From SME to Search Fund Investing

The search fund space is currently a small but deep pond. Ibrahim Abdel Rahim, Managing Partner of Moonbase Capital, is part of the growing group that is aware of its potential for creating new horizons and actively participates in it. Despite their power, he also knows why more people aren't dipping their toes into search funds.

Search funds are an investment tool that allows entrepreneurs to raise funds to acquire, manage, and grow a business. These funds offer a pathway to leadership roles for entrepreneurs lacking the requisite experience to serve as temporary CEOs, while simultaneously diversifying their portfolios and leveraging their knowledge and ambition (Stanford Graduate School of Business, n.d.). As Ibrahim eloquently says, search funds take the best of venture capital and private equity.

Growing up, Ibrahim knew he would one day take over his father’s SME in Egypt. But his journey took a detour when he decided to channel his ambition into an MBA at INSEAD, which influenced him to work for McKinsey & Company. Armed with McKinseian strategy and practical experience, Ibrahim returned to his father’s business with a unique approach of combining ambitious ideas with hard work to navigate the resource-based challenges and game-ending consequences of growing an SME.

“It was tough because in order to grow, you need more money, we had taken so many loans, and in Egypt, if you take a loan and you don't pay it, you go to prison.”

Ibrahim’s resilience, strong mind, and relentless dedication to his work bore fruit. Alongside his brother Khaled, he grew the business 10 times over. However, after seeing that his SME business was turning into a corporate one, he decided to venture into Silicon Valley through the MSx Program at Stanford in pursuit of individual growth, where he learned about search funds. A few chapters later, Ibrahim was the Managing Partner of Moonbase Capital, a company that invests in SMEs through search funds.

Search Funds: An Underdog Concept

If the search fund space is so promising, why aren’t more people participating in it? Ibrahim is shocked by how few people are aware of this alternative route to entrepreneurship. He suspects there might be a few reasons. First, the search fund space faces obstacles in terms of investments and publicity. Currently, search funds are in their nascent stages, with only $2 billion in investments compared to the $600 billion quarterly investment flowing into venture capital. The exhilarating narratives associated with venture capital-backed giants like Airbnb haven’t permeated the search fund space as much either.

“It's not a story you would tell in a bar, and everyone's like, ‘Wow,’ you know, it's more of, ‘Okay, we bought this waste management company, and we made a good IRR.’ "

But with his leadership and management experience, Ibrahim doesn’t take search funds' stability for granted.

“Investing in search funds is not boring at all. It's actually very interesting. And being an entrepreneur in search funds is even more stimulating than a startup.”

As with most innovations, search funds require a compelling and relevant story to bring them to the forefront of society’s attention. The internet has created a virtual space for stories to spread within days, and search funds will hopefully gain enough interest to become the next trend—and in time, the next permanent practice.

Another reason Ibrahim thinks search funds may be out of the world’s focus is the branding disparity compared to venture capital. The search fund concept was created by professors and CEOs, who focused on mentorship rather than mainstream finance figures. Ibrahim also highlights the misalignment between search funds and private equity. The private equity model, focused on a small number of companies, is not suitable for search funds due to their need for greater involvement and value creation. Ibrahim’s “Search Fund Squared” model proposes a smaller fund size of 15 million euros, enabling closer engagement with 20 to 25 companies. It emphasizes active investor participation, expertise sharing, and co-investment opportunities, providing a more agile and collaborative approach for search fund success, in addition to supporting the fundraising goals of young fund managers.

Disruption Potential

Ibrahim’s strategy for Moonbase Capital is an honest and efficient one. He aims to sow the seeds for a successful investor presence through hard work and open collaboration. One of the ways of doing this is by being close to the entrepreneurs, allowing them to lead without restriction, and supporting them in their journeys.

“It's their life. They're gonna spend 10 years on that. For us, it's one investment. Yeah, sure, it's important for us, but at the end of the day, it's about them. It's not about us.”

The communication style for each searcher varies, as does the journey, and Ibrahim fosters their agency by creating a more open and collaborative culture in an effort to build trust with the entrepreneurs and solidify Moonbase Capital’s reliability. As with most spaces, Ibrahim predicts that the future of search funds will not be as relaxed, and there will be increased competition. His goal is to build and maintain a prominent presence by working hard now so that Moonbase Capital is a popular choice when the pond gets larger and busier, and searchers have more choices in whom they want to get investment. An investor at heart, Ibrahim knows the vital places to channel energy for mutual benefit.

In tune with the rapidly evolving tech landscape, Ibrahim is keenly aware of the transformative potential of artificial intelligence. With the release of GPT-4 in March 2023 and a spreading integration of artificial intelligence and chat AI into industries, Ibrahim is confident of AI’s usefulness in Moonbase Capital’s management. He believes it can be of great use with manual labour, such as matching entrepreneurs and advisors based on the kind of support that is needed and can be offered. Not only that, Ibrahim believes Moonbase Capital could leverage AI to support their searchers.

Advice for Entrepreneurs

Acknowledging that entrepreneurship is no easy feat and that the search fund space will only get more competitive with time, Ibrahim has three pieces of advice for entrepreneurs looking to capitalize on their disruption potential. The first one is to find a horizon and keep working towards it. Making mistakes, and many at that will be a part of the process, but Ibrahim is committed to staying positive through it all. Putting on a smile when times are tough and things need to be running smoothly is not easy, but Ibrahim was able to do it for his team members in his SME leadership era.

The second piece of advice is to normalize seeking help, which the search fund community is always open to. As an SME CEO especially, there are multiple hats to be worn, and having help with some of these departments is smarter than spreading yourself too thin.

The last piece of advice Ibrahim has is to stay focused and avoid branching out too much. Even though it’s difficult to turn down more revenue, he suggests refraining from taking too many gigs.

Conclusion

Ibrahim Abdel Rahim, Managing Partner of Moonbase Capital, believes there is a lot of depth to the world of search funds. However, its current limitations are time, money, and publicity. His exhilarating journey, involving SME leadership, an MBA at INSEAD, work at McKinsey & Company, an MSx program at Stanford, and finally, investments for SMEs through search funds led him to the path he was meant for.

Ibrahim bravely believes in the power of hard work and open collaboration, and his strategy centers around mutual gain and trustworthy relationships by taking the time and doing the work. Ibrahim’s success proves that strong focus, an ability to seek help, and a combination of innovative strategy and perseverance can bring one past any horizon they set for themselves.

References

Stanford Graduate School of Business. (n.d.). Research on Search Funds. https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds