Becker Private Equity & Business Podcast
Investing in the Future of Small Business: Jon Staenberg on Search Funds & Entrepreneurship 2-18-25
Tue, 18 Feb 2025
In this episode, Jon Staenberg, Founder & CEO of Agate Hound Fund, discusses his journey in venture capital, the rise of search funds, and how his fund is transforming small business acquisitions.
Chapter 1: Who is Jon Staenberg and what is his background?
Hello, and welcome to the Becker Private Equity and Business Podcast. My name is Chanel Bunger. Today, I'm excited to speak with John Steinberg, a venture capitalist with over 30 years of experience and the founder of Agate Hound Fund, who joins the podcast to share insights into his background, search funds, and a bit more. John, thank you so much for joining me.
Now, can you take a moment to please introduce yourself and tell us a bit about your background?
Yeah, thank you so much. The pleasure is mine. It's really fun to be on this podcast. It's number one on Apple. You guys have done a tremendous job, so excited to be here today. Yeah, so I always like to start because of where I'm from. I'm from Omaha, Nebraska, and I grew up in a very, very middle-class family, a family of entrepreneurs.
My dad had a real estate business and my mom actually took it over when my dad passed away and she started several other companies. And I got to see firsthand what it was like to be entrepreneurial and to grow. have to do the day in and day out of running a small business. And that always stuck with me. My first job was picking weeds at eight years old at one of our apartments.
And so I really understood the value of hard work and treating people right and understanding customers. And that's basically the foundation that really has led me to today. I was lucky also enough to be around Warren Buffett. My mom was friends with his wife. And so he has always been a tremendous influence on my life and the way I look at the world.
And of course, Warren's always been about value investing. And that's something I hold close and dear to how I look at my own investments. So but from Omaha, I went out to the West Coast. I went to Stanford and went to Stanford Business School as well. And certainly was exposed to a lot of entrepreneurialism there, including, of course, the beginning of venture capital.
And I knew going to the business school and meeting the incredible people who were involved with VC at the time, that that's something I wanted to do. I, after business school, went to Microsoft to steep myself in tech and startups. And from there, I then launched a career of some 30 years in venture capital.
About five years ago, almost six now, I guess, I started thinking to myself that venture capital was a different game and maybe not one for me. And yet, I wasn't even close to being done. I think Warren's 94 or so now, and I don't see myself slowing down. And like Warren, I still skip to work. every day because I love what I'm doing. And I remember thinking, what am I going to do after venture?
I still love being around entrepreneurs. I still love the passion that they have. I love coaching and mentoring. And I love the art of the deal. So I went back to Stanford and met my professor. from many decades ago, Irv Groesbeck. And Irv is the godfather, the OG, of something called search funds.
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Chapter 2: What are search funds and how do they work?
So I basically have created Agate Hound Fund, which invests in funds, which invests in the searchers. And we have become a proxy, if you will, or index fund for small American business run by really smart MBAs using the traditional search fund model. So that's a lot of words. And I'm going to stop there and apologize for going on for so long.
All good. Thank you so much for that introduction. Now, speaking of search funds, can you dive a little bit deeper there and talk about what they are and how you use them?
Yeah. So at a very high level, search funds are where MBAs from business schools, instead of taking a job straight out of business school, they go out and see if they can get 8 to 12 investors who will give them a small amount of money, enough money to pay themselves to live and to do research on companies for up to two years while they search to find, acquire, and then run a small business.
So lots of people, it's actually becoming kind of a hot sector. There's a lot of people on social media talking about buying businesses and lots of people talking about doing a search. We are very, very specifically focused on what I call the traditional Stanford Harvard Search Fund model, which has a lot of elements that make it successful.
I think the thing that is the headline grabber here is that the Stanford study, which comes out every two years, and I encourage your listeners to read two documents if they're interested in this, the Stanford Primer, which describes in detail
the search fund process, and then the Stanford study, which is updated every two years with the latest numbers on all search funds, all traditional search funds, and the results. And the headline grabber here is that over the last 40 years, if you had done and participated, invested in every search fund, those that succeeded, those that didn't, you would have gotten a net 35 plus percent return.
And that's kind of remarkable. And I sometimes say to people, I don't know any other asset class that has that kind of performance. And so it's pretty intriguing. In fact, yesterday I had someone say, that's impossible. And so I would encourage people to read the study and take the time to understand why this playbook works so well. But at the end of the day,
We're living in a remarkable time of baby boomers needing to transition into retirement. There are kids not necessarily wanting to take over the family business. And we also are looking at implementation of AI and tech tools that is changing how small businesses compete. So it's a really, really interesting time for this small asset class. So that's what it is.
Yeah, definitely. Now, what kind of small businesses are you talking about? Is it just like mom and pops or is it just a wide spectrum of businesses? Can you talk about that?
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Chapter 3: What types of small businesses are targeted for acquisition?
Chapter 4: What makes the search fund model successful?
the search fund process, and then the Stanford study, which is updated every two years with the latest numbers on all search funds, all traditional search funds, and the results. And the headline grabber here is that over the last 40 years, if you had done and participated, invested in every search fund, those that succeeded, those that didn't, you would have gotten a net 35 plus percent return.
And that's kind of remarkable. And I sometimes say to people, I don't know any other asset class that has that kind of performance. And so it's pretty intriguing. In fact, yesterday I had someone say, that's impossible. And so I would encourage people to read the study and take the time to understand why this playbook works so well. But at the end of the day,
We're living in a remarkable time of baby boomers needing to transition into retirement. There are kids not necessarily wanting to take over the family business. And we also are looking at implementation of AI and tech tools that is changing how small businesses compete. So it's a really, really interesting time for this small asset class. So that's what it is.
Yeah, definitely. Now, what kind of small businesses are you talking about? Is it just like mom and pops or is it just a wide spectrum of businesses? Can you talk about that?
Yeah, great question. Sure, of course. It's very broad, but within that breadth, there is a lot of discipline of the companies being bought. So what do I mean by that? So in general, what we're looking for are businesses that are about $2 to $5 million in EBITDA, have some reoccurring revenue, have been growing for at least three years, have hopefully 20 plus percent EBITDA margins,
are not facing too much customer concentration risk, generally not in regulated industries and so on. So I'm giving you kind of a profile of what after hundreds and hundreds and hundreds of acquisitions, we know works. And so one of the beauties of this is that, The searchers looking, and by the way, searching is a really hard thing to do. Most people don't fully understand it.
And searchers who come out and decide to take this entrepreneurial path often don't even acquire And so they went to a major business school. They came out. They raised this money. Instead of taking a job, they tried to find a small company that I've described. And over a third of the time, they can't get it done. for a number of reasons. So it's really hard.
And part of that is why it works so well is because there's a lot of discipline on the companies that they're buying and making sure they're appropriate companies. But to be very specific in answering your question, It's everything from mostly non-sexy mom and pop businesses like pool cleaning, med spas, dental clinics, street cleaners, meter readers, airplane parts, et cetera, et cetera.
In our fund that we closed in June, we're going to have something like 200 of these acquisitions in over 125 different industries across the United States. And one of the great things is if this Harvard or Stanford or Booth or MIT or Wharton MBA goes in and buys an HVAC company in Topeka, well, here they're coming with their energy and smarts and training.
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Chapter 5: How has the landscape for small business acquisitions changed?
Chapter 6: What role does mentorship play in entrepreneurship?
And of course, Warren's always been about value investing. And that's something I hold close and dear to how I look at my own investments. So but from Omaha, I went out to the West Coast. I went to Stanford and went to Stanford Business School as well. And certainly was exposed to a lot of entrepreneurialism there, including, of course, the beginning of venture capital.
And I knew going to the business school and meeting the incredible people who were involved with VC at the time, that that's something I wanted to do. I, after business school, went to Microsoft to steep myself in tech and startups. And from there, I then launched a career of some 30 years in venture capital.
About five years ago, almost six now, I guess, I started thinking to myself that venture capital was a different game and maybe not one for me. And yet, I wasn't even close to being done. I think Warren's 94 or so now, and I don't see myself slowing down. And like Warren, I still skip to work. every day because I love what I'm doing. And I remember thinking, what am I going to do after venture?
I still love being around entrepreneurs. I still love the passion that they have. I love coaching and mentoring. And I love the art of the deal. So I went back to Stanford and met my professor. from many decades ago, Irv Groesbeck. And Irv is the godfather, the OG, of something called search funds.
And we spoke, and I talked about how I can't believe I missed it the first time around, because it's been around for a while. But I didn't want to miss it this time around. and steep myself in search funds. And today I have created, as of last year, the world's first fund of funds for search. Search is also called ETA at the business schools, Entrepreneurship Through Acquisition.
So I basically have created Agate Hound Fund, which invests in funds, which invests in the searchers. And we have become a proxy, if you will, or index fund for small American business run by really smart MBAs using the traditional search fund model. So that's a lot of words. And I'm going to stop there and apologize for going on for so long.
All good. Thank you so much for that introduction. Now, speaking of search funds, can you dive a little bit deeper there and talk about what they are and how you use them?
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Chapter 7: Why are search funds becoming a hot sector?
Yeah. So at a very high level, search funds are where MBAs from business schools, instead of taking a job straight out of business school, they go out and see if they can get 8 to 12 investors who will give them a small amount of money, enough money to pay themselves to live and to do research on companies for up to two years while they search to find, acquire, and then run a small business.
So lots of people, it's actually becoming kind of a hot sector. There's a lot of people on social media talking about buying businesses and lots of people talking about doing a search. We are very, very specifically focused on what I call the traditional Stanford Harvard Search Fund model, which has a lot of elements that make it successful.
I think the thing that is the headline grabber here is that the Stanford study, which comes out every two years, and I encourage your listeners to read two documents if they're interested in this, the Stanford Primer, which describes in detail
the search fund process, and then the Stanford study, which is updated every two years with the latest numbers on all search funds, all traditional search funds, and the results. And the headline grabber here is that over the last 40 years, if you had done and participated, invested in every search fund, those that succeeded, those that didn't, you would have gotten a net 35 plus percent return.
And that's kind of remarkable. And I sometimes say to people, I don't know any other asset class that has that kind of performance. And so it's pretty intriguing. In fact, yesterday I had someone say, that's impossible. And so I would encourage people to read the study and take the time to understand why this playbook works so well. But at the end of the day,
We're living in a remarkable time of baby boomers needing to transition into retirement. There are kids not necessarily wanting to take over the family business. And we also are looking at implementation of AI and tech tools that is changing how small businesses compete. So it's a really, really interesting time for this small asset class. So that's what it is.
Yeah, definitely. Now, what kind of small businesses are you talking about? Is it just like mom and pops or is it just a wide spectrum of businesses? Can you talk about that?
Yeah, great question. Sure, of course. It's very broad, but within that breadth, there is a lot of discipline of the companies being bought. So what do I mean by that? So in general, what we're looking for are businesses that are about $2 to $5 million in EBITDA, have some reoccurring revenue, have been growing for at least three years, have hopefully 20 plus percent EBITDA margins,
are not facing too much customer concentration risk, generally not in regulated industries and so on. So I'm giving you kind of a profile of what after hundreds and hundreds and hundreds of acquisitions, we know works. And so one of the beauties of this is that, The searchers looking, and by the way, searching is a really hard thing to do. Most people don't fully understand it.
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