- Fund: New Orchard Capital
- Search type: Classic search fund
- Partnered/solo: Partnered
- Stage: Search
- Location: Chicago, IL
- Alma mater:
- Erick: Chicago Booth (MBA), Northwestern University (MS), University of Miami (BS)
- Giovanni: Chicago Booth (MBA), Michigan State (BA)
Erick Lesaca and Giovanni Barbat are three days into their search at Chicago-based, classic search fund New Orchard Capital. The pair met at Booth’s part-time MBA program and have complimentary skill sets in operations and finance.
Highlights of this interview include:
- How they fundraised successfully
- What makes a complete investor syndicate
- The costs of raising funds and setting up a fund
Editor: What are your personal backgrounds?
Erick: I’ve spent years working at large corporations in a variety of operational and managerial roles. I most recently spent three years at Allstate and two years at Kraft Heinz – both in the Chicago area – before matriculating at Booth.
These companies gave me a great deal of experience leading large teams and integrating small businesses as part of their M&A strategies.
I enrolled in Booth’s part-time program but took a full-time course load so as to finish in two years.
Giovanni: Before business school I spent several years with GE Capital and Antares Capital where I worked extensively on financial due diligence for our investments in various sorts of companies.
What brought you to search funds?
Erick: When I arrived at Booth I felt like I already had plenty of experience in the corporate world and felt comfortable doing something entrepreneurial, but at the time I didn’t know much about search funds – all I knew for sure is that I wanted freedom and flexibility to work the way I wanted to work.
I learned more about search funds through my Booth network and coursework and wound up co-founding the part-time program’s Search Fund Club with Giovanni. Doing so gave us a lot of access to investors and search fund entrepreneurs and sealed my interest in search funds as my next step.
I performed search fund-focused research while in school with Booth professor Steve Kaplan, and this research informed my partnership and fundraising strategies (more on these strategies later).
Giovanni: I come from a family of entrepreneurs and believe that I’m an entrepreneur at heart. I’ve avoided startups because of their high failure rate and want to buy something established that I can work to improve.
I was exposed to search funds before business school and applied to MBA programs intending to raise a fund out of school. At the time I was applying Booth wasn’t the first MBA program that came to mind in the search fund space, as most people involved with search came from Stanford and Harvard. Booth has really started to become a big player in the space, however – especially during the last two years.
Search funds are a concoction of everything you learn at business school – finance, marketing, operations, entrepreneurship – and the network of investors and operators available to business school students makes search funds a terrific next step for MBAs.
How did you two find each other?
Erick: Giovanni and I founded the search fund club in Spring 2016 and at that point each of us was thinking about raising a solo fund. I had been doing some research with professor Steve Kaplan on search fund processes and outcomes, and learned from this research how important it can be to the success of a search fund for the entrepreneur(s) to have experience in both operations and finance.
I recognized that I lacked finance experience and set about finding a partner with a complementary skill set, and Giovanni fit perfectly.
What did your fundraising process look like at a high level?
Erick: By the time Giovanni and I decided to be partners I had already spoken to 45 search fund investors on informational phone calls. On January 2, 2017 I sent a “Happy New Year” email to all of these investors in which I introduced Giovanni as my partner. The email said that we would reach out during the next couple of weeks to schedule fundraising meetings.
Giovanni: We set up our meetings and did a road show during the second half of February. We visited 10 cities over a two week period in which we held two to three meetings per day in each city, and by the end of the second week we had completed 75% of our fundraising.
Importantly, we wanted to be very careful not to oversubscribe our fund. We felt that doing so would make us look unprepared – like we were spamming potential investors rather than being targeted. Practically, that meant that we didn’t book more meetings during that first road show than we had units of our fund to sell.
Erick: During our initial swing we had three prospective investors tell us “No,” so we set up some additional meetings to round out our fundraising.
What were you hoping your investor syndicate would look like?
Erick: We thought carefully before we began initial outreach about the sorts of investors we wanted on our roster and set out to build a team with the following characteristics:
- We wanted mostly individual investors
- We wanted investors with deep pockets
- We wanted some investors who were former operators
- We wanted other investors who are current operators
It can be tough to maintain discipline about investor recruitment when you’re pounding the fundraising pavement, but we had learned from our research with Kaplan and discussions with experienced searchers the importance of having backers who support your personal goals for the search. After a few investors turned us down we were careful to back-fill those open units with other investors who fit the “roles” that the investors who turned us down would have fit.
Giovanni: We wanted to be sure to have an investor set that would have us “covered” during all phases of our endeavor. Different investors like to get involved at different times, and we’ve been sure to build a roster that includes investors willing to participate at all stages of the process. We know, for example, that we have one investor who likes to get closely involved with diligence and another that participates heavily during the pre-LOI phase.
How did your fundraising meetings go? What were investors looking for and how did you present yourself?
Giovanni: Before you enter a fundraising meeting the investor has already read your resume and your investor memo describing your strategy, so they already have a good sense of your background. The meetings, then, are really conversations in which you’ve got to have an honest discussion about what you’re looking for and about what the investor wants.
The investors are using this conversation to determine:
- What does this searcher want in his career?
- Can he sell himself to a business owner?
- Can he manage people?
- Can he sell to customers?
- Is he going to be a good steward of my money?
The searcher should be thinking:
- What are this investor’s expectations, and what does he consider to be a good acquisition opportunity?
- What role does this investor want to play in a search? In the management of a business?
- How does this investor compliment the rest of my investor syndicate?
An important skill that a searcher should try to demonstrate in these meetings is the ability to communicate complicated concepts in simple terms. The searcher is going to have to do so with business owners throughout the search and with employees and customers once he’s acquired.
Erick: One element of our backgrounds that investors seemed to appreciate was our experience working for large, successful companies. When you acquire a small business and work to professionalize its operations, what you’re essentially doing is building your own bureaucracy in the likeness of whatever bureaucracy you left behind at the big company you used to work for.
Management is about influencing people you can’t completely control, and as you go about setting up the systems and processes that support good management it helps to have been part of well-constructed systems and processes at other companies. To manage well, it helps to have been managed well!
Could you give us an estimate of the cost of your fundraising efforts?
Erick: All things considered I think we spent $8,000 on fundraising. Expenses are flights, hotels, and meals – figure out how many of these you’ll need given the investors you plan to visit and you have an estimate of your fundraising costs.
It’s important to note that once you are fully funded you’re typically allowed by investors to roll your fundraising expenses into the fund – so pre-funding expenses aren’t ultimately coming out of your own pocket.
What do you think made you successful fundraisers?
Erick: Of the four Chicago Booth teams attempting to raise money this year we were the only team that was successful in raising a classic search fund. We’re not sure what happened with the other teams (a couple of them joined the Chicago accelerator NGP and it’s possible that that had been their plan all along), but one thing we did right was to begin our fundraising early.
Giovanni: If you’re in business school and goal is to begin your search shortly after graduation then you want to be fully funded by April. For students in the Chicago area, that means you want to be funded by the annual Chicago Booth Search Fund Investor Summit [LINK]. To hit this target we formally began fundraising in January, and if anything that was too late. You’ve got to start fundraising earlier than you might think.
What are the practical steps you’ve taken to set up your fund?
Erick: The first practical hurdle to clear is legal documentation. Prior to fundraising we retained an attorney who has experience with search funds and who has agreed to the following payment schedule:
- We paid an initial fee of $5k on the day we pulled the search capital from our investors out of escrow
- We’ll pay all other legal fees once an acquisition is consummated
- We only pay our lawyer if we acquire
Giovanni: We’ve rented a small office in Evanston from which we’re running our search. We’ve contracted with a freelancer to build a website which we’re in the process of taking live. We’re still figuring out which software and research tools we’ll use, but right now we’ve committed to using:
- Zoho CRM
- D&B/Hoovers for company research
- Intuit for accounting
What sort of company are you looking to acquire?
Erick: We’re evaluating a number of industries at the moment but we’re obviously in the very early stages of our search and we assume our focus will narrow over time. We’re very open minded in the sense that we don’t have an “ideal” target company – we’ll evaluate every deal on its own merits.
What roles does each of you plan to assume once you’ve acquired a business?
Erick: Giovanni will take responsibility for financing and strategy and I’ll own day-to-day operations.
Do you think now’s a good time to raise a search fund?
Erick: I think now’s a good time for a very strong individual or team. It’s always challenging to raise a fund, but it’s especially tough to run a search at the moment because there are so many searchers out there hunting for companies.
Giovanni: I think it’s hard for investors to tell who’s good and who’s not, and that it’s incumbent on the searcher who wants to succeed to differentiate himself. We did so by starting early, knowing the model cold, and connecting with lots of investors.
You’ve got to really work hard right now to raise a fund. It’s not enough to get an MBA and just show up.
Thanks for your time, guys!