Inside a $3M Self-Funded Search Investment Fund with Tony Cappaert

**Interviewer:** When somebody asks you today what you do, what do you say?

**Tony:** I typically say I'm a guy who did the venture-backed software thing and then bought a little place in West Virginia, a little cabin in the woods. Fast forward to today, we've got a portfolio of cabins and cottages. We raise capital from investors, we operate them as short-term rentals for cash yield. So I'm a vacation rental fund manager and a property manager. In the weeds doing turns all the time. And then I invest in a lot of search deals. I put together a small fund and we've done 16 deals in the last two years. So it's a mix: venture-backed software guy to SMB operator to investor.

If you ask my mom what I do, I play on the computer all day. If you ask my wife, same answer. If you ask my kids, when we go out to a cabin they ask, "Is this your home, daddy? Is this where he lives?" So it's a weird world.

**Interviewer:** Tell us about the business you co-founded.

**Tony:** It's Contactually. The punchline is we were a SaaS CRM for real estate brokerages and agents. Venture-backed business, grew it for eight years. We thought we were clever: a CRM that helped you stay in touch with your contacts, so Contactually. But no one could ever pronounce it. It was autocorrected to "contractually." People still say contractually to this day. It's like nails on a chalkboard, but it is what it is.

It was a SaaS CRM business. We grew it to $10 million of ARR and sold in 2019 to Compass, the big real estate brokerage. That was the nice win, the exit, and figuring out what was next. That's what led me to the SMB world.

**Interviewer:** Searchers always ask me what they should name their search fund. They spend days and months on it. I usually tell them not to worry about it. Just go start searching, call a broker.

**Tony:** We had worse ideas. Contact Samurai was one of them. There's an ethos with my co-founders and me: we're just gonna get stuff done and put it out there. We weren't overthinking it. The domain was available, so we bought it. We always thought maybe we'd change the name at some point, and we didn't. A year in, two years in, it felt like, oh, so many people know about us, it'll be disastrous if we change the name. We'll lose all that brand equity. Then you realize, the 10 people who know us are really gonna shed a tear. It just got worse every year, and we never did. Eight years in, it stuck.

**Interviewer:** Compass calls, you exit, you were pretty young, and you had to figure out what was next. Why did you choose the SMB path?

**Tony:** Initially I didn't have to. If you can sell to another software business and do the rest-and-vest thing, it's ideal. When you sell a venture-backed business to another software business, often not a whole lot's expected of you. You can rest and vest whatever equity you're getting. It was a cash deal with some equity upside. Compass was pre-IPO, so eventually the business did go through IPO. My objective was, can I add value but keep my effort minimal? That gave me an opportunity to figure out what was next.

My wife and I are big outdoors people. We always dreamed about owning a place in the woods to take our kids. We bought that little place in West Virginia. I grew up in the Midwest, blue collar family. I couldn't stand the idea of it sitting unused. So I figured I could put it on Airbnb. It was just printing cash. I went to my wife and said, why don't we buy a dozen of these cabins? My wife's an attorney, very conservative. She said, pump the brakes, we're not gonna be a landlord of dozens of properties in West Virginia.

It forced my hand. If I wanted to figure this out, what would it take to form a small fund, put some of our money in, put some friends' money in, and just buy these? That was the impetus behind Blue Maple. The first fund was right before COVID. Everything shut down in March or April 2020. But it ended up being a huge tailwind. Lots of guest demand. The first fund did really well. We raised a second fund to do another 100 properties, and we're currently buying out of that.

It was accidental. That wasn't an aspiration. But I like being in the weeds. I'm an operator. Unlike the venture world, with Blue Maple, I own it. We didn't raise any capital. It was very profitable from day one and spits off a lot of cash flow. It was like, oh, this is what a real business can look like that's actually profitable and growing organically, versus relying on raising tens of millions of dollars.

**Interviewer:** Ultimately you got into investing in self-funded search deals. How did you do that, and what is Workbench?

**Tony:** I had this business, got into the nitty-gritty weeds of property management, and started asking myself, I bet there are other businesses like that you can invest in or build or buy. Because I'm in DC and was a tech guy, I knew Steve Ressler, also a DC tech guy, who was investing in search. He said, have you heard of this Searchfunder website? This was two or three years ago.

I thought, I could do one or two deals, or I could form a small fund and put bigger checks to work in a lot more deals to diversify the risk. That's what we've done. Workbench is a small fund that invests almost exclusively in self-funded search. We've done 16 deals. Typical check is $150K. We have a clear sense of what we're trying to buy. Similar discipline to how we manage Blue Maple: consistently profitable, strong growth engine.

**Interviewer:** How much money did you raise?

**Tony:** $3 million. Average check is $150K. The first deal was $50K, then $75K. Then I thought, what am I doing? I'm gonna have to do way more deals, so let's just do $150K over and over.

**Interviewer:** What's the average transaction size?

**Tony:** They're almost all SBA debt deals. By definition, they're $1 million to $2 million of EBITDA. They're heavily levered, 80 to 90%. So $4 million to $6 million transaction value.

**Interviewer:** How much of the equity check are you usually?

**Tony:** A lot of search investors care a lot about how much equity they own in the business. I find that striking because, assuming SBA debt, you can't trip 20% anyway. So you're gonna be a small minority no matter what. Whether you're 2% or 4% or 6% or 10%, it doesn't really matter in my opinion. Our typical check is $150K. The typical equity raised is $500K to $1 million. So we're a minority of the equity stack and own probably 5% of any given deal.

**Interviewer:** Focus industries, geographies, searcher profiles?

**Tony:** There are two types of search investors. Traditional search tends to focus on businesses where they can be much more engaged, take a large position, own the majority of it, and grow aggressively, even if it hasn't done that historically. They're less levered, so the only way they can achieve results is aggressive growth.

I don't invest in those deals. I look for the opposite: much smaller deal, I know I'm not gonna have a lot of influence, I'm a small minority investor. It's heavily levered. We're sharing in that leverage with the searcher. We'll put in collectively, as investors, 10% to 15% of the deal, and we end up with 25% to 30%. We're stepping up.

We're looking for something that's been consistently growing 5% to 10% annually. Because it's levered, it allows us as investors to still achieve a 30%+ IRR in a conservative base case. We're not assuming any multiple expansion. If we buy it for 4x or 5x, we assume it's gonna sell for that. That's different from traditional, where they're assuming they're growing it more aggressively and reselling at a higher multiple.

**Interviewer:** They're almost LBOs, conservatively projected, not conservatively financed.

**Tony:** Exactly. These deals are risky. They're extremely levered. You're eating a ton of the cash flow paying the debt. It's easy for me to say I'm looking for something that's historically grown consistently, but I see a lot of modeling where the base case assumptions are just garbage.

It's easy for someone to see, oh, if you're buying it for 4x, are you selling it for 4x in the model? Even your passive self-funded search investor doing one deal a year can pick up on that. But the subtleties trip people up. Someone mentioned yesterday: you buy a business, the EBITDA margin's not gonna improve, certainly not in the short term. It's gonna drop. A lot of people assume, I'm gonna come in and cut a lot of OpEx and make things more efficient. We'll definitely do that from year one, but that's not a base case assumption.

A lot of people assume they're gonna return a lot of cash to investors early on because the business is profitable. That's a way of inflating the IRR for investors and keeps the MOIC relatively low. I see a lot of people shopping deals like that or being coached to. They're not great deals for the investor. The assumptions are nuanced, hard to catch that they're not conservative, but they're really not.

**Interviewer:** How do you think about a search investment, an operator, a business, the deal terms?

**Tony:** On the operator, I prefer people with actual operating experience versus deal experience. The deal's gonna be a short period; you're gonna operate for five to ten years. That matters more. In a business where I'm a small minority check, I want someone who's gonna call the right shots and has been there, done that. Folks with military experience typically have managed more blue-collar teams. They're great. It's a platitude, but there's a reason it's a platitude.

On the business side: consistent growth, long track record, but not extreme. Profitable. Pretty industry-agnostic, geo-agnostic. I tend not to like stuff that's super cyclical. If it's tied heavily to construction, that wouldn't be for me. But I've done some commercial roofing tied to more industrial, where it's less cyclical.

On deal terms: assuming investors come in with 10% of the equity collectively, we're getting stepped up to 20% to 25%. We're sharing in the leverage with you. The searcher owns the rest, 70% to 80%.

It's akin to angel investing in startup land. As an angel, someone's raising 10% to 20% and keeping the rest as founder. Angels have some influence, advise, help out, but don't pretend to have any real influence or board position. Angel investing is risky one-off, but a portfolio approach can work. In startup land, you have one giant winner and nine fails out of 10. In this world you still have a bell curve. As long as you're diversified and screening well, you can get a couple of fails, a lot doing pretty well, and a few outstanding, and drive a 25% to 30% portfolio return.

Lastly on terms: the step-up, a preferred return of 8% to 12% standard. When it doesn't make sense is when people don't understand the dynamic of the step-up. People try to think, well, you're putting in 10% of the proceeds, you should own 10% of the business. But that doesn't recognize the extreme risk of being 90% levered. And frankly, it's still a great deal for the operator: own a whole business, put little to no money in yourself, end up with the vast majority. A lot of traditional search investors blanche at that, but I think it can work and has worked.

**Interviewer:** Turnarounds okay or no?

**Tony:** No.

**Interviewer:** High-growth small businesses?

**Tony:** Okay if it's been doing it for 10 years plus.

**Interviewer:** It always happens the year after close where revenue kicks up.

**Tony:** I'm conservative in my underwriting. I've missed deals where that has happened, at least for the last two years. The stuff I don't invest in is not necessarily not quality. Great operators, great businesses, sometimes great deal terms. It's just the level of risk I'm not comfortable with.

**Interviewer:** Domestic only or international?

**Tony:** I've done two in Canada and I'm looking at a deal in the UK. Those are the three countries I'll do: US, Canada, UK. There are slight tax nuances investing in Canada and the UK, but it's not super disadvantageous as a US investor. I haven't sought it out.

**Interviewer:** We don't talk about the intangibles of being entrepreneurial business buyers enough. The support we have at home to do these crazy entrepreneurial things. What is home like for you?

**Tony:** We have three kids, six and under. My wife's a partner at a big law firm, so she has way less time than I do. I've tried to design a life that gives me a lot of flexibility. I'm pretty intentional. I don't work more than 40 hours a week. My laptop closes at 5:30 and doesn't open until 7:30 the next day. It doesn't open on weekends.

The time I'm working today is far less than 10 years ago, probably at least 50% less. But the quality of that time is higher. I'm forced to be much more efficient and highly levered with my time. I'm relentless about prioritization, focus, and leveraging my team effectively.

**Interviewer:** We as operators take all the time given to work on our business, whether 30 or 80 hours a week.

**Tony:** Life's too short. If an alien came to this planet and saw us staring at this inanimate screen all day, they'd say, what prison are these people being kept in? It's kind of messed up. I try to keep that philosophy in mind. I take a day off every three weeks to go in the woods, hike, kayak. Life is the focus and work is a component, not the component.

Selling my business filled what felt like a giant chip on my shoulder. It was nice financially, but it caused me to do this life refocus on what really matters. It was a lightbulb moment.

**Q&A**

**Audience:** Cash flow questions. Do we get cash flow from the businesses or wait until exit?

**Tony:** It's about 50/50. I've been at it just over two years. There's not a lot of cash flow we'd want the businesses to issue out. This is nuanced if you're investing in an LLC. There's phantom income. If the business is profitable, I have a tax burden as a partner if it's an LLC. So we'll get money from that, that's standard. If you're not planning to do that for your investors, you're really doing them a disservice because they're paying a tax bill on income they're not receiving.

A third of the businesses are distributing cash in significant amounts. Another 20% are paying the preferred in an actual cash dividend, around 8%. About half, we're not seeing anything today. Of those, the bulk are intending not to do it until exit. We're fine with it. We're not looking for cash yield. It's a way to juice the IRR, but if we can get a higher MOIC by holding and reinvesting in the business, I'd prefer that.

That's a weird part about self-funded: because you own the majority as the operator, you can operate it indefinitely. There's real risk as an investor, especially as a fund investor. I don't want to be managing fund one for 15 years. What I look for is, what's your intention? Not that you need to resell, but what is my opportunity to exit the position in seven to 10 years? That might mean you plan to resell, or there are other investors in the business who would buy me out.

**Interviewer:** The cost of capital has changed a ton. To the extent there's free cash, a year ago paying off seller debt at 10% was an interesting use of money. Now your SBA loan is at 11%, might as well pay that off. Investors a year ago, the pref was 7%, that was a nice rate. Now it could be 12% or 13%. They want to take that money out quickly.

**Don Meyer (Austin, TX):** How do you think about liquidity timeline and owner's compensation?

**Tony:** Liquidity timeline: seven to 10 years to exit the position. Even if we get cash flow earlier, that's nice, but it's the resale expectation that drives the bulk of the return.

Owner comp: short answer, I don't care. From the philosophy of being a small minority investor, I'm explicitly backing operators I trust in all senses of the word. Typically the docs state what the comp can be, and if you're intending to increase beyond X, you need approval. Honestly, when I see those docs, it's an administrative burden. I'd rather you do what you think is fair. If someone was pulling a million dollars a year salary, maybe I'd have a different attitude, but I don't see that as a real risk.

Think about it in terms of levers. If a searcher needs higher comp for family, that's okay. Tell us. But you can't also pull the lever of low pref to investors and try to get the most equity. You have to balance the levers you push and pull with your investor group.

**Michael:** Why are some portfolio companies not doing well?

**Tony:** Three categories. Two are largely out of their control. Sometimes sellers aren't honest, the business was actually worse than thought. There's one deal where they're starting in the hole. That's the unfortunate reality. Another is rising interest rates and a looming recession. Businesses we thought were recession-proof have seen drops in revenue and EBITDA, not really their fault. Long-term they're probably okay, and our intention is seven to 10 years, so it probably doesn't matter too much.

Then there are messes on the operator side. That can be fine. What I get most upset about is when I'm not aware of it. The lack of communication or lack of seeking help when something's going awry. During the search and post-close, minimum quarterly updates. Not pages and pages, just a basic email of highlights and lowlights. I'm shocked I have to say that, but it doesn't always happen.

There's one deal in particular: no updates, very uncommunicative, deal going sideways, trying to recapitalize and raise more money. I'm like, thanks but no thanks. There's no way I'm putting more money in. All the other investors are in the same boat. That could have been avoided just by being smarter.

I think about portfolio performance around: is this thing executing as we thought today? What's my current belief on the long-term potential based on what we know about the operator, industry, and business? And how communicative is the operator, how much intel do I really have? I use all three.

**Joe Hich (Omaha, NE):** When I look at funded searcher deals, there's more governance in place. With self-funded deals as an investor, there's no governance. Given the leverage profile and risk, that can be concerning. What have you seen or recommend?

**Tony:** My stance is different from most other people in this space. It's so analogous to angel investing: let's not pretend you have governance or real control over the operator when you collectively as equity investors have a small minority position. Instead, I'm over-indexing on assessing the operator and their trustworthiness.

I encourage them: if I or any of my investors can be of value, think of us as advisors. At minimum put together an advisory board you treat like a board. You may want to put together a real board so people have actual incentive, paying them or giving warrants. A lot of people seek out self-funded search because you have more control, a larger percent of the business, and don't have a board breathing down your neck. All good things. But it's foolish not to structure some sort of vested-interest board, even just an advisory board in practice.

**Interviewer:** In traditional search, the investors own the business and have hired an operator with carry. That operator can be terminated and removed. I don't know how the SBA would look at it if a board could remove the guarantor.

**Tony:** The PG is actually a nice governance device. When you have a personal guarantee on the debt, you have a lot of incentive. It rarely actually comes to bite you. But it helps ensure the business isn't going away. The slight disconnect: things that ensure the debt gets paid may not be good for the investor. The business can eke along and meet the debt obligation, but my investment can still go to zero.

**Joe:** Can you talk about your fund overview and dollars?

**Tony:** It's called Workbench Capital. About a dozen investors in the fund. About half are search investors doing one or two deals a year who found themselves, like I did, with a lot of inbound and not enough time for underwriting and diligence. They've explicitly told me, you're like my outsourced diligence, and I'm willing to pay for that. The other half are people from tech, high-net-worth folks who wanted access to the asset class.

Fees are standard fund fees: 2 and 20. 2% management fee, 20% carry on the upside. On a $3 million fund, the management fee is $60K a year. That's not a full-time job, so by definition it's on the side of my desk. The carry is nice upside. I'm a big LP in the fund. It's a way to achieve what I wanted, which was a diversified pool.

**Lisa:** I want to remind people there are some SBA nuances around distributions. If you're putting a fund together as an investor, reach out to an SBA lender who knows how to work with investors within SBA rules. The 20% threshold was mentioned. It's one thing to have a certain ownership percentage on your cap table, but if you're baking lots of stuff into the operating agreement where investors are paid $100K a year, that gets added to the inferred ownership for economic benefit. It's not exactly cowboy city, although with SBA loans there are no covenants, which is good. You don't have to ask your lender for permissions, but there are nuances.

In the SBA docs, they don't speak to distributions. You can pay distributions to pay taxes. Hopefully you're not over-distributing to the detriment of the company. Reach out to SBA lenders that know how to work with investors so you understand how much you're allowed to distribute.

**Will (Austin):** For the operators or searchers you back, do you meet them before they've identified an acquisition target, or with an LOI in hand?

**Tony:** It's about 50/50. Ideally I'm meeting people early in the search. Someone said to me 10 years ago: investors love to invest in lines, not dots. If the first time I've met you is when you have the deal in hand, it's hard to assess trustworthiness. If we've built a relationship over time and I've seen you consistently send updates and do what you said you'd do, that goes a long way.

There's tremendous value in building those relationships early on, on both sides. Because of the size of the deals, if you're only raising $500K of equity and I'm trying to put $150K to work, there's not a lot of room. So if I'm not meeting someone early, it's hard to get into smaller deals, which sometimes have better terms.

It's like buying a business: there's value in proprietary deal flow. Same in investor land. But I've done a lot of deals and know a lot of investors who share deals back and forth that are under contract. If it's big enough, I'm getting a call no matter what. In terms of outcomes or quality, deal terms are slightly better when I meet someone early on because it's a smaller deal, but performance seems similar either way.

**Mark Schwartz (Austin):** We talked about the downside case. Talk about the upside outside of quarterly updates. What in those reach-outs to ask for help has really worked well? What resonates?

**Tony:** Most search investors do a couple of deals a year and want to be more involved. Whether they're helpful is debatable. Doing 10 deals a year, I just don't have the bandwidth. I'm never gonna proactively ask, how can I help, how can you utilize me? But if you have an ask, please put it out there, because I'm decently connected. I try to be the node in the network pushing help out to others.

Regular updates. Don't assume I'll have continuity on the business or know the depth like you do. A refresher: this is what we do. A consistent format: here's what we said we'd do in revenue and growth, here's what we did. I see a lot of updates like "here's what we did," and I don't have context for whether that's good or bad. That's more unique to me because I'm spread across so many deals, but it's true even if you're doing one-off.

It's an easy way for the operator to set a mask when things are going poorly because they don't compare it to the goal. Showing the comparison to goal is most helpful. Make the asks explicit, especially intro-focused asks. That's where they can be most helpful.

**Interviewer:** Thanks, Tony.

**Tony:** If you want to reach out, tony@workbenchcap.com. I'm doing a lot of deals, but I love this community. Feel free to reach out.