree that there are niches that I am aware of today that possess good businesses and it’s not unreasonable to pursue one of those niches?
In Conclusion
I believe the Specialist Search, if executed properly, will be a more rewarding process and lead to better outcomes and higher searcher yields.
I’m not arguing that a searcher NEEDS a deep contextual understanding of an industry to make good investment decisions. I’ve seen enough data on the best search outcomes to know that wasn’t historically the case…
I’m arguing that a searcher NEEDS a deep contextual understanding of an industry to become a preferred counterparty and THAT is critical to being a successful searcher.
Much like a Specialist Searcher, all I can do is shout my opinion into the ether and hope that I attract and engage with like minded folks who think this is worth discussing.
If you have feedback or know searchers who have done this, reach out!