When I planned to launch my search fund, I reviewed dozens of searchers’ websites, most tying back to the same three categories (or some flavor): business services, healthcare, and software. Within each of these categories, searchers appeared to be going after the same niche markets due to their respective tailwinds and the investment style of the search fund community. To keep my opportunity set broad and conform to those who have successfully raised search funds and acquired businesses, I did the same by initially focusing on those three broad categories.
In the first four months of my search, I dove into two particular niches with entirely different business models, one services-focused and one software, and what I found was somewhat surprising. In conversations with business owners, I sometimes struggled to articulate what I was looking for. Yes, I had a set of criteria, but they varied a bit based on the business model. Was I valuing the business on recurring revenue, EBITDA, or some combination of both? How should I be thinking about the quality of their revenues or their cost structure in general? I knew I needed to make a change to have more fruitful owner conversations.
After reflecting more on my first quarter lessons, I recognized that I could more effectively qualify opportunities and articulate my thesis with business owners by refining my focus exclusively on B2B software. I could double down to better understand the business model, communicate effectively with owners on what we’re looking for, and differentiate myself from others in a convoluted market. Further, its attractive business model provides the opportunity for equally high-quality revenue streams with increased scalability relative to services-based businesses. I won’t dive into the specifics of the SaaS business model but instead explain my logic on how reeling in my criteria helped certain aspects of my search.
Concentrated knowledge
As a searcher, I find that coming up with new industries to research is one of the most challenging activities, more than having owner calls or doing any analysis on a particular space or business. I recognize that some searchers struggle with other areas much more, but for me, this element of the search has been a real pain point. Refining my focus to purely B2B software freed up some of that concern by giving me more clarity on how I should spend my time when I am not meeting with owners. By only looking at this business model, my industry research focuses more on the core products that a particular solution provides and the end markets they serve. Further, I’ve been able to leverage countless resources online on vertical SaaS and broader software investing by some of the leading venture capital firms and thought leaders in the space to sharpen my perspective. Although I still have a ways to go, the tighter focus has taught me the importance of getting to the core of how a software business creates value and whether the solution has a sustainable competitive advantage.
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