B-School Life

Booth MBAs Now Have a Pipeline to Investors


Booth MBAs Now Have a Pipeline to Investors

Photograph courtesy Chicago Booth

The University of Chicago’s Booth School of Business is starting a program that acts as a shortcut to the C-suite for entrepreneurial-minded MBAs.

The idea behind the program is at least 30 years old. MBAs form “search funds” and find investors willing to fund the acquisition of a business. The students then build the business and sell it at a profit, generating returns for the investors.

The most daunting hurdle for any MBA undertaking such an endeavor is finding investors. The Booth program, known as Booth Search, effectively reduces that barrier by assembling a network of potential investors that includes alumni from Booth and other business schools, institutional funds, and high-net-worth families.

“I’m hoping to erode that barrier and get a lot more interest,” says Alex Hodgkin, a weekend MBA student at Booth who is spearheading the effort.

Hodgkin says he believes that Booth would be the first school to offer this kind of formal matchmaking service connecting students interested in search funds with a pool of eligible investors.

An Oct. 30 panel discussion on the new program drew more than 50 Booth students, Hodgkin says, more than he expected. More than 20 alumni investors are involved, and the number is growing.

According to Hodgkin, student proposals will be distributed to the network of alumni, who can then decide individually which, if any, teams they’d like to invest in. The typical acquisition plays out over two years. Investors commit to funding both the search for an acquisition target—which typically costs about $600,000, including transaction fees—and the acquisition itself in return for an equity stake in the company. They plunk down $25,000 to $40,000 each for the search and another $350,000 to $600,000 each for the acquisition.

And what do they get for their money? A 2011 study at Stanford’s Center for Entrepreneurial Studies found that the aggregate pretax internal rate of return on 100 search funds to be 34.4 percent. As an article in the Booth student newspaper Chicago Business noted, search fund returns are comparable to those investors achieve on private equity investments.

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Louis_lavelle
Lavelle is an associate editor for Bloomberg Businessweek.

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