Ask PG: Do you get companies wanting to acquire Y Combinator itself?
And how do you typically respond?
I'd be very interested to hear your opinion on the relative importance of the various roles YC plays.
To wit, this is a lot of the reason the storied SF law firm Heller Ehrman collapsed a few years ago: a large group I believe simultaneously left the firm, and the firm had losses, and there was no capital base left to draw on to get over bad times (for the record, a lot of professional services firms like investment banks used to be organized this way, and in bad years, the partners would be responsible for recapitalizing the firm. This is one of the reasons you so frequently saw IBs and other similar firms so anxious to sell themselves in the 90s, and it was, in fact, the primary driver behind the notoriously secretive Goldman Sachs going public: they had people rejecting partnership because losses made it unattractive, and their capital base was too unstable to compete in the global big leagues when it was just partners).
That said, Heller was cobbled together through a series of acquisitions, most notably for the HN audience, the famed Venture Law Group. And it's not like this was all terrible, the firm lasted for well over 100 years.
Similarly, people have acquired real estate brokerage firms, where you'd think there'd be even _less_ of value to acquire, but they do it profitably. I think Cendant paid like $50m for Corcoran Group. Organizing people and assembling clients is difficult: if you can buy an organized group of people with an active customer list/market position...there is some value there, it's just not going to be at sales/earnings multiples we are used to seeing with companies that own technologies.
Hell, giant BHCs are investment firms, they just focus on very different opportunities (sovereign debt, insured mortgage bonds, etc.) and they have a different regulatory regime and funding source (deposits, short-term debt finance)
Man Group plc is a large acquirer of investment firms and stakes in investment firms.
If you broaden the definition of "investment firms" slightly (from the top down an insurance company looks an awful lot like an investment firm with a strange 'cost of float' funding source), then they get acquired all the time. E.g. everything Sanford Weil has done in his life.
Edit: Ok I see what gave you that impression. The Gates comment. I don't mean to imply that this behavior is brought on by Paul at all.
Anyway, to actually add some relevant content to this thread in case anyone reads this, it's worth thinking for a second about what me and pg are talking about. For example, when he says someone bought a fund of Conway's, they were buying a portfolio, that's an interesting point.
Let's say you are a hedge fund. The hedge fund has some volume of LPs. The fund itself has no "capital" /in the fund/ (for this example). The owners themselves are additionally LPs, but the fund is paid 2% of the AUM and a further 20% of returns in excess of a benchmark blah blah blah.
It's perfectly possible to acquire this fund without acquiring the portfolio at all: the ownership of the portfolio remains with the LPs. This is similar to buying a bank. You don't think of yourself as buying the deposits the bank holds, right? The scale of the deposits, as well as the scale of the AUM for the hedge fund, are a large determinant in the value of the enterprise because their revenues are a function of this number, but you don't own it.
What pg is talking about is different. If Conway sells a fully invested portfolio, ownership of those positions transfers from Conway and his LPs to the new person, but there is likely still a residual firm there, albeit with minimal assets: copiers, chairs, computers. The entity that exists to decide where to make investments is financially separable from the investments.
The thing is, with a VC fund, there is just...no one has ever built a VC fund that was so awesome that it was worth money on it's own, where it couldn't make MORE money by just investing capital on behalf of its own LPs. This is partly because VC is a very difficult business to scale (it's also partly because most VCs are not good at their jobs, if you consider their jobs to be generating investment returns, rather than accreting LP capital). Generally, if you take a VC who runs a $100m and give him $1bn, he can't generate the same returns on that fund.
In fact, cash flooding the VC market in general hurts VC returns because contrary to popular belief the "investment ground" (which, for most VC funds, is actually a limited geographic area, market, and bite size) generates only so many good deals per unit time.
For other types of investment, this is not the case, and they may benefit from economies of scale. Say your investment strategy is to roll deposits into longer-term high-grade securities. Have more money, make more money. In fact, return on capital goes up because this business has economies of scale, unlike VC investing.
Other investment firms will fall somewhere in between: there are hedge funds who, with access to greater capital (essentially a distribution problem in hedge funds. For example, if you work at a large firm with a lot of high net worth individuals, the firm may set up 401k-type plans with hedge funds. GS employees, for instance, can choose to put their money in AQR Capital instead of say...a Vanguard index fund or whatever you have your workplace, access to this distribution can be a huge boon for hedge funds who's model scales. Unfortunately most hedge fund managers are terrible at their jobs and their strategies are losing to begin with, never mind scale (unless you look at their strategy as "making money for myself", in that case most of them are geniuses. Even if you barely ever beat a benchmark like the S&P and it takes you a lot of risk and cost to do so, you still get paid extremely lavishly if you are effective at raising large amounts of capital).
This is why you occasionally see banks acquiring hedge funds (although, honestly, I think this is generally a pretty bad strategy). They aren't acquiring the portfolio of investments, like pg is describing with Conway, they are acquiring the future return stream of the organization that makes and manages those investments, and yes, of course, there is a lot of risk around losing the people, so these deals generally come with lockups of one kind or another (payment in restricted stock grants, generally). This is partly why people at investment firms are paid so lavishly.
Neither of you. PG can't be blamed for people feeling a need to suck up to him. You can't be blamed for having a motive (if that was the case) to protect your identity.
One last thing about this: pg is not my boss. I don't know him and we have no relationship, consequently, I cannot "stand up" to him, and he cannot "stand up" to me.
A similar situation happened the other day. There was a thread about race and somebody commented that none of the "leaders" had anything to say. I wonder why that was?
While apparently this is not what you did, the fact is, it wasn't a stretch to think that is what had happened.
I wasn't disagreeing with what you were saying by the way.