Top MBAs are flocking to search funds. One Harvard grad explained why he founded a $600,000 fund to buy tech companies.

In February, Singh, 31, founded Guddi Growth. The Toronto-based search fund focuses on buying software-as-a-service companies with annual recurring revenue of at least $5 million.

Lower salary — but a big potential payday

A search fund founder like Singh raises money from investors to buy and operate a privately held business, like manufacturing, home improvement, and transportation companies.

Investors put $2.3 billion in search funds between 1986 and 2021, according to a 2022 report from the Stanford Graduate School of Business — a small sliver of the money that’s gone to private equity firms. They have generated about $9.8 billion for investors and $2.4 billion for entrepreneurs, per Stanford.

And they’re becoming an increasingly popular career choice: Until 2013, fewer than 10 funds were launched per year, on average, according to Stanford’s report. But by 2020, 66 such funds hit the market. A third of “searchers,” as Stanford termed the fund founders, took a recent business school class about entrepreneurship through acquisition.

In some ways, search funds are like a mini version of private equity: They target small companies, often with a handful of employees that serve regional markets, and can own several businesses. Investors typically mentor the searcher in their day-to-day operations.

Singh said he raised $600,000 from investors for the next two years — an amount he can spend at his discretion to pay his salary, business travel, and company expenses. That’s above the median of $425,000 per person raised in Stanford’s survey of searchers in 2021.

His fund is backed by a dozen investors, including search fund-specific investors and private equity firms he pitched. He’s in talks to buy two companies.

Exit strategies can include selling the revamped company to a bigger private equity firm, going public, or buying out the initial investors and continuing to run the business.

For Singh, running a search fund means making less money in the short-term than his HBS classmates who work in consulting or private equity.

“Why you do this job is that when you make a sale, you probably get $5 million at the end of it,” he said about selling one of his acquisitions down the line.

Here are three reasons why he decided on a search fund:

Shift in the search fund business

Search funds stereotypically pick up small HVAC companies in the Midwest, not tech businesses.

“Historically, tech people have stayed away from search funds because it’s not exciting to them,” he said. “In the last couple of years, people have started to love software within the search fund space because it makes a lot of money for everyone.”

There is “massive opportunity” to find legacy software businesses that could benefit from a new or more efficient business model, he said. These could be projects that convert on-premise software companies to cloud companies or projects that change one-time software purchases to yearly subscriptions.

Generational transfer opportunities

Many small companies do not have succession plans and may fold if they are not acquired, giving search funds a good pitch for buying them, Singh said.

“Baby boomers are retiring,” he said. “They have had profitable companies with long-term sticky customer bases, and these customer bases are not going to go away.”

Singh said he is particularly excited about companies that could benefit from AI overhauls by automating sales and marketing or widening customer bases without increasing the number of employees.

Driver’s seat

Search funds are also an opportunity for Singh to work for himself. If he’d started in VC or PE, he wouldn’t get as much hands-on expertise or immediate leadership experience.

“For me, it was the fastest way to get into the driver’s seat,” he said.

He can work from anywhere in the world, which gives him flexibility to spend time with his friends and family, including his toddler daughter.

“As an entrepreneur, you work even harder, but how you work and where you work from is totally different,” he said.

Singh said he knew of about 20 MBAs from his Harvard cohort who started search funds, out of about 800 in his class.