Search Fund Capital: Raising Bigger Rounds | Catalyst Fund I

Raising larger search fund capital is challenging but achievable with the right strategies. Here's what you need to know:

• Search funds involve two phases: raising funds for the search process (around $550,000) and securing $2M–$15M for acquisition.
• Investors back searchers before a specific acquisition target is identified, making trust and preparation essential.
• A strong investment thesis and clear operational plans are crucial to securing larger commitments.
• Focus on markets with growth potential, fragmented industries, and companies with $1M–$5M EBITDA.
• Build relationships with high-capacity investors, including institutional backers, family offices, and former searchers.
• Diversify funding sources using a mix of equity, debt, and seller financing to optimize returns and reduce risks.

Key takeaway: Start early, present a focused plan, and maintain steady communication with investors to secure commitments and close deals effectively.

Building a Strong Investment Thesis

Your investment thesis is the backbone of your fundraising strategy. As Search Capital Partners puts it:

Your investment thesis is the cornerstone of your funding efforts. It should clearly articulate the value proposition, target industries or companies, and the searcher's background and commitment.

In simple terms, your thesis needs to explain what you're targeting and why you're positioned to succeed. To attract larger investments, you must show a clear path to returns, backed by focused industry selection and proven operational skills.

A focused approach can make all the difference. Data shows that searchers who narrow their scope to 3–4 specific industries tend to close deals faster than those casting a wide net. For example, a searcher targeting "multi-site ABA therapy businesses in the Southeast" is likely to hold investor interest more steadily than someone broadly pursuing "healthcare". Investors who align with a specific growth thesis are less likely to back out during due diligence — crucial when you're seeking larger capital commitments.

Selecting a Target Market with Growth Potential

Pick a market that can scale to meet the return expectations of high-capacity investors. Those writing checks of $1.5 million or more want to see opportunities in markets with strong growth drivers, not just stable performance.

Focus on B2B services or software in fragmented markets. Ideal targets are companies with $1–$5 million EBITDA, gross margins above 15%, and customer concentration below 30%.

Take the case of Sandy Paige. At age 48, he raised $420,000 in search capital in 2018 and acquired Explora BioLabs, which had around $2.5 million in EBITDA. By implementing operational improvements and leveraging a recurring revenue model, Paige grew EBITDA by 7x in four years. When the company sold for $295 million in 2022, investors saw a 27–28x return.

Direct your efforts toward fragmented B2B trade services like HVAC, plumbing, or electrical work. These industries often have aging owners facing succession issues, creating opportunities for buyers who focus on less competitive, brokered deals.

In your Private Placement Memorandum (PPM), include a deal model that outlines potential returns, such as 3x to 5x on a $10–$15 million acquisition. Use comparable transaction multiples from your target niche to back up your projections.

After narrowing your market, the next step is to show how your operational expertise can unlock its potential.

Showing Operational Experience and Value Creation Plans

A focused market strategy is just the beginning. To win over investors, you need to demonstrate how your skills will drive value creation post-acquisition.

Jake Nicholson of SMEVentures highlights the importance of earning significant equity value — around $5 million — to align incentives effectively.

Your thesis should highlight your distinct edge, whether it's industry knowledge or a geographic advantage. If your background includes investment banking (23% of successful searchers), management consulting (16%), operations (14%), or the military (10%), link those experiences directly to your plan for creating value.

Lay out your post-acquisition strategy in detail, including steps like improving financial reporting, setting key performance indicators (KPIs), and making strategic hires such as a COO or CFO. Showcase your understanding of margin expansion opportunities, especially in businesses with recurring revenue between 40% and 60% and gross margins of 35% to 50%.

Develop a three-scenario financial model (base, downside, and upside) to illustrate your IRR targets and risk mitigation strategies. Stress-test your downside scenarios to show you've thought through potential risks. Collaborate with financial consultants or use acquisition consultation services for a Quality of Earnings (QoE) analysis to ensure the target's financials hold up under scrutiny.

Finally, be specific about your deal-sourcing strategy. Outline how you'll balance direct outreach (letters to business owners) with broker relationships. Considering that the average searcher reviews about 30 companies for every one LOI submitted, showing a systematic approach to deal flow will reassure investors that you understand the effort required to secure the right acquisition.

Finding and Working with Key Investors

Once you've nailed down your investment thesis, the next hurdle is finding investors who can write bigger checks and actively support your search. Raising substantial capital isn't just about having a polished pitch deck — it's about building strong relationships.

Focusing on High-Capacity Investors

When raising larger sums, not all investors are the same. You'll want to focus on three main groups: experienced search fund institutional investors, family offices and high-net-worth individuals (HNWIs), and SMB-focused private equity firms. Institutional investors are often the backbone of your funding. They usually commit between $100,000 and $200,000, and they bring more than just money — they also provide mentorship and guidance on governance.

Former searchers are another invaluable group. They've been in your shoes, so they understand how buying a business works inside and out. These investors typically contribute $25,000 to $100,000, are quick to close, and offer hands-on advice that can be a game-changer. It's smart to start your outreach with them since they're well-equipped to guide you through the challenges ahead.

To find the right investors, tap into specialized directories and alumni networks. Tailor your emails to highlight an investor's past search fund investments or specific industry interests — generic templates won't cut it. A structured 12-week fundraising plan can help you stay on track: focus on former searchers in the first two weeks, move to institutional investors in weeks 3–6, and then shift to individual HNWIs in weeks 7–12.

Keep your outreach organized using a CRM system to track progress, from initial contact to securing commitments. On average, you'll need to pitch 50 prospects to have meaningful discussions with about 20, and ultimately close 10 to 15 investors.

Once you've identified your investor pool, securing early commitments is key to building credibility and momentum for the rest of your round.

Using Early Commitments to Build Credibility

Getting early commitments from investors can set the tone for your entire fundraising effort. A lead investor covering 20% to 30% of your target fund can significantly boost your credibility and attract more backers. If this lead investor is a respected institutional player or an experienced former searcher, it sends a strong validation signal to others.

Aim to secure soft commitments from at least three investors to cover 50% to 75% of your required equity before closing the round. This not only validates your investment thesis but also demonstrates growing momentum to other potential investors. Since search capital carries higher risk — it's the riskiest money in the venture — it often comes with a 1.5x step-up premium. For instance, a $50,000 search investment could convert into $75,000 in acquisition equity.

Maintain consistent communication with your investors through regular updates, like monthly newsletters that share deal pipeline metrics. This helps build trust and keeps them engaged. Remember, these relationships don't end with the initial raise. Search investors often have the right of first refusal for your acquisition round, so nurturing these connections is critical for long-term success.

Diversifying Capital Sources

Expanding beyond early investor commitments can reduce risk and improve financial flexibility. By incorporating varied investor types and innovative financing structures, you can strengthen your fundraising efforts and prepare for unexpected challenges.

Combining Equity and Debt for Optimal Capital Stacks

The most effective search fund acquisitions often resemble leveraged buyouts, blending different funding sources to keep costs low while maximizing returns. A typical 2026 acquisition model might include 30% to 40% senior debt, 50% to 60% investor equity, and 10% to 20% seller notes. Each component plays a specific role in the overall financing strategy.

• Senior debt is the least expensive option, priced at Prime + 2.75% for SBA loans or SOFR + 4% to 6% for conventional loans. Using safe levels of debt and carefully monitoring DSCR (Debt Service Coverage Ratio) and banking covenants can help lower acquisition costs while protecting equity upside.
• Investor equity, though more costly due to preferred return rates of 6% to 8%, fills any gaps left by debt and seller notes. This layer reassures lenders by providing a financial cushion.
• Seller notes offer dual benefits: they act as subordinated debt, which is cheaper than equity, and they align the seller's interests with yours post-acquisition. Seller notes can also help bridge valuation gaps, especially when paired with earnouts — future payments tied to the company's performance.

To optimize equity, consider using Redeemable Preferred Stock, which allows you to gradually pay down investor equity over time using cash flow. This method protects your common equity upside while giving investors a clear exit path. It's crucial to stress-test your capital structure to ensure that preferred return rates don't become unmanageable during challenging periods.

For those navigating these complexities, tools like the Clearly Acquired platform can streamline the process and simplify decision-making.

Using the Clearly Acquired Platform

The Clearly Acquired platform is designed to help searchers manage the intricacies of structuring capital stacks. Acting as an all-in-one brokerage, it combines acquisition financing and equity partnerships into a single, integrated system.

The platform's loan marketplace connects your deal to lenders across SBA, conventional, and private credit markets. Whether you need SBA 7(a) loans for smaller acquisitions, conventional loans for larger deals, or other financing like equipment loans or working capital lines, Clearly Acquired matches you with lenders who understand the unique economics of search funds.

Features like acquisition pre-qualification, powered by Plaid, simplify financial verification and speed up lender matching, helping you progress more quickly through the financing process.

In addition to debt solutions, the platform supports creative financing options such as seller notes, earnouts, and mezzanine capital to address funding gaps. Its AI-driven business valuation tool provides instant, data-backed valuations based on industry trends, giving you a solid foundation to negotiate effectively. To maintain confidentiality during due diligence, the platform also offers secure, permission-controlled data rooms for sharing sensitive financial documents with lenders and investors.

For larger capital rounds, Clearly Acquired facilitates investor and co-investor matching, connecting you with partners who can help fill equity gaps. Its pipeline and deal flow management tools centralize communications between you, your investors, lenders, and sellers, reducing friction and keeping everyone aligned as you move toward closing.

Common Mistakes to Avoid in Capital Raising

Even seasoned searchers can hit roadblocks when raising larger capital rounds. The most common pitfalls come from delayed outreach and poorly validated investment theses. Both timing and precision are critical when building a strategy for securing larger funds.

Starting Investor Outreach Too Late

The key to successful capital raising is starting early — long before you've identified a specific target. The search phase itself can take anywhere from 18 to 30 months, with raising search capital alone requiring an additional two to four months. Waiting until you're ready to submit an offer can leave you scrambling for time.

The biggest issue here is the mismatch between the short transaction windows sellers typically demand and the longer timelines required to assemble a syndicate of 10 to 14 investors. Sellers simply won't wait while you try to secure funding. Without established relationships, you risk encountering what investors call a "slow no" — investors who take weeks to decline your pitch, draining valuable momentum.

Raising capital for a search fund requires a disciplined, relationship-driven approach.

To avoid this, focus on securing a lead investor who can commit 20% to 30% of your target fund size. From there, aim to lock in soft commitments covering 50% to 75% of the required equity from at least three backers before pitching to a broader syndicate. Use technology and data analytics like a CRM to track your outreach efforts and maintain a steady cadence with regular updates — monthly newsletters, for instance, can share deal pipeline metrics. This keeps potential investors engaged and ready to act when you find the right opportunity.

Presenting an Unvalidated Investment Thesis

Once you've built those early investor relationships, the next step is ensuring your investment thesis is sharp and specific. Investors are quick to dismiss generic pitches. One common mistake is presenting a broad, unfocused thesis that lacks a clear competitive angle. Searchers who target three to four specific industries tend to close deals faster than those with a generalist approach, and investors are well aware of this.

A weak thesis often fails to meet the operational and financial rigor investors expect. To validate your thesis, focus on providing detailed benchmarks for your target sector, such as recurring revenue (ideally 40% to 60%), gross margins (35% to 50%), and customer concentration (less than 15% to 30%). Directly verify key customer metrics by engaging with the top 10 customers of potential targets. Additionally, use professional CPA firms to conduct Quality of Earnings (QoE) analyses, which normalize EBITDA and adjust for any one-time expenses, strengthening the credibility of your financial projections.

To further build confidence, present a three-scenario financial model — base, downside, and upside — that outlines realistic IRR targets. Include an illustrative deal model (e.g., a $10 million purchase) that demonstrates how your thesis can deliver returns in the range of 3x to 5x.

Conclusion

To successfully raise larger search fund capital, preparation is everything. Building strong relationships with investors and using efficient financing tools are equally critical. A well-crafted investment thesis targeting three or four specific industries, paired with a polished Private Placement Memorandum and detailed financial models, helps establish credibility with investors.

Securing a lead investor who commits 20% to 30% of your target fund can create the momentum needed to attract additional investors. Early engagement and regular updates keep potential investors informed, reducing last-minute scrambling when opportunities arise. On average, searchers raise capital from a syndicate of 10 to 14 investors, a process that demands both time and persistence.

In addition to a strong thesis and investor strategy, structuring your capital stack effectively is essential for managing risk and optimizing returns. Most acquisition deals combine equity and debt, often including seller notes and mezzanine financing, to bridge valuation gaps. Platforms like Clearly Acquired streamline this process by providing tools such as AI-driven financial analysis, SBA 7(a) and conventional loan options, and access to verified deal flow.

With 57% of searchers successfully acquiring a business and achieving a median return of 4.5x ROI at a 35% IRR, the potential rewards are substantial for those who execute their plans with discipline. Start early, stay focused, and use the right tools to close your deal. The opportunity is there for those who are prepared to seize it.

FAQs

How do I pick 3–4 industries for my search thesis?

To pick 3–4 industries, begin with a well-defined investment thesis that targets specific, defensible niches. Look for industries that show strong growth potential, offer operational stability, and have a competition level you can handle. Use your expertise as a foundation, dive into detailed market research, and validate your choices through networking or by drawing on relevant experience. Start with a broad perspective, then narrow your focus based on your background, strategic goals, and the opportunities you spot in the market.

What makes a strong lead investor in a search fund raise?

A strong lead investor offers expertise, trustworthiness, and dedication during a search fund raise. These investors typically have a history of success with search funds, a well-established network to draw in additional backers, and the ability to provide mentorship and strategic advice beyond just financial support. Their detailed due diligence and shared vision with the searcher instill confidence in other investors, boosting the chances of a successful fundraising effort.

How much debt is too much in a search fund acquisition?

Balancing debt levels during a search fund acquisition is all about managing risk while keeping the acquired business financially stable. A widely used guideline is maintaining a debt-to-EBITDA ratio below 3 to 4. This helps ensure the business can handle its debt obligations without putting daily operations at risk. To strike the right balance, it's crucial to assess factors like cash flow, growth potential, and the stability of the industry. This approach reduces the chances of over-leveraging and supports a more manageable capital structure.