Behind the boom of “research funds”: a new way of becoming the boss

Barely two weeks ago, Adam Froendt was vice-president of investment capital and the junior capital in Churchill Asset Management, a private capital subsidiary of the insurance giant The active director of Tiaa Nuveen.

Not yet 30 years, he had been promoted three times during his eight years in industry, concluding more than 60 investment capital agreements on the intermediate market and 30 fund investments.

Last month, he left this promising work to manage a business. Now he just needs to find one to run.

Froendt is part of an increasing number of young people who seek to test their entrepreneurial courage around the world of so-called research funds. Sometimes described as a private mini-space or acquisition entrepreneurship, a research fund is a small investment fund managed by one or two people established to buy an existing small business. Once the company is purchased, the “Searchers” perform it in order to create value by rationalizing operations and increasing in size.

A 2024 Stanford Business School study noted that the creation of research funds reached a record level in 2023, the last year with data, with more than 90 research funds for the first time. The strategy is particularly hot among young people, Stanford, noting that almost 80% of fundraising for the first time in 2023 have timed at 35 or less, many of which Freshly graduated Mbas.

Some researchers, such as Froendt, are so eager to be their own boss that they give up investments outside – using their personal savings or their spouse’s income to finance their entrepreneurial ambitions.

The boom of research funds is partly a response to A more complicated labor market. White cervix jobsOnce the way is obvious to success, you feel less stable. The dream of entrepreneurship is still very alive, but technological startups can feel out of reach given Huge giants of shadow technology like Google and Amazon now thrown on the economy.

The research funds and their various cousins ​​offer a more realistic path to entrepreneurship.

“It is an alternative to romantic entrepreneurial belief that you can only succeed in creating a company,” said Bi Newton Campos, professor of entrepreneurship at IE University in Madrid and BI.

Froendt, who was bitten by the entrepreneurial bug who runs car washing in high school, calls him “betting on himself”.

“Entrepreneurship traditionally is considered” zero to one “, involving new ideas from the ground floor,” said Froendt. “When my eyes opened up to the idea of ​​being an entrepreneur in the context of an existing company, it immediately resonated with me.”

Here is why some of the most brilliant young people choose to buy and exploit unpleasant businesses such as porty porty rentals (yes, really) instead of climbing the business scale.

How do research funds work

The original research fund model, created in the 1980s, begins with an entrepreneur finding investors to finance their salary and their expenses during a multi -year research of a company that deserves to be purchased.

Froendt takes a higher risk path with higher reward by self -financing his research, which takes on average two years. This model offers more flexibility on targeted companies, as well as more control and, possibly, more equity. As a founder of Truegrit Capital, Froendt will live from his “personal assessment” (his savings) up to two years.

The next step is to buy a successful small business, often a owner-exploitation who seeks to retire. Froendt is looking for a company with between $ 3 and 12 million in annual income between Maryland and South Carolina and in health services (think of health or management of home care), financial services (think about insurance or accounting), or knowledge (think of training or certification).

The objectives of researchers are to rationalize operations, increase income and create value for themselves and their shareholders. Most researchers plan to go out after five years or more, although some plan to hold indefinitely, which Froendt hopes to do.

Payment can be massive. According to the Stanford study, the average return Through the research funds studied, there were four and a half times invested, invested, Much higher than that of a traditional investment capital company.

There are many similarities with investment capital, which means that some call the “mini-capital-investment” model. But Peter Kelly, lecturer at Stanford Graduate School of Business who heads the Biannual Survey and who headed a successful research fund in Home Health Care, said the terminology was inaccurate.

Kelly, who prefers the entrepreneurship of the expression by acquisition, said that the model borrows from the financing of investment capital, but is fueled by the entrepreneur’s desire to become an owner-management.

The manager of a investment capital fund is paid through costs, encouraging them to develop their assets under management, he said. A researcher is a direct investor (generally the largest) and is paid by increasing the company.

AJ Wasserstein, a lecturer at the Yale School of Business said so: “Research consists in jumping in a CEO and directing and building.

Why is it growing

Research funds have been developed in the MBA world, and part of its popularity can be awarded to a constantly increasing list of prices on the model.

Campos has 25 schools that teach him worldwide, but said he expects the number to reach only 100 in a few years.

As the interest of research funds increases, more companies, including Pacific Lake Partners and Relay Investments, have collected funds to invest. Campos founded its own investment fund earlier this year to help institutional investors find research funds in Europe and beyond.

Campos, who said that he had sold a rental apartment in Invest, made 18 personal investments in research funds, which allowed him a good return.

Website like Searchfunder, which connects investors to potential researchers, and a series of practical guides has easier to do easier than ever.

“An introduction to research funds”, updated every few years by Kelly and his colleagues from Stanford, offers a very granular guide to the process, including examples of legal documents to help conclude an agreement. Campos called the “Bible” document for the business model.

The teachers and entrepreneurs of Harvard Rocye Yudkoff and Richard Ruback published the “HBR Guide to Buy has a small business”, another essential reading for anyone interested in industry.

They even transformed it into a podcast, recently discussing how the purchase of a small successful business can be less risky than betting on a career with a large company.

“This institution can be there forever, but that does not mean that you are going to be there forever inside this institution,” said Yudkoff.

The interest of research funds should only continue the technology and advice companies have reduced jobs and that the hiring of Wall Street slows down in the midst of fears of an economic slowdown.

Some 15% of the 2024 class 2024 of the Harvard Business School which was looking for jobs did not receive any job offer after obtaining the diploma, against only 4% in 2021.

Research funds have even become the target of online jokes. They are a recurring theme of the Sta research fund, a manufacturer of financial memes on Instagram whose page is full of jokes on non-sexy companies such as Port-a-Potty rentals and social media influencers promoting the model.

The StA research fund told Bi that he operated a company he bought via a research fund and asked to remain anonymous so that he could publish freely. One of his messages shows a Photo of a dog with uncomfortable appearancelabeled “MBA without full-time offer” and on a labeled mini-check “a research fund of $ 500,000”.

In addition to the jokes, there are animated discussions on “SMB Twitter / X”, where the current operators compatible and rejoice in the tops and stockings of the model, generating certain stars of influencers of good faith, such as Codie Sanchez, with more than half a million followers and 2 million Instagram disciples.

Sanchez has left a career as an investor investor to buy and sell small businesses and teach the model to others through its media brand, Contrarian Thinking.

Froendt recently left social media, but said that Walker Deibel, another influencer and author of the guide “Buy then Build”, played an important role in his decision to try the model.

Kelly warns, however, that people should not embark on research funds because they see it online. They are still quite risky compared to the climbing of the company’s hierarchy, 37% of the funds raised fail to acquire a company and 31% of the companies have acquired operations that have always been operational or that have been released, according to Stanford Survey.

“We try not to promote it in class, and I don’t care that my students do it, I just want them to learn,” said Kelly.

“If no graduate of the Stanford Business School did it a year, I could say:” It’s a shame “,” he said, adding: “If 30 graduates did it, it would make me nervous.”