The Rise of SaaS Search Funds in Latam
SaaS (Software as a Service) search funds are growing rapidly in Latam, leaving abundant opportunities for investors and entrepreneurs alike to profit. While most people think of private equity funds for these types of investments, search funds offer numerous benefits to entrepreneurs. Let’s dive in and explore the attraction leading to the rise in SaaS search funds in Latam.
What are Search Funds?
Search funds are investment funds created so that a single entrepreneur or a pair of entrepreneurs can acquire, operate, and ultimately sell a single business. It is an ideal tool for entrepreneurs who wish to enjoy the entrepreneurial lifestyle but either lack an idea to implement or have a greater risk aversion than the average start-up founder.
Most search funds have a five to seven-year exit strategy, much like private equity funds, but there are many differences that set the two apart as investment tools for entrepreneurs, including those listed below.
Acquire smaller companies. Most private equity funds target bigger fish, but search funds will go for smaller companies with the intention of growing them into bigger fish over time.
Starting a search fund doesn’t require as much experience as private equity funds. While some do have MBAs, many come from investment banking, management consulting, and other fields.
Private equity funds don’t want to operate the company once the acquisition occurs, search funds are looking to step into operational roles and seek companies whose leadership is ready to move on to new projects and adventures.
Of course, all of this is done with the use of investor funds and the search fund officially operates in four stages.
Stage 1: Lasts approximately two to six months and involves raising the initial capital.
Stage 2: This stage operates in two parts. Part one is the search for acquisition which can take anywhere from one to 30 months. Part two is the raising of acquisition capital and the closing of the transaction.
Stage 3: Operation and value creation within the business. This stage is usually between four and seven years though it can take longer in some instances.
Stage 4: The exit.
Search funds are amazing tools that allow go-getters to become CEOs at young ages when they have the energy and excitement to accomplish impressive things. For investors, they provide a promising ROI when done properly.
Why Search Funds Matter for Founders
Many start-up founders are true adrenaline junkies. They have great ideas for products and services that can transform businesses and industries and have no problem taking the risks required to get their businesses off the ground. These founders, though, have no appetite for the day-to-day grind of operating the business. They prefer to move on to getting their next ideas off the ground.
That makes search funds an important tool for founders. First, they don’t have to spend the time growing the operation big enough for private equity funds to take an interest. Next, it provides them with fast capital they can reinvest into their next ideas.
Finally, it means that their start-ups get the leadership necessary to take the organization to new heights. It’s like they are giving their “brain children” a better environment to thrive. They do this by bringing in new leadership interested in nurturing and growing the business where the founders were dedicated to creating the business.
Why Focus on SaaS?
The real question to ask is why SaaS is experiencing so much attention from search funds. There are plenty of good reasons why so many are focusing on SaaS. These are some of the most important reasons from an investment perspective.
Recurring revenue. This is money that comes in month after month for businesses.
Predictable income. While there are ebbs and flows in subscription services, even for SaaS, it offers fairly stable and predictable income year over year.
Capital efficient. That means greater profit potential for search fund investors.
Some are concerned about the fact that SaaS search funds are getting closer to private equity funds like Vista, Thoma Bravo, Silver Lake, Sagemount, and others. This is good news as we are now seeing a growing number of search funds.
Criteria to Consider
There are certain criteria search funds are interested in when investing in businesses and they do reserve the right of refusal if they object to a certain investment opportunity. This is what most search funds seek.
Companies with annual revenues between one and 20 million dollars.
Slow, compounding growth.
Little funding. Bootstrapped companies.
Owner-led (in most instances).
Profitable or at least breaking even.
The idea is that companies meeting these basic criteria are poised for growth under new and dedicated leadership and management.
New Players Eyeing SaaS Search Funds in Latam
Below is a list of up-and-comers in the SaaS search funds space in Latam.
Garos Capital. Specializing in B2B software, scalable technology, and mission-critical solutions, the Garos Capital Team was founded by Oswaldo Garcia and focuses on providing competent succession by building on what already works. Garos Capital operates out of Brazil.
Tractus Capital. Led by managing partners Lucas Fiuza and Rodrigo Eddine, Tractus Capital seeks a medium-sized company in Brazil with revenues between $30 and $100 million annually. They wish to operate in education, healthcare, and B2B services.
Oca Capital. With managing partner, Anna Moreira Bianchi at the helm, Oca Capital seeks companies throughout Brazil with recurring or contracted revenue in the B2B sector.
Horizon Capital. Seeking a single company in Brazil, Horizon Capital is managed by Patricia Barbosa and Lucas Correa. They are specifically interested in businesses in growth industries with recurring revenue, low investment needs, and strong positive cash flow.
Caatingac Capital. Helmed by managing partners Rogerio Santos and Marcelo Gomes, Caatinga Capital seeks companies with revenues between R$60 and R$150 in high growth industries with low regulatory risks and the potential for geographic expansion. Sectors of particular interest include B2B services, education, health, financial services, and security and monitoring.
220 Capital. Managing partners Joao Luis Lima and Rene Almeida bring their talents to the table for 220 Capital. The firm is a search fund seeking opportunities in B2B services, education, cheers, financial services, logistics and transportation, and security and monitoring sectors.
SFG Capital. SFG stands for Search, find, and grow. It is a laudable goal this fund has dedicated itself to since its inception.
Arco Capital. It's a Brazilian search fund located in Belo Horizonte that is evaluating exciting opportunities in all sectors but paying extra attention to the logistics, technology and health sectors.
If you know of other search funds operating in Latin America, please list them in the comments below and we will update the article with new information as it arises.
A Different Approach – An Attempt to Build a SaaS Consolidator
Nuvini is not a search fund. Rather it is a new company attempting to acquire multiple SaaS companies. The ultimate goal is to build a SaaS consolidator similar in nature to Constellation Software and Opentext & Enghouse Systems.
Ultimately, SaaS search funds are building new wealth and bold opportunities in Latam. Now is an excellent time to take advantage of the possibilities they represent. Technology is the future and SaaS offers too many possible benefits for investors to ignore or dismiss.