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Alexander Pöschl is a Full Professor of Entrepreneurship at the University of Applied Sciences Saarland, Germany. Before his university career, he worked at large German corporations and co-founded the data science startup digitalbetrieben GmbH, which was acquired by bewegewas Holding GmbH, where he also became a shareholder. Bewegewas was subsequently acquired by Conrad Electronic SE.
1/ You have just completed research on searchers in emerging or nascent SF markets. Could you please provide more information regarding the scope, the markets, and the number of SFs you have studied?
We talked to a total of 29 searchers from 19 countries around the world where SFs are still relatively nascent or underdeveloped compared to North America or Spain. These countries include Egypt, Malaysia, Vietnam, Hungary, China, Japan, Austria, Germany, Brazil, countries from the Middle East, and others, covering Western, Southern, and Eastern Europe, Latin America, North Africa, the Middle East, Southeast Asia, and East Asia. We also cross-checked and validated our findings through research interviews with international SF investors.
2/ What are the primary strategies you have identified for searchers to approach and attract international investors?
We focused on traditional SFs in nascent SF markets, particularly on search capital fundraising and searchers who successfully raised their search capital. Searchers almost unanimously indicated that it wasn’t feasible to raise enough capital from local investors alone due to:
a) a lack of local investors interested in SFs or not being in the searchers’ networks, and
b) the desire to bring on experienced SF investors who offer expertise or pattern recognition in making deals. These experienced SF investors are almost always from abroad. Therefore, searchers actively seek out international investors to fill a substantial portion of their cap tables.
The ‘how’ is interesting: almost all searchers found that international investors required them to collect commitments or soft commitments from local investors first. To find local investors, searchers utilized their networks, including MBA networks, professional networks, friends, family, and local business angels. These individuals help validate the market and the searcher. Using these initial soft commitments, searchers then find it easier to persuade international investors. Hence, having a good network in these markets is crucial.
3/ So, local investors play a crucial role. Are there specific advantages or challenges associated with relying on local investors in these regions?
Our findings indicate that local investors play a vital role by enabling searchers to fundraise from international investors. Professional international SF investors perceive these locals as providing searchers with local expertise and help with potential issues, such as regulations or market insights. It’s also crucial to work with international lawyers who understand the SF model perfectly, dominate the fiscal implications, and offer legal guarantees to international investors. This is similar to how venture capital investors behave when investing internationally; they try to partner with local investors or ensure that local investors are on board, thus validating the investment opportunity. For searchers in nascent SF markets, the implication is clear: build your network with potential local investors.
4/ How do searchers tailor their pitching and communication strategies when dealing with investors?
While the overall PPM remains the same, searchers employ a dual strategy: they discuss domestic economic opportunities with international investors and explain how the SF model works and cover SF basics with local investors. This reflects the different areas of expertise of these investor groups.
The communication style also differs: many searchers indicated they have more informal discussions, sometimes over coffee, with local investors, whereas communication with professional foreign investors is more structured, often following a specific playbook.
5/ Can you elaborate on some of the key cultural nuances you have noticed?
This is also an interesting aspect. For example, some Asian searchers suggested that financial tools such as seller notes or earn-outs aren’t very common in their markets. In Japan, everyone works through intermediaries who then receive commissions, making proprietary deal flow very rare. In South America, debt interest rates are really high, so most searchers use very little bank leverage. Germany and France are very competitive markets with a lot of private equity in the lower or smaller segments, making it harder to find deals at a good multiple. All these examples led to discussions among local and international investors and the searchers. It also resulted in a different playbook when financing and negotiating an acquisition. A South American searcher mentioned targeting a specific industry that does not appear to exist outside their country or continent, requiring detailed explanations to foreign investors. A few such nuances have emerged, and while none are major, they are quite interesting.
In conclusion, do you think it’s easier to raise a SF in an emerging or nascent market than in a very competitive one such as the USA, Spain, or Mexico? What lessons can be learned from their experiences?
I cannot comment on the USA and Spain as we only looked at nascent SF markets. In these markets, it is a mix of foreign investors being interested in taking their first steps there and looking for investment opportunities, as well as considering their allocations. Some searchers indicated that various investors were already over-allocated in a certain region or continent, creating a problem if a searcher is too late and is told to wait for the next fund. Additionally, some searchers and investors suggested that in the next wave of SF investments in new markets, the role of corporate governance, such as how to fill the board, will become more important.
