Issue #15 - Beware the Charlatans
A Quick Note:
Majority Search is, for now, just a two-person firm. At present, our resources are stretched thin (this is a good and welcome problem). As a consequence, our publishing of Letters of Intent has been slower than we'd like recently and the issues may continue to be more erratic or shorter than usual, or both, until we once again have more capacity for projects less central to the job we've been hired to perform: supporting our searchers in their efforts to find the very best acquisition candidates available in the lower-middle market. Thanks for your continued readership.
Schemers and Crooks Are Among Us
Over the past few days as the story about the sudden collapse of the crypto trading platform FTX and its eccentric founder Sam Bankman-Fried (SBF to his fans) has unfolded, like many others, I've been intrigued. We don't know yet whether fraud was involved or it was merely negligence or incompetence that destroyed billions of dollars in value and capital in just a few days, but it has got me thinking.
Scam artists and white-collar criminals exist at all times and in every industry. Closer to home, the search fund community has historically been a high trust ecosystem where reputational risk and the close-knit referral base required to gain entrance have largely mitigated the presence of bad actors. That said, with the growth of the model and entrepreneurship through acquisition more broadly, we are likely to see periodic cases of criminal and fraudulent behavior, which is something I'd personally very much like to avoid. For those thinking that this cannot happen, I've been defrauded in a search deal and, more recently, discovered some very questionable prior behavior from a sponsor that came out during a background check. Given the risks and hopes for a long-term relationship with a high-integrity partner, in most cases anything but a pristine history is disqualifying in my opinion.
The Importance of Trust
So what? Why does it matter if a few bad apples fall in the orchard? As long as there are still vastly more honest players in the market, won't the system still function? Can't we just impute this as 'the cost of doing business'? Perhaps. But, I believe that misdeeds impact not just those directly affected, but everyone.
As trust erodes in the broader system, we might expect to start seeing things like slowing deal velocity, a resultant rise in the cost of capital, and potentially an exit of the best and most ethical participants, further helping to create a vicious downward spiral where the presence of morally deficient people becomes commonplace. That, while extreme and unlikely to occur to any significant degree, would be awful.
To counteract that possibility, we all need to do our part or we may find that we will all be departing. And the best way to do our part is to be trustworthy. Trust is the be-all, end-all to the formation of functional markets and relationships.
I'll close with a few recent tweets from a private account that I follow that offers a few more related thoughts: