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Ask PG: Do you get companies wanting to acquire Y Combinator itself?
78 points by badclient on Nov 3, 2011 | hide | past | web | favorite | 27 comments
And how do you typically respond?

No; investment firms don't get acquired.

Investment firms get acquired all the time. There's nothing any less acquirable about an organization that deploys a pile of capital into third-party companies to produce return than any other type of company. Sometimes investment firms even sell chunks of themselves to the public, like BlackRock or Berkshire Hathaway (which is a slightly different story, and a different structure, but not in the important senses)

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.

By investment firms I meant VC funds and the like. I've never heard of a VC fund being acquired. (About 10 years ago a fund of Ron Conway's was acquired, but I believe it was fully invested then. I.e. the acquirer was buying a portfolio, not a business.)

Wow Paul. Someone creates a new HN handle just to refute something you've said and hide their identity. I wonder if the sign up IP was also anonymous. What happened to the days when Gates liked someone who gave him a hard time and stood up to him?

"Gates liked someone who gave him a hard time and stood up to him?"

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.

I never thought that. YC applications take hn handles. People have karma they are trying to protect. It is entirely possible that someone with high karma or some other motive would want to say something and not have it tied to them whether it be their HN identity or real identity (for those with links to a website in their profile). An anonymous comment. PG is "the boss" in more ways than one to the HN community.

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.

How is this Paul's doing?

I didn't say it was Paul's doing.

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.

Easy there, big fella. Why would the signup IP be anonymous? I only created a "new" HN handle because I didn't have one before, and making a handle on HN takes like four seconds (kudos HN team). I lurk on HN. There's no conspiracy here, and I'm not even sure to which of us you are ascribing fell motives.

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.

"I'm not even sure to which of us you are ascribing fell motives"

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.

Is it fair to call YC an investment firm? I've always thought of YC as being an incubator which dabbles in investing -- in the sense of creating wealth primarily via mentoring rather than the initial startup-picking process -- rather than as an investment firm which dabbles in incubation.

I'd be very interested to hear your opinion on the relative importance of the various roles YC plays.

Didn't Sequoia invest in Y Combinator, $8.25M in 2010 (http://techcrunch.com/2010/05/21/y-combinator-closes-new-8-2...)? I guess you can argue that LPs it's not quite the same as a direct investment.

Sequoia isn't a Limited Partner of YC, it's a Limited Partner in one of several funds in which YC is the General (Managing) Partner; I presume.

Fair enough. What if a PE group made you an insanely crazy monetary offer for majority stake?

Do you mean that sort of thing just isn't done? Or there are legal/other reasons why it can't be done?

I meant mainly that it isn't done. I'm not sure if there would be legal obstacles as well. E.g. we're not a C Corp, but a collection of LLCs.

YC is likely in the same situation as a famous Hollywood studio: you can buy the buildings and the logo, but once the people leave, the value is gone. So there is nothing worth acquiring.

You could say the same thing about a law firm, or an investment bank, or a talent agency. But people acquire both of them all the time, just like people acquire Hollywood studios all the time. The question is, "why would the people leave?" or "How do I ensure that they stay?" I think you have a point, I just don't think it is quite the point you are trying to make.

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.

But famous Hollywood studios do get acquired, making that an odd analogy. For example, Pixar was first part of Lucasfilm, then sold to Steve Jobs, then sold on again to Disney, and still seems to be doing well.

Importantly, the people went with it.

I think YC has a very strong brand among first-time entrepreneurs, in that pg has removed a lot of the intimidation surrounding VC firms. There's a lot of goodwill out there in the startup community for YC. Plus YC may just be the most succesful VC firm out there from the last few years, save for Accel

In fact a better question for PG would be, would YC license or franchise their brand (like TechStars has done). Except I already know the answer: No.

What about portfolio positions?

This statement is bait.

An alternative question: Does Y Combinator ever consider fully acquiring one of its companies? Surely there must be a few companies directly relevant to your business that you could acquire?

YC has hired and/or made partners of founders of companies it invested in. That seems more in line with its goals than buying companies.

PG said a couple of days ago "I never considered what I'd do if someone wanted to buy YC, because companies like YC aren't buyable. But even if someone wanted to buy it I could not imagine selling it, because I don't need the money and it wouldn't be worth the risk that the acquirer would ruin it."


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