Episode 10 - Round 2 with Ibrahim and Khaled of Moonbase Capital

So the big question is this, how are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk? Welcome to Search Funded, the Entrepreneurship Through Acquisition podcast. I'm your host, Nick Lallen. Today we have Ibrahim and Khaled of Moonbase Capital back in the house. Really great to see both you guys again. A lot has happened since our first meeting, which was just the second episode of this podcast. I've started raising my own search fund. I just got back from the ETA conference at mit, which was a great event and really inspiring to meet so many amazing people there. And you two have some really exciting news. You've just raised $5 million for your fund since we last spoke. So I think that could be a great place to start, just to learn how that's gone for you. I mean, these aren't really the best economic times to be raising a fund of any kind, so that's pretty impressive. And you two are first time fund managers if I'm not wrong. So would love to start there and I'm sure we'll have a lot to catch up on.

Thanks Nick for having us on the call again.

Thanks. So Carlos, our trade partner, has quite a lot of experience, but at least for me and Ibrahim, it was the first time to actually fundraiser. I mean, we've had M and A experience quite extensively, but when it comes to actually fundraising, pitching to people that would like to invest in a fund, it's definitely our first time and it's definitely a learning curve. And I mean, it's, yeah, it's not easy, it's definitely not easier.

I mean, there are certain advice that I got from many of the private equity friends I had. And the moment I never, never really resonated. So for example, everyone said you should start with friends and family, you should put your own money until you have some good track record before you can raise funds from other people. And I never, you know, I thought, what the hell, if you have a convincing story, if you, you'll be able to do it. But they're very right. So we started off with people who know us or who know people who know us. It was the close circle. So it was easy to raise the first 5 million through this, through people who are not really friends and family. But yeah, many of them are friends or people who, who know people who know us very well. And this works really well. And then for the second fundraise, with the second 5 billion which you're raising now, it's much easier because you could do the first closing and because we have two investments already and we have a pipeline of searchers or popular investors. So the more story you have, the.

Much easier it is to fundraise, more to show for.

Yeah, and the difference is huge. I mean, it's actually quite interesting. It's quite interesting how investors care about track record more than anything else. So just the fact that we did the closing and the fact that we did two investments is making our life much easier.

Yeah, it makes a lot of sense. And I've heard that for fundraising, for any PEBC anything, the track record is what's most important. So the more you put out there.

I think the easier, especially when it comes to track record. I mean, both of us have very, very. I wouldn't say big, but we have great experience when it comes to SMEs. We've done M and A, so we have track record when it comes to the content itself, but just purely by the fact that we've never raised a fund before. That in itself was where we really needed to prove. And this is why now that the fund is actually operational and that we've actually done investments, it's kind of like the missing piece that really is now helping quite a bit. Because in terms of SME experience, in terms of what we know how to do, we're quite usually convincing when it comes to that. But when it comes to managing a fund, that was the new part. So it's been much easier now on the second round. Definitely.

Sure. Yeah. You both definitely have extensive experience that is incredibly relevant. But I guess that's just the last kind of small missing piece there to push you over to where it may be a bit easier. Have there been any other learnings or anything that was unexpected in terms of raising the fund or your experience and funding search fund entrepreneurs compared to when we last spoke, based upon how you had envisioned it?

I mean, the one thing that comes to mind is how I was very worried. Given the climate of investment these days, most asset classes are suffering big time and most investors are losing a lot of money, which makes it really hard to even talk to them about allocating money anywhere. However, Search Funds has a very good story, which makes it a bit easier because you are not asking them to risk money, really, because search fund investing is safe, or at least the risk is much lower than if you compare to venture capital, then it's way lower. But I think even private equity, I think it's lower. And the Reason I say it's lower is because the divest, I mean, you have with our 15 million euros diversity, definitely we want to invest in around 25 companies. So private equity would probably spend 50 million euros in one company. So that's the reason why I think even search funds is less risky than either private equity or these days, the stock market is doing really bad. So although the climate of investment is really tough, I think search funds is an asset class that still intrigues people. And people who want to invest out of venture capital or out of the stock market find search funds as a good way of investing these days.

So I think, whereas I like to look at search funds as if you are investing in the S and P, for example, as if you're investing in an index. So you have the diversity of an index, not investing in one specific company. So whereas PE obviously has some great returns, but the amount of money you're investing in one company is much, much more significant. When it comes to the diversity you get when you are investing in a fund of search funds such as Moonbase is that one ticket of, let's say, a million dollars gets you invested and gets you exposed to an entire portfolio of investments. And then these investments have a diversity that can really carry the risks. So in terms of risk management, I think it's one of the major things that we as a fund can propose to a lot of investors and what lots of people are finding very interesting.

Sure. I think all that makes a lot of sense if you're going to put your money anywhere in the world these days, search funds are definitely not a bad option at all. And I think your point on diversification makes a lot of sense too, that for the same ticket size as pe, you're getting exposure to way more. So, yeah, all that does make sense. But one question I have, which I'm not sure if you would know the answer to it yet, but given that LPs may be somewhat more hesitant just to invest in general, I was wondering if that is affecting how search fund investors are investing in searchers. Has that made them more hesitant or are they, or are they basically just operating their mandates as usual?

Right now, I have not seen any slowdown in search fund investing, so most of the deals are fully subscribed. So from my activity, what I've seen, both searchers and acquisitions, the investors are still excited, they're still engaged, and they're putting their money. I mean, at the end of the day, investors and search funds are a bunch who really go by the book in a way, so they're still doing that. I mean, what I'm saying is if a company is a turnaround, they won't do it or if a company has excessive risk, they won't do it. However, for a good company that follows the criteria these days and the past years you see all the search fund investors still engaged and raising money and I don't see, actually I see more investors coming into the market rather than leave.

Yeah, no, it certainly seems like it's becoming a more popular area to invest and doesn't seem to be slowing down. So I guess the next question I'd have would be when it comes to geography, it seems that Europe is getting a lot more crowded when it comes to search fund investors and searchers. Is there any, Are you seeing the environment there in Europe? Is that making it easier for the searchers you're investing in to raise or any other new thoughts on searching in Europe?

I mean, Europe is booming in terms of search funds. You are totally right about that. I think the fact that you have more investors and more searchers coming into the market is allowing everyone to get what they want, basically. So I can see a lot of, I mean the amount of searchers that are now entering versus two years ago, it's just incredible. I mean, two years ago you were fishing for searches like you, it was not so easy to find. They're there, but so not so easy now every week you get a new searcher contacting you or looking to raise. However, also they raise quite rapidly because the amount of investors that are entering the space is also quite high. So yeah, I mean the competition is basically benefiting everyone because the top searchers will still get the top investors and the searchers who are maybe not that criteria wise, not that relevant or not that exciting for investors will still find other investors who need to prove themselves and are and can't get into the top cap tables. I think in the States it's quite different because in the States you have a bunch of searchers that get snapped up very quickly. Some people who are graduating from Stanford or Harvard or Chicago Booth or a few universities that are very known for search funds have a quite a strong ecosystem and they get the investors, some of them get them in a matter of weeks. So this, you don't have this in Europe. However, on the other hand, you don't have people suffering the way some suffer in the States to fill up their cap tables because everyone in Europe, I think not everyone, but a very big portion of the searchers end up closing.

Their deals sure, yeah. It seems like in some ways Europe is actually more exciting place to be right now. Search is becoming really popular in the us.

It's also the environment because Europe is also quite heavily based on family businesses. So the availability of opportunities also for our searchers are quite good. So so far we've seen that. In a lot of the cases that we've seen so far, we still haven't seen the crowding effect. So whereas people are worried that at some point when searchers, the number of searches get a bit too high, you will find a crowding effect where two or more searchers would start to approach one company. We still haven't seen that and I mean we're still quite far from that. In some cases it does happen, but it's still not an issue. So as long as we're still not getting into that constraint, basically. I think the more people get into this community, the healthier it's going to become and the bigger it's going to become and the more fine tuned it's going to get. Because today if someone wants to get into this community, people need to give more. Searchers are going to demand more from their investors which is only going to get the community stronger and better. So investors are going to have to give more to their searchers. Searchers are going to have to be better. I think at the end this competition really is going to foster an environment that's going to grow this asset class further. Of course, of course.

When we talk about Europe, Europe is not one entity. So for example, Spain, quite more crowded if you will, versus Italy. So in Spain you start finding searchers stepping on each other's feet a bit. But something like Italy, France? Not yet. Germany? Of course not. So it depends on the country a bit. But so far I think it's yeah, I agree with ged.

Would you attribute Spain being crowded just to the fact that there are so many top MBA programs there or is it, does that have more to do with the demographics or characteristics of the country?

No, I mean I, I think it so ese the main factor of that. I think also historically, given that many of the investors who started investing in Europe were from Spain, given Mark Bartmas's entry into Spain some time ago. So I think it's more historical. But also the country has been quite good in terms of returns and with companies to find. So yeah, I think it's a mix of things. It also started earlier. I mean, you look at Italy, it's quite new compared to Spain. Spain has been doing this for a While now?

Sure, yeah. I guess with search it's a longer process. So once you start seeing returns in a place, then it means search already started in that location almost a decade ago. And so a place like Spain may be further along for that reason. I guess that's what I've always heard about why it took so long to expand outside of the US is that the, the returns that were seen from the original search funds didn't spread so far.

Exactly, exactly. I mean, if you look at the US it took 80s and 90s and most of the 90s even before you had a handful of people doing search funds. And then after, slowly, slowly, when people saw the results and saw the returns, now it's rising like crazy. The same in Europe, it took the past 15 years to slowly, slowly, slowly ramp up. Now that you have a few exits and you have people being successful, you can clearly see that the same is happening now. It's becoming more. There's influx of both investors and searchers.

Sure. Definitely seems like really exciting time to be in Europe right now. I was wondering, beyond what we've covered already, are there any major differences between Europe and the US Particularly when it comes to being a search fund investor?

One thing is the difference between the US and Europe, when you look at the relationship between search fund searchers and investors is quite big. In the US the investors in general are more entrepreneurial, more from CEOs, more professors, people who will work closely with the searcher and add value much more. In Europe you have great investors, but many of them come from the finance world, private equity, different finance. And they are great people and they add a lot of value. They add value in a specific niche of things. They wouldn't be the ones who would help the searcher in doing a strategy or talking about maybe a function like sales or looking at an industry in depth. So I think this is one thing where slowly you can see that searchers in Europe are demanding that their investors add more value. And the advice I would give to any investor is you need to find a way to really add value and stand out of the crowd. Because the game is mainly getting the best searchers. If you're able to get the best searchers, probably you'll get the best deals and get the best return. But in order to get the best searchers, you need to have the best value proposition, you need to be helping them. So yeah, I mean, that's one advice I would give to people who are looking to invest in this world. Have your value proposition very clear and make sure. That there is niche for it and a need for it.

Yeah, that's really great advice. And I think it's extremely important in a place like Europe, where investors may need to start differentiating themselves more there as the market is becoming more crowded. And what may be available in the US in terms of entrepreneurial expertise among investors is not quite there in Europe as much. So it's really important point and it brings me to what I wanted to talk about next, which is the new sort of model that you're applying to search fund investing, which you've termed Search Fund Squared. I was wondering if you could talk a little bit more about that and what Search Fund Squared means to Moonbase.

So basically the concept is, when we looked at the way most of the funds are structured, the funds that invest in such funds, it was very much mimicked close to the private equity style funds, which is starting with 30 million euros. This is the amount that all the private equity people always start the smallest fund with and having a few GPS that are running it, which is hard because if you think about it, you have around 50 companies to invest 30 million euros in. And to be a small group, we thought, is hard to give the right service because search funds money is never enough. You need to give advice, you need to help them. The chemistry is really the relationship between the investor and the searcher, actually, especially.

When you go back to the concept of the search funds themselves. The idea behind it is that the investors are also supporting the searchers. So the fact that you have the investments themselves, the investors, that the funds should still provide the same type of support that is expected out of a search fund investor. So in some cases we have found that in some funds do not have that kind of support because it's very, very difficult because they are managing 50 different companies just with just three GPS.

Now what we've done is we've of course don't make fun of the name Search Fund Squared. Everyone does. The concept is we took the search fund concept and we just mimicked it to one step up, which basically means we only look for investors that will add value. We look for investors that are willing to either invest along us or get close to our searchers and we have different committees for that, etc. Etc. So we just operate with our investors the same way the searcher will operate with his or her investors.

Can you give some examples of what that value add may be? Is that investors that have specific industry expertise or are they people who have experience with search funds?

So for the first closing of our fund, they are all people from different industries. Most of them are either ex CEOs or ex entrepreneurs. Some of them are family offices with some resources that they can help us with. So it's usually people from the industries, business people. And the beauty is these are people who like the search fund concept. And the way we are positioning our fund is it's a very good way for people who want to enter into the search fund investing world but don't know exactly where to start. They don't have a name yet. So there's mostly people who like the space and consider Moonbase as a way to start investing in the space and then eventually doing it on their own or continuing with Moonbase. So yeah, that's the investors we have at the moment.

Sure. And could you talk a bit more about how your fund is structured and what you may be expecting from these investments? If you could refresh my memory from last time. Are you participating in a search fund raise or are you going to be the sole funder? And then versus private equity, which you mentioned, I mean in private equity they're usually looking for an exit and a return within a specific time period. Is that what you're looking for? Are you more open to long term holds?

We are very traditional search fund investors, so we invest either one or two units. So we take always above 5%. So we do the same as traditional search for investors. We never take more than 10% of our company. So that's the way we are. And during the search phase, we work along the other investors in the cap table to support the searcher. And the way we do it is through two things. One is we have an advisory board which is a bunch of people, mostly from my own network at INSEAD, McKinsey and Stanford, like where I worked and studied. And these are all individuals who are happy to help searchers. And the way we structure it is we do a call with the searcher every month, each of our searchers. And during this call we pinpoint areas where the searcher would like to have support. And then we choose an advisor or an lp, someone who could support the searcher. And we just have a call between the searcher and the advisor or the lp and then we take it from there. Sometimes we have more than one call on a certain topic. Sometimes you have someone who is in a country and looking for someone specifically in this country. So it really depends.

Sure. And have you started deploying capital yet? Are there any search funds that you've invested in out of this search fund Squared or are you still waiting to raise the full fund before you do that?

So, yes, we've done two investments so far, two very exciting ones actually. The first one is in the waste management sector, Italy. And the second one is in the tech space in France and Lyon. Two very, very interesting acquisitions, top searchers. And we have a pipeline of around 16 searchers that were already invested in. So very, very soon. We have another two investments that are coming up within the next few months. So we're quite active actually. And what we're trying to do is we're trying to pretty much, we're pretty confident that we're going to be able to complete the fund. So we are structuring it and we're planning it as if we have already gained the 15 million and we're just moving towards that goal because we're quite secure. A lot of the investments are already secure. It's just a matter of signing people off. So been quite busy because we've been investing in searchers back in 2021. So we have searchers that have been operating for now two years. So most of them are actually coming up with some great acquisitions today.

That's wonderful. I'm really happy for you guys. I guess my next question would be related to the advisory board that you've mentioned or the value add that you give to the entrepreneurs. Is this something that is basically pretty standard across all of your investments or is it more up to the entrepreneur if they request it? And secondly, I was wondering how it manifests post acquisition. Is this something that turns into board seats? How does that mentorship or advisorship continue on after the entrepreneur has acquired a company?

So basically what we really believe in is the autonomy of the searcher. So searchers are entrepreneurs at the end and we don't force feed our advisory under any circumstance. What we provide is pretty much give them the availability of those advisors and we suggest to them that certain advisors could fill in certain gaps. But it is completely up to the searcher to choose whether or not they want to take this advice or not. And of course this happens all throughout the journey. So it happens in the journey, the search phase, in the due diligence phase, up until the acquisition and then post acquisition definitely in the first 90 days. We really believe that the first 90 days, first 180 days are very important. So we are there for the searchers if they would like our support. And when it comes to that, even us as gps are available to also support them as much as they need. But at the end, I Think it's a question of what the searchers actually need. And in terms of board seats, again, it really depends on the acquisition. In some cases we really believe that we need strategic people on certain boards. So if we find that there are other investors that have great strategic experience that can take our behalf on the board, then we're quite happy with that. But in some cases we must insist the board has someone that with great strategic experience in order to really have a good, well rounded board. So in some cases we try to ensure that, ensure that happening. So if there is no one in the cap table, then in some cases we try to insist that we are on the board, but this only happens in very, very specific cases. In most other cases we're more than happy to either accept the current board or if certain investments do not require a lot of strategic support because the investments themselves are quite simple, then in some cases we just take a step back.

I mean, let me give you some detail on how this actually happens on the ground. So what happens is we have a minimum of half an hour with each searcher every month. And during this half an hour it's mainly to look at what sectors they're looking in, what help we can provide them. And then after that we think together. Problem solve. Who from our advisor can we get in? Is there an LP that has an experience? Is there something we can do? And if there is, we do then have a call with an advisor, with this searcher for an hour and yeah, we take it from there. That's before, that's during the search, during due diligence, etc. Now if during the due diligence, for example, you find one of our advisors has very relevant knowledge for the sector and clicks well or clicked well with the searcher, we're happy to have this advisor of ours represent us on the board. We push them to be on the board instead of one of the gps. And yeah, so this didn't happen yet the situation, but it's one of the major reasons why our advisors are taking this role is because they're interested in board seats and we're very happy to push people in the boards and our advisors are quite senior. I mean most of them have graduated from their MBAs 20 years ago. So they have quite the expertise in their fields and that's how we usually operate.

Shiren, the advisors, are they also investors or how do you attract these advisors?

So some of them are investing in our fund, but the majority, not, not investing, they're just advisors. And given that there are advisors Their minimum investment into the fund is much less. So they can invest anything above €100,000 into the fund, although regular LPs have to put much more. So they have this as one of the perks, basically. But many of them are just advisors are people who are happy to support fellow MBAs in a very exciting quest of looking and finding for a company. So they're doing it for giving back basically to fellow MBAs and giving back to their friends from MBA, who's me. So it's. I mean, there is. We don't pay our advisors any money, they're doing it purely for the love of it. And at some point they can get a board seat, they can invest small amounts, but at the end of the day it's primarily for the excitement of it and they love it. I mean, every time we have a call, two things happen. Firstly, our advisors start the call by saying, I'm not sure I can add value. And every time I know that they say that out of humbleness and then in the end it's a great value added. And the second thing that always happens is how excited our advisors are and how motivated after the calls, because our searchers are entrepreneurs and they're live. And so, yeah, so you have a very good dynamic there, which I think is really useful for us.

Yeah, that's really exciting. I've seen something sort of similar with this actually through a VC advisory network that I'm part of called Loyal vc. And it's really cool to see that in search funds. I think it could add a ton of value to searchers to have that sort of network of advisors. I mean, a lot of investors do provide advice and input, but you have a broader group of people who have background who are just doing it out of their own curiosity and interest and maybe potentially being a board seat, I think it could be really valuable to the searchers. So sounds like that's a great value.

We're also trying to do the same with the LPs now. So what we have is we have four committees for our LPs and the LPs can choose to be part of any of those committees. So one is interview committee. So once we are talking to new searchers and onboarding them, they would take their opinion. If LPs would like to interview searchers with us, then the other committee is the mentorship, which basically is during the two years some of our LPs could work closely with or do basically the half hour call with our searchers and build this relationship, depending on the LPs. Experience and if they can add value or not. And then there is the due diligence which they look at all the deals that come and they give us the first opinion and their knowledge. And then finally there is the investment committee which, which look at deals that we actually as management want to go ahead with. And again we tell the LPs is we're not a fund, we're more of a platform where everything is open book and you can see everything we're doing and you can learn from the way we are doing it. And in parallel our LPs get the chance to either invest in searchers alongside us if they, if they like a searcher during the interview phase, or we're happy to introduce them, but also as co investments. So anytime there is an equity gap, we will always as Moonbase, invest one to maximum two units. But then if there is more bigger equity gap, we're very happy to have our advisors and we will basically help them invest, group together their investment and create another maybe unit or two, which is our advisor, not our advisor, sorry, I meant our LPs in parallel to us. So we really try to involve them because these guys also have skin in the game. So we think our, our LPs will have the potential to be even more involved than our advisors because they have everything to gain. And at the same time we have a small number of LPs or we hope to have a small number of LPs so we have a minimum ticket, bigger minimum ticket to just make sure you don't have too many LPs and hopefully we have for every fund we hope to continue these 15 million euro funds. And for every 15 million refund you maybe have 20, 25 LPs who are focused on this fund and together they have the right environment for our 3040 searchers to thrive and to give them the right support in order to get the best companies. So let's see how it goes. But yeah, I mean we're very excited. We love to, for us to work with stretchers is such a natural and beautiful thing. I mean it's a joy. So yeah, we love what we do and let's keep our fingers crossed and see how it goes.

Yeah, that's, that's what I said. With that level of transparency could really benefit all sides. The searcher unplp and especially when it comes to having them fill in the equity gap. One last question maybe related to that, just how do you interact with the other investors when you do invest in a search fund? Let's Say that you're offering all of this. How has that gone? Do the other investors also offer support? In some cases. How do they strategically work with you on the acquisitions and the rest of the process?

The investors we work with in Europe are. Most of them are great people. I mean, I've worked with some really interesting people who all add value. So I really think it depends on the searcher. So the searcher will choose who to work with the closest. So some of our searchers are really close to us and they would always say Moonbase is the closest one and other searchers wouldn't say the same. So I wouldn't say that all of our searchers are as close to us as the way I'm describing it, but at least half of them are. And our relationship with the other investors quite strong. I mean, we are. One of our values is to be quite independent. So although investors are our friends and we talk to them, etc. But we'd like to make up our mind based on our own. So, for example, we give soft commitments without waiting for other investors. We try to be totally independent, but we work closely with other investors and we have very good relationship. I mean, our ideal scenario is to add so much support, investors would like to have us on the cap table. So that's basically what I mean. The investors in Europe are really strong, they're very close to each other, They're a bunch of magnificent people. So, yeah, we love to work with them closely and ideally they would more and more see our value and be happy to be with us on the cap table. That's our best case scenario to get the best searchers and the best investors, I think cannot go wrong if you manage this quiz.

Wonderful. Yeah. It's great to have you guys on again, really excited that you are making the progress that you are and sounds like what you're offering with the search front Squared is a really innovative way to approach search funds and I think it'll provide so much value to everyone in the process. So, really excited to stay in touch and see how it goes. And once again, thanks again for coming in. These two are the. I really launched this podcast with Ibrahim and Khaled, so it's great to see them again and see them doing so well.

Thanks, Nick.

Thanks, Nick. It's always a pleasure to be a part of the podcast and best of luck for your own fundraising. Yeah, I'm sure you could do great as well. So best of luck and stay in touch.

This episode of Search Funded is brought to you by smbpodcastnetwork.com the network is a collection of podcasts and shows from around the Internet which focus on bringing you interviews with amazing guests who share actionable advice, ideas and information for small and medium sized business owners and and entrepreneurs. Visit www.smbpodcastnetwork.com to find more great shows and easily subscribe to be notified of new episodes. It's a great way to discover quality content. If you've discovered us today via the network, then I hope you're enjoying the show and will consider subscribing directly so you never miss any of our great episodes.