“Search is 90 percent mental. The other half is physical.” -Yogi Berra (with some editorial liberty)
The great Yogi Berra may have initially been speaking of baseball when he uttered the quote above, but the principle applies equally to successfully operating a search fund.
Raw analytical horsepower, technical skills and knowledge are no doubt critical factors in executing a search and ultimately leading a high-performing company. We can think of these as equivalent to an athlete’s physical toolkit.
But the mental game—navigating the psychological challenges of search—is a crucial, albeit amorphous, success factor. In fact, if we analyze the most common searcher pitfalls, the root causes—at least in my estimation—are often related to challenges with managing our own psychology.
As a quick disclaimer: I am no psychologist and my classical training is limited to a few undergraduate courses and a shelf of pop-psych books. My observations are less academic, but based on my own experience as a founder/entrepreneur and now as an investor working closely with dozens of searchers and CEOs.
Let’s consider a few of those pitfalls, focused on the search phase.
Pitfall 1: Lacking a Bias to Action
The most successful searchers are thoughtful but tend to favor action. As concrete examples: they make quick decisions about disqualifying opportunities and avoid wasting time with non-sellers; they submit more LOIs than the less successful searchers; they jump into diligence quickly post-LOI and start sharing/circulating insights without waiting for all the data they eventually want to be provided.
Why might some searchers lack this bias to action? One reason: a lack of comfort with imperfection and a fear of making mistakes. Doing nothing—or more likely, spending more time analyzing or researching or discussing—can feel safer than making a choice that may turn out to be the wrong one. Getting comfortable with being uncomfortable and recognizing that search ultimately is all about runs scored (and you just need 1) and not batting average, is a helpful antidote.
Pitfall 2: Losing Objectivity
The best searchers are optimistic but conduct the diligence process with a healthy skepticism, an earnest desire to find truths—good and bad, and a willingness to walk away if diligence reveals unsolvable issues. Other searchers lose that objectivity and as they go through diligence it’s clear they are focused on seeing what they want to see and try to avoid looking in the closets most likely to contain the skeletons. Some investment memos read like sell-side investment bank pitches.
Why does this happen?
I’ll suggest a few possibilities:
(1) The possibility of failure for folks accustomed to uninterrupted strings of success can be so intolerable, so crushing to the ego, that there can be a temptation to close any deal—good or bad—just to avoid taking what feels like a loss and closing a search without an acquisition. Of course, over the long-term, being stuck in the wrong seat in the wrong business is far worse than not acquiring any company, but at least it delays that pain. Attaching a sense of personal self-worth too strongly to the outcome of a search can thus meaningfully drive this lack of objectivity.
(2) Confirmation biases are very real and we can be ingenious at finding plausible explanations for why what we want to believe is in fact the truth…or as the physicist Richad Feynman said, “You must not fool yourself, and you are the easiest person to fool.”
Pitfall 3: Failing to Try
The biggest pitfall for many happens at stage 0—failing to try to raise and manage a search fund because of excessive risk aversion. That’s not to say search is right for everyone. It’s clearly not. But sometimes we encounter folks who are energized by the idea and seem to possess the requisite toolkit, but they can’t quite get over the hump of launching because of fear—the fear of failing to acquire a company.
The data shows that individuals who launch a search but fail to acquire a company generally find wonderful roles and build terrific careers. Failing is a distinct possibility, but also highly recoverable over the long arc of a career, with downside further mitigated by some compensation paid during the search process. However, there’s a non-financial component to the fear of failure that doesn’t answer to facts and logic. Conquering those negative thoughts is the first major milestone for searchers.
Making observations on common pitfalls and their phycological underpinnings is easy. As Mr. Berra once said, “You can observe a lot just by watching.”