SEARCH FUNDS: How Founders Are Cashing in on The NEW WAVE of Entrepreneurship Through Acquisition

Welcome to another episode of Making Billions, I’m your host Ryan Miller and today I have my dear friend, Ibrahim Rahim

Ibrahim is a recovering McKinsey consultant who turned the private investment space on it’s head when he became the managing partner of Moon Base Capital; a new type of equity fund that blends venture capital and private equity into what is known as a Search Fund. All representing a perfect example of someone with an amazing fund that won its industry.
 
What this means is that Ibrahim understands business, he understands funds, and he is about to give us a master class on how to win in the private markets to help us all in our pursuit of Making Billions.

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[THE GUEST]:  Ibrahim is a recovering McKinsey consultant who turned the private investment space on it’s head when he became the managing partner of Moon Base Capital; a new type of equity fund that blends venture capital and private equity into what is known as a Search Fund. All representing a perfect example of someone with an amazing fund that won its industry.

[THE HOST]: Ryan is a Venture Capital & Angel investor in technology and energy. He achieved market-beating placement growth in his first 5 years in the industry.

Transcript

Ryan Miller  
My name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, in the show will give you the answers so that you too can enjoy your pursuit of making billions. Let's get into it. 

You ever feel like you know a ton about business but just haven't found the right business to start? Well, I have a treat for you. My next guest is about to introduce you to a new fund sector somewhere between venture capital and private equity called Search funds. So in this episode, we're going to chop it up on how search funds help entrepreneurs to build businesses through acquisitions. So the question is, how are you going to use this information to be a better investor, and entrepreneur? All this and more coming right now? Here we go. 

Hey, welcome to another episode of making billions. I'm your host, Ryan Miller. And today I have my dear friend, Abraham Ibrahim. Ibrahim is a recovering McKinsey consultant that has turned the private investment space on its head when he became the managing partner of Moonbase. Capital. It's a new type of equity fund that blends venture capital and private equity into what is known as a search fund. So what this means is Ibrahim understands business. He understands funds, and he's about to give us a masterclass on how to win in both. So Ibrahim, welcome to the show, man.

Ibrahim Rahim  
Thanks Ryan. It's really a pleasure to be here. I love your show whether we win a lot of energy on it and of the ideas. Thank you so much for having me,

Ryan Miller  
man, it's an honor to have you. And yes, we've been very fortunate to be in the top 2% in the world. But we're not here to talk about it. We're here to talk about you, brother. So you know, I'm very intrigued of research Moonbase capital. And I'm wondering if you could just walk us through on, you know, 60 seconds or less, what is a search fund,

Ibrahim Rahim  
a search fund is it's entrepreneurship through acquisition, which basically means an entrepreneur who does not have an idea and doesn't want to do a startup, but rather wants to go out and look for a company with specific criteria, then buy this company. So what we do as investors, we work with this entrepreneur during two years, when they're looking for these companies, once they find the company, the entrepreneur becomes the CEO of this company, we help run the company. So it's a mix of venture capital, because you have an entrepreneur and you have the entrepreneurship part. But also you actually buy a company that exists, which makes it and you use leverage. So celebrate vine, so it's an end of the day, it's a mix of both, I'd say,

Ryan Miller  
Man, brilliant. So entrepreneurship through acquisition, I love that. So you're somewhere in between VC and PE where you blend both, you know, for a lot of people starting out in this industry, because we've got listeners from around the world, and a lot of them are emerging fund managers, and some are aspiring to be that or even entrepreneurs, both work and your case for those beginners maybe can walk us through some early value that we can give them on, let's say how do the beginners win in this industry? And also, how do they not lose?

Ibrahim Rahim  
So as an investor in such funds, it's a bit different than than investing in other asset classes, which is because you need to help the entrepreneur and support the entrepreneur during this period. And so what advice is, make sure early on as an investor in search funds to have your value proposition clear. So how are you going to help these entrepreneurs? Because if the entrepreneurs are happy with your value proposition, then you will you will, you will for sure, get other good entrepreneurs, and if you have good entrepreneurs, pipeline will be good. And things start to move in the right direction. So for sure, the value proposition is 111 main thing that that we do.

Ryan Miller  
Okay. And now on the downside, how do they not lose? Like, for example, I would say betting those entrepreneurs, because I mean, I'm assuming you don't just take anyone just because they asked you to help them. They're obviously the entrepreneurs a big success factor, it's a critical path factor for you, how does vetting your entrepreneurs come into play as far as running a search fund?

Ibrahim Rahim  
So that is basically a period where we just do interviews, so we just do interviews about the passion, what they want to do, are they ready for leadership. But honestly, Ryan, the fact that we work with these entrepreneurs over two years quite closely, in our case, you really have enough time to bet them because you don't have to invest once they find the company, you have the option to invest. So the right to invest, but not the obligation. So what happens is we work quite closely with our entrepreneurs, vended, over two years, many different situations help that. And then finally, you know the quite well by the end before you decide to put real money in.

Ryan Miller  
Man, brilliant. So vetting your entrepreneurs aligning with a good pipeline of deals and entrepreneurs. These are some of the early ways to add points on the board and also not lose a few points when you're beginning. So this is brilliant. That's a true sign of a masters, they can simplify the complexities of their industry. So that being said, speaking of your industry, and wondering if we can shift a little bit to the market, I'd love to see what you're seeing out there, particularly just where is the market at and after that maybe you can help us understand where do you see this going?

Ibrahim Rahim  
So it's very interesting because search funds started at Stanford's Harvard but Stanford nearly 30, 30 years ago, so mid mid 80s. And it's started very slow just because of the nature of how much time it takes to ramp up today, especially in the US search funds are growing a lot and if you think about the the markets in general, the SMEs is a huge part of the market. The generally speaking does not get a lot of investment. When you have a lot of people pouring money into large caps, we have a lot of more money being poured into venture capital and startups. But this whole middle section, if you think about it, it's not a it's not where finance goes not where investment goes. So, but on the other hand, from a science perspective, this middle parts is more than half of the economy, it's maybe 80% of the people working in this SME parts. So an end of the day, it's a huge part of the economy that doesn't get any investment. So you can clearly see that the growth, huge growth of search funds over the past especially the past 10 years, makes makes it obvious that we're just scratching the surface of this SME chunk. And that I think it will, it will, it will grow enough in 10, 15 years to compete with venture capital in terms of size of investment that will take some time. But with if it's if it continues on this trajectory, I think very soon, you'd have three asset classes private equity, venture capital and a search funds in this private equity world,

Ryan Miller  
man, that's brilliant. So SME, these are the places where we want to go and it's an we'll say, an emerging asset class, I don't know how to use a big college word. But what it really is, and this is like an island emerging out of the ocean of capital, where you can actually park and build something impressive. So companies that are in the middle ground where they're too big for VC, but too small for PE. This is where Moonbase capital, Ibrahim and his team start to come in very, very handy for a lot of entrepreneurs. So imagine calling Moonbase capital, you're a very seasoned business professional, maybe recovering consultant, like my friend, Ibrahim here, wherever you got that information or that knowledge, then you can call Moonbase and say, Look, guys, I know how to run businesses. I know how to keep profit margins, I just need a company. And they go around and you work with them to actually build that businesses. Would you say that's a fair statement? Yep.

Ibrahim Rahim  
Yep. Yep, I will say that the beauty of it is it's a different type of risk profile for entrepreneurs. So if and for investors, so it's not the high risk, high rewards model of venture capital, for example, it's more a model where the reward will never be a unicorn. But you can reach 10 20x over five years. So you still make quite the good. I mean, the average IRR, according to Stanford over the past 30 years has been 30% for such average IRR for the market. So that's higher than the average of VCs or private equity or any other asset class. Now, of course, I need to say the market is still still still not that big. So I'm not sure if it will continue to have 33% IRR on average over 30 years. But you can clearly see that there is a lot of value there that that's why it's it's also growing like crazy.

Ryan Miller  
Wow, that's phenomenal. So maybe that's some of the benefits of an early ish adopter, you said, it's been around for 30 years and still emerging, but a 33%. Any investor should be very happy with that for an annualized return. So you know, thank you for that on the market. Now, I'd love to just transition to kind of the heart of the matter, I'd love to just cover you've been very experienced, you still are and you run a moon base, you've done all of these amazing things. Now you have the luxury of what we call a look back analysis. So through your own personal loopback analysis, we'll say I'm curious if you have any, we'll say cheat codes for anyone in this industry, whether you're an investor, like yourself, or someone on the other side, what are say two or three cheat codes that you could prescribe to some of our listeners around the world.

Ibrahim Rahim  
Especially I mean, for us, what works really well is the connection with the searchers. Well, the way we've done it is first of all, we were clear to position ourselves, people who will help the search as much as possible and to position ourselves this took a lot of work into starting with podcasts, white papers, trying to have webinars with people and then try to add to the community. So slowly, people are like, okay, these guys know what they're talking about. And secondly is when you work with the searchers, you we really made an effort to get close to them to support them, to help them in any way they decide. And that's an important part because they're entrepreneurs. So if you recognize that it's their journey, that entrepreneurship, you need to support them and them, but it's more about them, they feel it and they they recommend you to other searchers, and then you will get the best pick of searchers, which naturally means the best pipeline. So that's one part which, which I think is very important. And and you need to make sure you do that in order to get the best pipeline and survive. Now on the other hand, the choice of companies, the whole market really looks at the same criteria somewhat, which is the strategic of having size of one to 5 million euros indeed, that's that's the size we work in, which is a great size, but it's still smaller than what private equity usually runs behind. And at the same time, it's not as small as a startup or a company that doesn't have management. So it's a very good size. And you look for recurring revenues, you look for businesses that are quite safe, you look for businesses that have a big margin and that have good cash flow. So I would say stay within the agreed upon search fund criteria that the whole markets basically follows. What we do extra after doing this for a while is we always look for companies that have the potential to grow it so you don't have to because some people are more of the private equity style where it's More of a safe pay back the debts type of investments, we do that as well. But one advice I would give is try always to have any portfolio, one or two companies that are able to do the 20 20x 10x 15x. Because this will take the whole portfolio to another level. But the beauty also is the downside, if given the diversification that sirtuins allow you because let's say if you have a fund of 30 million euros, you're going to spend these for 30 million euros over 5060 companies, because on average put half 1,000,001 million. So it's an end of the day, you really spread out your bets, which which makes the downside given that the asset class is so safe, and that you can see the company going visit the company putting also this diversification, which makes the downside, almost zero. So that's that's another big part which I would which I would recommend diversify as much as you can.

Ryan Miller  
Yeah, so building that diverse thing, and you talked about, a lot of that is building that portfolio one, but also number two, more importantly, is make sure it's diverse, especially building that network of entrepreneurs. And you mentioned just getting out there and making sure as I like to say your reputation and your relationships, right to most valuable assets in your possession. And so getting out there and just building a reputation in this industry, sometimes I call that your integrity, but also just being a known advocate and voice for people who can can be successful in your industry, entrepreneurs will gravitate towards that they are a different animal altogether, they consume a ton of information. And so if part of that is you, and then that messaging brings them to you. Now you've established through blogging, maybe you go on people's podcast called making billions or some other amazing ones, and just get your voice out there to be a known advocate. This acts like a magnet that can bring a lot of diverse entrepreneurs to and this is what Abraham and I are standing on the hill yelling over the bullhorn saying like you got to get out there, you got to build your voice in this industry. Because if you do it, now you have an opportunity to bring entrepreneurs to you. And that is a heck of a lot easier. It takes a while. But it is a lot easier when they come to you then you're going around chasing every little butterfly that flies past you, would you say that's a fair statement?

Ibrahim Rahim  
100%, 100%, couldn't have been done better on top of it. Also, in the search fund world, the market is or the people are really well knit together, which is very interesting, you don't have the same attitude between the investors in private equity or venture capital the way you have in social sections, we're really good friends, because we're not really competing. Each investor invests anywhere between two to 15% of the company. So in any cap table, you'd have maybe 15 names of investors that all work together. So we don't compete the way for example, private equity. And in this regard, we always are very much helping each other the same on the search fund on the searchers side, searchers are really in touch together, they talk about the investor they talk together. So I think what you said is even more true in search funds simply because it's such a close knit society.

Ryan Miller  
Yeah, that's right. And often, so I have the wonderful opportunity to coach amazing and brilliant people. And they often say Ryan, I love your show. I've a couple days ago someone was like I've been binge binge watching making billions. And I was very flattered. And so a lot of people are like, I think I'm going to start a podcast Should I do it. And I say absolutely not coming from the guy who actually has a show. But really, if you want, you can, but it takes a while to do that. But the alternative, and I think this, what he was saying is you can spend a long time building your own show, or you can just do what Ibrahim is doing and just go on podcasts. And so you can talk to audiences that have already been built up. So there are fast ways as we used to say, let the facts go fast. And so getting out there being an advocate having your voice in the industry so that entrepreneurs can trust your advice, and start coming to you for that advice. And now you got a pipeline of entrepreneurs, big part of that is just going other people show, along with blogging and even events and speaking on stage. I mean, there's a lot of ways for people to get familiar with you to trust that you know what you're talking about. And those are just a few areas. So definitely Moonbase has got it figured out. So what about building a network of professionals? I mean, how does that work? Because we talk about building a network of entrepreneurs, maybe if that's all right, maybe just touch on some of those things. As far as building a network of professionals

Ibrahim Rahim  
In building a network of professionals is not necessarily a part of how all these old investors invest. That's a very Moon based like thing, and for some others, which is when we started. And that's actually one of the ingredients, which I didn't mention when you talk about the secret to success. So it's not no this important point. So when we started working with entrepreneurs, and we found that we need to add value as much as possible search font is really white, because it SMEs you have so many sectors, so many different things going on. So what we did is I went back to my MBA buddies to people I worked with at McKinsey. So I went to other people that that I know well, and I asked them to become part of part of an advisory group full moon base to help shallow MBAs, fellow young professionals who want to have advice on managing the company on a certain sector. And it was crazy. So what I've done is I've I've created this program for a bunch of my friends really, and all of them were very excited to join and now we have around 50 People who we call once every few months to just have a call. We connect them with it with an entrepreneur and this brings a lot of value to the entrepreneurs. And at the same time, the advisors love it because you see your sector from a different angle like this SME, usually if you're a big multinational, you, you don't get to see this, this perspective. So they see more about the sector. And they they see the, or they love the inspiration of talking to an entrepreneur who has a dream, they always say they're very excited. So 100%, I think the more help you get to your searchers, and your entrepreneurs, the more they will succeed, which means also you will love that.

Ryan Miller  
And have you ever found that I'm just curious, from your experience here are found sitting on boards to be helpful to you? I'm curious if if that is ever an element that you've been able to fold in, as far as you know, building your network meeting other professionals? Have you ever tried the boardroom?

Ibrahim Rahim  
I mean, I love it. That's my favorite parts of the the I mean, I don't really personally I don't act like a board member, I really act as a team member. So yeah, I do the board parts. But I always say one extra day, two extra days with a team just to work on a certain topic or word or answer a whatsapp at a certain situation. I really think that CEOs and entrepreneurs needs board members who are not necessarily pushing them, but rather who are their support and who are there for them and can can can do the task as needed. So for me boards, board seats, and working with Entrepreneur on a certain company is where I personally love it the most and where I'm most comfortable, probably given my consulting background and my SEO background. So that's where I feel I love it. Yeah,

Ryan Miller  
sitting on boards is a wonderful way. And if I can round that out for my own experience, folks. So what Abraham and I are talking about is, as I like to say, it's one thing to get in the room, it's another to be remembered that you were there. And so too often we can go to these networking events. And that but the issue is, is that everyone kind of goes there to take no one really goes to give. And so that the answer is or the better question is, what room can I get in where actually everyone there is? Has some means connections, whatever resources, and what is that room? And it's often not at a local networking meetup event, you'll have great conversations and raise no money or do no deals, right? Everybody shows up. And so people with the means what rooms do, they go in, they go to the boardroom. And so in the boardroom is what we hope networking events actually are but never turned out to be. And so by going to board meetings, now we're meeting people who do show up to give who do have means and resources to provide, but they don't let anybody in that room. So building yourself, like Ibrahim was talking about in the early days, being a voice, being an advocate, talking to universities, all of these things start to come to a front and allow you to be the kind of person that they opened the door and lead in the boardroom. And now you're building your reputation relationships even further. Would you say that's a fair statement?

Ibrahim Rahim  
I mean, I wouldn't. I mean, I didn't think about it, actually, before you said it. But let me give you just reflect on my own experience. The other good thing about being in a boardroom is that your true experience and wisdom really comes out because you're sitting small, a bunch of people on a table talking about something. So your character, your wisdom, your experience comes out really nicely, and you bond with people who resonate with you. I don't think about that. But you're right. I mean, for some of the people, I think we have the biggest mutual respect and biggest friendships in a while is people who are with me in boards, because you bond on these topics, especially if a company does well you have success together makes it very easy to enter another success together. So I actually didn't think about that the way you put it. 100%

Ryan Miller  
Thank you. Yeah, it's a wonderful place. And it was a mentor of mine that kind of walked me through. So it's the ultimate rich guy networking event is the boardroom and he said on public companies and, and it was very successful. And so he counseled me in the early days, and I never forgot that this was over 20 years ago, he's like, don't go to local networking events, not that they're bad, there's just your hit rate is quite low. But in the boardroom, your hit rate is quite high. So you have these high professionals. And imagine if you've been able to sit on the board of I mean, it will be ridiculous, but Disney and apple and you know, like you say that out loud, instant credibility. So I absolutely love that. And that's another way to get these money deals come to you in the search fund. So I did ask for three things. So I'm curious some of the cheat codes or just some of that early experience that you're been able to share, what would you say would be a third element that you can share with people who are launching a search fund or really any kind of fund one

Speaker 2  
important part is I know this is not something which is said a lot in the investing worlds because it's a world where all of us are looking for the IRR, etc. But entrepreneurs especially feel that you are different if you deal with them in a in a more personal in a more understanding and empathetic way for an if you understand the struggle they're they're going through. So I would simply add being a human being before being a investor, I think is a big thing. Because in some cases in some circles, the word investor is not even looked at any more that positivity simply because in some cases investors overly push their people so one thing that that I personally do is I don't look at myself as an investor with the money and I'm going to come in and invest in you guys. It's more of your it's your project you will entrepreneur, I have some means to help you. And first, I make sure I get the benefit. I'm just talking more about your your attitude towards the relationship is not one of I'm the investor, you will entrepreneur. And you know, it's more of let's really work together on this as a team. And this has helped me a lot in building my name as someone who builds a bridge to work with.

Ryan Miller  
I love that. And you know, I'm curious of, of what you've been able to find through all of that. Now, typically, in acquisition kind of funds. A big part of that is understanding what your some people call it your Buy Box or your investment criteria. I'm curious on that, do you have how important is it been to just have that clearly defined Buy Box, and if you'd love to share, I'd love to hear what what is the buy box for someone in a search fund, as far as you're concerned.

Ibrahim Rahim  
So as I mentioned, briefly, there are certain criteria, first of all, that all of the social investors agree on. And this is this is a major major parts, because this allows us to be 15 investors who never talk together one sentence and still be able to sign on the same shareholder agreement and invest at ALL OF US airlines, is because of these criteria of what type of companies are looking for how long do we want to stay there, what are we want. And so these criteria are, some of them are the size, so they'd be down to 5 million euros, the recurring revenue margins of at least you know, 50%, high margins, at least 50% in the margins, keys to clever market where you don't have a monopoly. So it's like a fragmented market, you have a market that's growing, you don't have one suppliers controlling the company or so there's a bunch of those. But then on top of those, there are two types of investments that is more the they call them the Harvard side, which is more private equity, which is more leverage a lot and, and do maybe m&a. And then there's a Stanford style, which is, which is more growth oriented. And between these two, it's really a tasting because we mix both, but personally, I like more the Stanford one, maybe one because I'm biased, but I like growth. I mean, when I was CEO, I was all about growth, I think growth makes the journey much more exciting. growth within within reason, because there's no reason to it's not a startup. But still, if you can manage to get in a proper growth rates over five, six years, and then exit the good exits, then you can do get your 1020 times and you know that and that's what I personally would would love to you know, see. So yeah.

Ryan Miller  
Awesome! Yeah, I love it. Man. Thank you for that. So as we round third base, final question, is there anything you would want our fans around the world to know anything at all, I

Speaker 2  
just would really be happy if they look more at Search Funds, because I can bet you and maybe people will leave in the comments that 95% of your viewers don't even know what search Sundar and that's my I talk to a lot of people in the finance world, most people don't know. And it's because it's so much an MBA, something that comes out of MBA, so there's a few business schools that are bigger on it, and it's still growing. So that's why it's not so known. So I would really encourage them to look into it, especially, especially the ones who want to enter the investment world, but are not big, very big funds. Because search funds, the average tickets can be half a million euros dollars. So the half a million dollars, or even less, you can you could put this if you want. So you could easily with $1 million have a portfolio for companies. So it allows you to enter the investment field quite prominently with not so much money. So I would push them to read more and know more, because it's very exciting. It's very exciting fields.

Ryan Miller  
All right. Well, you heard it from the master himself, Ibrahim Rahim from Moonbase capital, just search search funds and really learn that business you might be surprised as much as I was, of how amazing this emerging asset class is. So just to wrap things up, learn to build a diverse portfolio to protect your downside. The second thing that he mentioned was build a network of professionals and there's many avenues that you can go about doing that. And then finally have a clearly defined Buy Box. You do these things, and you too will be well on your way in your pursuit of making billions.

Wow, what a show. I hope you enjoyed this episode as much as I did. Now if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode where we dive even deeper into the people the process and the perspectives of both investors and founders. Until then, my friends stay hungry. Focus on your goals and keep grinding towards your dream of making billions