India Has the Perfect Recipe for Search Funds. So Why Don't They Exist?

Anshul Bhide,Thu Apr 24 2025•Search Funds India Entrepreneurship

Search Funds Drake Meme

Wait - I can just raise money to buy another company On a call with a serial entrepreneur who had exited his business, I asked him what his next gig was.

"I'm looking to acquire an IT Services company with Rs. 150 Cr. in revenue," he said. "Do you know of any?"

I was surprised as I didn't think he had that much liquidity through his previous exit.

"With whose money?" I asked.

"I've secured funding from investors, don't worry about that," he replied.

I was blown away. What investors fund the acquisition of ₹150 Cr. companies before a target has even been identified? Are we back in the ZIRP era?

Or is there something else here?

What is a Search Fund?

Note: Feel free to skip to the next section if you already know what a search fund is. Here's the TL;DR version.

What the entrepreneur above described is a search fund. Search funds are popular among MBAs, as they involve oft-abused business-school concepts like "synergies" and "strategy," while allowing them to operate a business independently. The focus is on the 1 to n scaling, not the 0 to 1 building.

A search fund is when an entrepreneur or "searcher" raises money specifically to find and buy an existing company instead of starting one from scratch. This concept started in the 1980s, by H. Irving Grousbeck, a professor at Harvard Business School. Many of his MBA students told him they wanted to run a company but lacked both a start‑up idea and enough capital to buy a business outright. Grousbeck noticed three things:

Under‑the‑radar companies with retiring owners could be bought at reasonable multiples. Recent MBAs had energy and managerial skill but minimal net worth. Individual investors were willing to back talent if they could keep downside limited and get first right to invest in the eventual acquisition.

He combined those observations into a two‑stage vehicle:

Stage 1 – "search" capital: a small pool (≈ USD 300K) to pay the searcher's salary and expenses for up to two years. Investors received redeemable preferred stock. Stage 2 – acquisition equity: if a suitable target was found, the same investors could supply the buy‑out capital on pre‑agreed terms and convert their search shares into common equity.

To raise the value of the acquired company, a searcher drives EBITDA up by tightening pricing, professionalising sales and marketing, adding higher‑margin products, and stripping out waste to lift profit quickly (basically concepts that are taught in MBA programs). They will then try to sell this acquired business to another strategic acquirer or a PE firm.

Search Funds by Activity Year Source: 2024 Search Fund Study Research Overview by GSB

The Search Fund model really took off when Grousbeck moved to Stanford Business School as a lecturer and later founded GSB's Center for Entrepreneurial Studies. The first formal Search Fund Study was published in 2001. With data on 46 funds, it showed LPs that this could be an investable asset class. In 2023, there were 94 search funds, and the IRR for all search funds from inception was 35.1% and the ROI was 4.5x.

Paul Graham at Launch Conference Would PG consider search funds "founder mode"?

Why aren't there any Search Funds in India?

For a successful search fund, you need a large market of promoter-driven businesses who want to sell out for personal reasons.

India fits the bill perfectly. More than 85% of businesses in India are family owned. We all know of a family business being run by a baby boomer (born 1946 to 1964) and whose kids don't want to take over the business as they have usually moved abroad or because they are just not interested. India's GDP is growing at 6-7% annually, which is amongst the fastest in the world, and these tailwinds raise all businesses. We have plenty of MBAs with an entrepreneurial spirit who'd like to own a small, cash-flow-rich business instead of swinging for the fences with a VC-backed idea.

However, there have been less than ten search funds that have ever existed in India. And as far as I know, there has never been a single successful exit.

So why doesn't the search fund market exist despite the plethora of targets to acquire?

Well, several reasons actually:

Cultural issues

This could be the biggest reason; promoters in India aren't rational actors (at least in the economic theory sense). What I mean by that is that there's always the expectation that the family business is meant to be handed over to the next generation and isn't going to be sold to some young whipper-snapper MBA. Therefore, there is almost no price at which they are willing to sell - and if they name a price, it's usually not a realistic one.

High cost of debt

Debt plays an integral part in the search fund acquisition as it improves the ROE of the eventual exit. In the US, most search‑fund deals finance about 50 - 75% of the purchase price with debt; the US government has something called SBA loans which are available to small businesses without collateral. In India, banks will not give you debt to finance a small acquisition for a search fund (can you imagine the face of the loan officer if you bring this up?). Even if you get debt from HNIs or other sources, unsecured debt in India costs between 16-20% p.a. which makes it very difficult for the math to work.

Low-trust environment

In India, it's hard to trust financial statements from small businesses. So you have to spend much more time and money on conducting hands-on due diligence which adds to the search fund expenses.

Lack of LP capital

Search funds are usually seen as too exotic by usual sources of capital in India (HNIs and family offices). Meanwhile, it's tough to raise from foreign LPs given the lack of awareness about the Indian market, and higher hurdle rate due to the depreciating rupee. However, based on my conversations with several searchers, this is changing. It just takes one search fund to show success, and you'll have foreign LPs clamoring to enter India - similar to what happened with VCs in the 2010s and PEs in the 2000s.

Lack of exit options

The traditional exit route for search funds has been strategic buyers or PEs. While the market for ~$50+ acquisitions has taken off in the past decade in India, it's still shallow compared to other countries; but similar to point #4, it is already changing.

There are green shoots beginning to take off and this asset class is on the rise. I know of at least 6-8 searchers who have investor backing and strong credentials currently on the hunt for a business to acquire in India. They're probably a couple of years early, but there are some first-mover advantages.

Next, I'll dive into why IT services (a sector I know well) is uniquely positioned for search funds, offering stable cash flows and clear paths for leveraging operational improvements with Gen AI.

Special thanks to Anmol Maini, Sid Puri and Krishna Kulkarni for reading drafts of this, along with the searchers who have taken the time out to speak with me!