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Growing up with a father who actively acquired 20 small businesses, what lessons or experiences from your childhood have had the most lasting impact on your approach to ETA and investing?
There are several key lessons that I have carried with me throughout my investing career that come directly from watching my dad own and run small businesses and then investing on his behalf. The first is that businesses should be run for cash flow and that individual cash flow dynamics within a company are critical to understand and to prioritize. The second is that being incredibly conservative on valuation at the time of acquisition is very important in both protecting downside operating cases and creating massive opportunity for upside as the business grows. The third is that it is more attractive to buy and run an easier to understand, simple business than it is one that is operationally complex. There are a lot of “easy to understand” businesses out there, and especially for first time CEOs there are many benefits in buying those companies. And most importantly, I have witnessed firsthand many times over that once a simple, attractive, cash flowing company has been acquired for a reasonable entry multiple and the debt associated with the purchase has been paid off, even if that company is growing modestly, if you are to hold it for a long period of time and let those cash flows grow, it is hard to replicate that type of return and that type of cash flow profile in other Investments.
Hunter Search Capital (HSC) is the first female-founded investment fund to invest in the lower middle market through SF and other ETA vehicles. Could you elaborate on the vision behind founding HSC and your investment strategy? How do you evaluate your progress after 15 years in the industry?
The vision behind founding Hunter Search Capital was a desire I had to take my own entrepreneurial leap, which in my case best took shape by capitalizing on my 10 years of experience investing for my dad and our family office and leveraging that to build my own firm and take on outside capital for the first time and also to learn the dynamics of fund management in addition to investing. I am raising two teenage daughters and feel strongly about demonstrating for them the joy, hard work, and continuous learning that all come from being an entrepreneur, and that women can be entrepreneurs just as well as men.
The Hunter Search Capital investment strategy is simple. We prioritize partnerships with top caliber entrepreneurs who want to buy and run companies. In terms of importance, we say the entrepreneur is first, the company is second, and the structure with which the entrepreneur finds and buys the company is third, meaning we are quite flexible on the shape of the entrepreneurial journey that best suits each individual entrepreneur, and we are most focused on the entrepreneurs’ vision, passion, and work ethic.
I would measure my progress as an investor in the search fund space on several dimensions, the first and most obvious being financial returns, to which I will simply say that the returns I have generated across all ETA investments I have made are down the fairway with the asset class overall, which is what I expect by building large enough portfolios. A second dimension with which I would measure progress as an investor is reputation within the fund space. The investor and entrepreneur communities work very closely together and collaborate across a long list of investments and relationships, and it is important to continually demonstrate a willingness to contribute and partner, a level of flexibility, as these investments are made with a cohort of other investors, and a strong respect for others around the table with you. Finally, I think progress in my case could be measured in my contributions to bring more diversity in the space, first by being the first woman to invest in search funds and to build an investment firm focused exclusively on the space, and second to work to educate prospective female search entrepreneurs and to support those in the ecosystem to maximize their chances for success through my work with the Women’s Search Network.
You define your firm as actively involved in post-acquisition value creation. What key challenges have you observed in this phase, and how do you guide portfolio companies through them?
While every new CEO faces their own unique challenges with regards to the business they buy, there are some shared challenges that we see more commonly, the most prevalent being necessary changes to the management and employee base. Whether it’s identifying a “B” or below player who needs to be removed from the company, or it’s identifying a massive skill gap that needs to be filled, all new CEOs need to focus on and prioritize getting their teams right in order to set the company up for growth and success. Most search entrepreneurs do not have extensive (if much at all) direct management experience. This is an area where boards can be particularly helpful in designing go forward org charts and workshopping with CEOs how to address and prioritize the necessary changes. A second common challenge for new CEOs is in understanding their companies go to market function and optimizing it for their particular set of industry and customer circumstances. There’s no one size fits all in sales and marketing, and every new CEO needs to figure out the right building blocks to put in place across sales, marketing and customer success to help the company acquire and maintain happy customers. A final common challenge I would highlight is learning to prioritize what to focus on and spend time on for new CEOs. They often get into companies and want to touch, work on and fix too many things at once – which can be particularly problematic during the first year or two when cashflow is constrained as foundational investments are made. Learning how to prioritize where time should be spent, and in what order to tackle companies’ challenges and opportunities is a critical skill for CEOs to develop. This is another area where the board can be incredibly helpful to the CEO and providing mentorship and guidance.
At Hunter Search Capital, we help with post-acquisition value creation primarily by serving on boards, but also offering resources to all of our CEO partners and occasionally to jumping more significantly into project work with CEOs. Directly addressing a couple of the challenges above, we have written both cash management principles and go to market primers for our CEO partners, and my colleague Billy Bennett is very skilled at helping CEOs build and optimize their sales and marketing functions. He has done deeper project work with a handful of our portfolio companies to help develop and refine all go to market functions.
You co-founded the Women’s Search Network. Have you observed significant progress in encouraging more women to pursue ETA in recent years? What more can be done to support female searchers and CEOs in this field?
I really appreciate and admire how much our entire investor community has rallied around efforts to encourage more diversity in search. We have great support across the ecosystem, which is the most important thing. And we have seen significant progress in the number of women deciding to pursue ETA. According to the Search Fund Study that Stanford Graduate School of Business publishes every two years, women have accounted for 10%, 13% and 18% of all searchers in 2021, 2022, and 2023 respectively. This increase in women entrepreneurs is critical to encouraging more women to pursue ETA. Once women start seeing more examples of successful female search fund entrepreneurs in all materials related to search – cases taught at business schools, articles, podcast interviews, panels at events and conferences, and all other related material – it will continue to encourage more women to pursue this path as they see others before them be successful. A guiding principle for us at Women’s Search Network is the famous quote by Marian Wright Edelman that “you can’t be what you can’t see.” Let’s all continue to showcase female search entrepreneurs in materials on search funds – that will keep moving the needle and is something we can all work on.
What role does networking play in the success of SF entrepreneurs, and how do you leverage your network to support the companies you invest in?
Networking capabilities, which I believe to be an important sales-related skill for search fund entrepreneurs across the entire search fund journey, are a critical asset for new CEOs. All search fund CEOs are essentially involved in customer-facing roles, including customer success and new customer acquisition. We encourage CEOs to be proactive about this, including identifying through LinkedIn who the key contacts are at target companies and to reach out to investors or other contacts that have even tertiary connectivity to those people to ask for an introduction. We also proactively recommend service providers in our networks, industry experts including bankers, and anyone else we believe can help drive value at the company. All investors have massive rolodexes of relevant contacts, and the onus is on the search entrepreneur to ask for connections and introductions or to let investors know what they are working on so that investors can make appropriate introductions.
As a successful investor, entrepreneur, and mother, how do you balance the demands of your professional and personal life? What advice do you have for other women trying to achieve a similar balance?
Every working mom I know handles balance and prioritization in their own way, and we all struggle at times and keep refining our approach to balance our professional and personal lives. I very simply prioritize my life by 1) family, 2) business, and while 3) is everything else, consistently top priorities in that bucket include friends and personal wellness, which in my case mostly means exercise. To make it all work for me, I do wind up working all seven days a week but that means I can still drive my kids to sports and be around for dinner. I don’t have advice for aspiring entrepreneurs who are also moms on how to find balance because I think it is such an individual decision, but I would tell them that many women have done it before them and that they can certainly do it and be successful if they have that passion.
You recently completed a study on SF partnerships. Could you share some surprising findings from this research and how they might impact future partnerships in the ETA space?
Yes, this summer we surveyed almost 200 entrepreneurs, both individuals and partners, on their attitudes towards and experience with partnerships in ETA. We will be sharing the results of the research this Fall, but in the meantime, I can share a few of the key learnings, the first being the duration of pre-partnership relationships was much longer than we thought it would be at 8-10 years on average. A second topic we explored was the use of partnership agreements, which we did find to be extremely useful as partnerships are being formed. However, we also learned that partnerships require meaningful ongoing investment and cultivation, meaning it’s not enough to form an agreement and assume it will cover all things that may arise in the ensuing years. As such, partners need to continue investing in the partnership through actions including weekly check-ins, agreements on conflict resolution, etc. A final learning I will share here is the importance of complementary skills in partner selection. While many prospective entrepreneurs look to friends as potential partners, we also learned the importance of finding someone with different skills, background and even personality. Stay tuned on LinkedIn for more learnings from this study.
Looking ahead, what trends or shifts do you foresee in the ETA landscape that entrepreneurs and investors should be preparing for now?
One thing we’re already seeing that everyone should be aware of, particularly prospective searchers, is the impact of more entrepreneurs in the market trying to buy businesses. That increased competition is making it harder to get traction with business owners. To differentiate from the sea of would-be buyers in the space, search entrepreneurs are working hard to differentiate their approach in many ways, a lot of them quite innovative. On the investor side, we should expect to continue to see a decline in acquisition rates and a decline in overall returns, albeit slow declines in each area. That said, I think there is plenty of runway to continue to buy great businesses and produce outsized returns. Another area of development is the rise of alternative ETA structures, including hold cos, consolidation strategies, roll-ups and the like. This is another way search entrepreneurs are differentiating from other buyers and putting their own unique stamp on the ETA journey. Finally, we expect to see increasing diversity within the space due to the efforts of Women’s Search Network and the community support as a whole for more diverse entrepreneurs to enter the space. I’ll end it there on a high note.
