Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: I'm excited with for today's episode. I'm only really excited to
Speaker 2: talk about search funds if I'm being honest, because.
Speaker 1: I want to get straight into you your future as
Speaker 1: an h VAC tech.
Speaker 3: Yeah.
Speaker 2: I was reading this article as a guide, you know, right.
Speaker 1: The appeal to the search fund is that, like, who
Speaker 1: among us hasn't wanted to own a lucrative HVAC business
Speaker 1: in New Jersey?
Speaker 2: Just run into the swamps of New Jersey and get
Speaker 2: into waste management. Wait, that's a different thing. It is similar,
Speaker 2: I'm sorry about Yeah, right right, right, right, right, right right.
Speaker 1: Hello, and welcome to the Money Stuff Podcast, your weekly
Speaker 1: podcast where we talk about stuff related to money. I'm
Speaker 1: Matt Levien, and I write the Money Stuff column.
Speaker 2: For Bloomberg Opinion, and I'm Katie Greifeld, a reporter for
Speaker 2: Bloomberg News and an anchor for Bloomberg Television.
Speaker 1: Wouldn't that be a great story, though, if you're like
Speaker 1: some twenty eight year old Harvard MBA and you're like,
Speaker 1: I'm gonna start a search fund, and you scour the
Speaker 1: earth and you send cold emails to a bunch of
Speaker 1: people and you end up getting into the waste management
Speaker 1: business in New Jersey, and you're like, oh great, now
Speaker 1: I can be my own boss and like run this
Speaker 1: licrative business. And then like the mob shows up.
Speaker 2: Yeah, surprise, Yeah, now you have you have many bosses,
Speaker 2: and they'll kill you. I'd never heard of search funds before,
Speaker 2: even as a dedicated money stuff reader. I guess I
Speaker 2: never absorbed it, but I was so charmed by this piece.
Speaker 2: This is probably the longest article I've read in a
Speaker 2: long time, but I wrote it start to finish in
Speaker 2: Business Insider.
Speaker 1: Right, there's a Business Insider story about search funds. I
Speaker 1: love search funds so much because search funds are like
Speaker 1: if you get a business degree from a fancy school,
Speaker 1: the highest calling could be running a duct cleaning business,
Speaker 1: or I always say pest control. Like pest control to
Speaker 1: me is the archetypal search fund. I don't know if
Speaker 1: it's actually that common search fund use, but basically, right,
Speaker 1: a search fund is like you go to business school,
Speaker 1: you graduate, you raise a like six or seven figure
Speaker 1: fund from investors. The investors, I think are often like
Speaker 1: your family, but sometimes are professional investors. Because the returns
Speaker 1: on search ones are really good. And then you go
Speaker 1: out and search for years to find a boring small
Speaker 1: business who's somewhat aging owner is looking to get out
Speaker 1: of the business and sell to some young whipper snapper,
Speaker 1: and then you buy it and then you run it,
Speaker 1: and you use the tips and tricks that you learned
Speaker 1: in your two years of business school to like optimize it,
Speaker 1: and you're like a little private equity king pin. Except
Speaker 1: instead of being like an associated a big private equity
Speaker 1: fund is just you. And instead of like rolling up
Speaker 1: a giant business, you like buy one pest control company
Speaker 1: and then you run the pest control company.
Speaker 2: It's so good, it is so charming. And I mean
Speaker 2: reading this Business Insider article, Okay, so it's told through
Speaker 2: the lens of this man, Dan Schweber, I believe his
Speaker 2: name is. And I mean I thought that I deal
Speaker 2: with a lot of rejection as a journalist. Being a
Speaker 2: search fund founder, what do you call them? Just a
Speaker 2: search fundor a searcher. Being a searcher sounds absolutely grueling
Speaker 2: in terms of dealing with the word no. By the
Speaker 2: end of it, he sent thirty six hundred initial emails,
Speaker 2: three hundred and seventy five introductory calls, just thirty intro
Speaker 2: meetings and six signed letters of intent and this business
Speaker 2: that he ended up buying, which is an HVAC company.
Speaker 2: He emailed the guy twelve times, as you pointed out
Speaker 2: in your column, And I don't think I've ever made
Speaker 2: it to the twelve email. But I don't think I've
Speaker 2: sent twelve emails to the same person pitching them, which
Speaker 2: is I don't know. It was inspiring. It was inspiring
Speaker 2: on so many different levels, Matt.
Speaker 1: How persistence pays off by getting you an HVAC.
Speaker 2: Company exactly, but just sends a dozen emails. Maybe I
Speaker 2: can own an HVAC company.
Speaker 1: What I love about it is that this was a
Speaker 1: sort of novel idea at some point, you know, twenty
Speaker 1: years ago, and it has now really like pervaded the
Speaker 1: top business schools, so that a lot of people are
Speaker 1: doing this, which means that if you run an h
Speaker 1: BAC company, you are constantly, constantly getting cold emails from
Speaker 1: searchers and so like. Of course you had to email
Speaker 1: I twelve times because the guy who was like, ah
Speaker 1: more search funds.
Speaker 2: Yeah, it is.
Speaker 1: Such an amazing time to be in an unglamorous business
Speaker 1: because there are so many people with MBAs who want
Speaker 1: your glamorous business. Right. A lot of them are searchers,
Speaker 1: but some of them are like private equity funds doing
Speaker 1: roll ups of like pest control or whatever. Right, Like,
Speaker 1: there are a lot of buyers to choose from if
Speaker 1: you happen to own an HVAC company. And I don't know,
Speaker 1: it's just so strange to me to think, like, you're
Speaker 1: a plumber, you like work in plumbing for twenty years,
Speaker 1: you start your own plumbing company, you like go around
Speaker 1: doing plumbing, and then like you occasionally check your email
Speaker 1: and there's like four hundred emails from private equity firms
Speaker 1: and MBAs. It's just like a strange dynamic.
Speaker 2: It's a seller's market. I wish I had a plumbing
Speaker 2: company to.
Speaker 1: Sell, right, And Like, one thing I wondered about is like,
Speaker 1: if you are a search funder and you buy yourself
Speaker 1: a plumbing company in a year, do you flip it
Speaker 1: to another search funder, because like the demand keeps growing.
Speaker 2: I do want to talk about that how you exit
Speaker 2: it as a searcher. But you seemed charmed by particular
Speaker 2: from getting into the shoes of the man who owned
Speaker 2: this HVAC company. The article also got into the shoes
Speaker 2: of the employees who worked there. I think that's another
Speaker 2: interesting level. Like, Okay, the founder and owner of the
Speaker 2: business is getting a bunch of emails. How do the
Speaker 2: employees react when you tell them this thirty two year
Speaker 2: old now owns the business and you work for him
Speaker 2: and he's the CEO, and you know he's some Harvard MBA.
Speaker 1: Okay, here's how I think about this. I think in
Speaker 1: the olden days, people would start businesses and they would
Speaker 1: be like, you know, high school educated, like you know,
Speaker 1: they start a business because like they're just scrappy entrepreneurs,
Speaker 1: and then they would run the business for a while.
Speaker 1: They'd have employees, and they would have like a kid,
Speaker 1: and they'd be like, well, of course the kid is
Speaker 1: going to take over the family business. But because they're
Speaker 1: rich now, instead of like the kid just like you know,
Speaker 1: starting at the family business. After high school, they send
Speaker 1: the kid to Harvard Business School and the kid gets
Speaker 1: all these like new fangled business ideas and he comes
Speaker 1: back at age twenty eight and he's like, I'm going
Speaker 1: to take over the family business and run it in
Speaker 1: a modern way, and like, you know that's good, right,
Speaker 1: Like you have like the scrappy founder, and then you
Speaker 1: have the next generations like professional and educated. But the
Speaker 1: chain has been broken. So now like the founder gets
Speaker 1: rich and the kids are like, well, I don't want
Speaker 1: to work at the family h fact business sounds terrible, right,
Speaker 1: So the kids go off and like become documentary filmmakers.
Speaker 1: And meanwhile, like, it's really hard to get into Harvard
Speaker 1: Business School now, So you can't just get into Harvard
Speaker 1: Business School by being the like shiftless child of an
Speaker 1: h back founder. But all the people in Harvard Business School,
Speaker 1: you know, there's still a demand for Harvard MBAs to
Speaker 1: run h back companies. So now instead of it like
Speaker 1: being the kid of the founder, it's just like some
Speaker 1: random person who happened to get a Harvard MBA and
Speaker 1: now wants to run the you know, hvac business in Peoria.
Speaker 1: So it's disaggregated the like family you know family family air. Yeah,
Speaker 1: instead of like the son taking over the family business
Speaker 1: with his fancy Harvard degree, it's like some random person
Speaker 1: takes over the family business with his fancy Harvard degree.
Speaker 1: But you know, it's like still kind of the same.
Speaker 1: It's like the employees still have to work for a
Speaker 1: thirty two year old who hasn't marked the back. You know,
Speaker 1: it's like it all makes a kind of sense. It's
Speaker 1: just become more like coldly logical and market driven.
Speaker 2: Something that I kept thinking about while reading this article
Speaker 2: for some reason, a meme that keeps popping into my
Speaker 2: various algorithm is, you know, a cartoon guy hand in
Speaker 2: his face in the middle of the circle, and it's like,
Speaker 2: I meet a girl. Her dad owns like a twenty
Speaker 2: million dollar a year, like waste management company or pest
Speaker 2: control or something, but he doesn't want to like hand
Speaker 2: the keys to his ambitious future son in law, and
Speaker 2: then we stop talking, which it would be a lot
Speaker 2: funnier if I could show the meme, but I promise
Speaker 2: it's funny, but it kind of reminded me of this
Speaker 2: sure anyway, I thought also it was interesting. You know,
Speaker 2: this article described it as a phenomenon happening around like
Speaker 2: late twenty year old and like graduates in their thirties,
Speaker 2: and I think it speaks to something about millennial culture,
Speaker 2: that there is that desire to run into the woods
Speaker 2: or go to Peoria and run an HVAC company, versus
Speaker 2: stay in a city and try to climb the corporate ladder.
Speaker 2: Like this probably happens with every single generation, but it
Speaker 2: does feel like it speaks to some sort of disillusionment.
Speaker 1: Yeah, I don't know. You think about like what you
Speaker 1: can do with your MBA, right, Like if you're a
Speaker 1: sort of corporate type, like you can go work in
Speaker 1: private equity, and you can start by building models and
Speaker 1: doing kind of grunt work, and your hope is that
Speaker 1: in ten or fifteen years you'll be you know, kind
Speaker 1: of leading big deals and sitting on boards of companies
Speaker 1: and kind of running portfolio companies. Or you can just
Speaker 1: do deals and run companies yourself immediately, with the trade
Speaker 1: off being that those companies are small pest control companies
Speaker 1: in Peoria. But like maybe that's good trade, right, Like
Speaker 1: maybe you want that trade, right, Like I am sure
Speaker 1: that in like ten years you'll be reading about people
Speaker 1: who started as search funders and bought like one HVAC
Speaker 1: company and then bought another HVAC company and then became
Speaker 1: like billionaire private equity kingpins by like doing roll ups
Speaker 1: of their industries. There's kind of two paths to that outcome, right,
Speaker 1: There's like the outcome of being a private equity associated
Speaker 1: and there's the outcome of taking over an HVAC company.
Speaker 1: And I bet the second path is more we're likely
Speaker 1: to get you to the billionaire Kington outcome at this
Speaker 1: point than like being a private equity associate.
Speaker 2: Well, I think you have to have some ridiculous amount
Speaker 2: of just self confidence or real earned ego to think
Speaker 2: like I'm going to go in and I am going
Speaker 2: to ceo this small company, like it hasn't been ceoed before.
Speaker 1: Yeah, it's here like a little bit more confident, a
Speaker 1: little bit more risk taking. You're not like just following
Speaker 1: the expected prestigious path of going to a private equity
Speaker 1: fram and you're like, I'm going to strike out on
Speaker 1: my own and see what happens. Well, you know, it's
Speaker 1: interesting because like also in ten years, this will be
Speaker 1: such a like well trodden path, you know, they'll be
Speaker 1: like incubators for search funds and like it'll be so
Speaker 1: standardized that it won't be like particularly entrepreneurial and risky anymore.
Speaker 1: But right now it's still a little entrepreneurial and risky.
Speaker 2: So you're saying I should get it now, is what
Speaker 2: I'm hearing.
Speaker 1: I don't know I was gonna say you should have
Speaker 1: gotten in five years ago. I have no idea what
Speaker 1: the market is like. I think you shouldn't get in
Speaker 1: ten years.
Speaker 2: But yeah, get really pandemic.
Speaker 1: I think this is great. I feel like we've had
Speaker 1: a number of like career ideas for each other during
Speaker 1: the course of this podcast. But you like taking you
Speaker 1: raising money from friends and family to take over an
Speaker 1: HHAC company. I like it. I didn't know that you
Speaker 1: had such an intense interest in HPAC.
Speaker 2: I'm not specifically h we're using a horse barn, but yes,
Speaker 2: that's the thing.
Speaker 1: I don't know if that works. I think like the
Speaker 1: whole point of this is that you're taking over like
Speaker 1: non glamorous family businesses from like aging founders who don't
Speaker 1: want to do it anymore, not like people's like delightful
Speaker 1: lifestyle businesses.
Speaker 2: But there's there's plenty of people who would think that
Speaker 2: a barn is un glamorous.
Speaker 1: Do any of them own barns?
Speaker 2: No, they don't.
Speaker 1: It's your problem. You have to buy the barn from
Speaker 1: someone who runs the barn. I don't know.
Speaker 2: I'm reading this have like a renewed I'm reinvigorated, and
Speaker 2: you know, I thought I wanted to be a podcaster
Speaker 2: or I did that, It's okay. I wanted to be
Speaker 2: a novelist, still working on that, but I think that
Speaker 2: what I really want to be is a searcher. I've
Speaker 2: always wanted to buy a trissage barn, but now I
Speaker 2: have a fancy, not yet saturated sort of term to
Speaker 2: apply to it.
Speaker 1: Yeah, I mean that is really like. The thing about
Speaker 1: the Search Funding is like it's given people a set
Speaker 1: of concepts to sort of standardize and think about and
Speaker 1: justify this thing of like I want to buy an
Speaker 1: existing small business and run it according to my own
Speaker 1: you know ideas. I think like a while ago, if
Speaker 1: you're in business school and you're like, I want to
Speaker 1: run an HVAC company, people would be like, that's a
Speaker 1: strange thing to want to do with your forward MBA,
Speaker 1: Whereas now it's like totally standardized. I was like, oh,
Speaker 1: of course the Search fund. And similarly, I feel like
Speaker 1: this is going to be like season two of the
Speaker 1: podcast is going to be You're going to go to
Speaker 1: investor meetings. We're going to record them. People are going
Speaker 1: to be like, of course, here's a million dollars you're
Speaker 1: going to people. I think send every horse barn in
Speaker 1: America at.
Speaker 2: Least twelve at least twelve. If anyone listening right now.
Speaker 1: You own cold email, you'll show up on a horse.
Speaker 2: That's true, and they'll know I'm the real deal. They won't.
Speaker 1: Yeah, That's like one thing in this h RAG article
Speaker 1: is like, you know, the guy who owned the h
Speaker 1: RAG company was like, all these search funders emailed me
Speaker 1: and I was like, all right, come out and they're like,
Speaker 1: let me check my schedule. But this guy and the
Speaker 1: guy who bought the company from him, I was like,
Speaker 1: I'll be there tomorrow, right, You're going to show your
Speaker 1: enthusiasm by like showing up on a horse.
Speaker 2: That's the other thing I found charming is that it's
Speaker 2: just like old fashioned sort of you know, I'm going
Speaker 2: to come up and meet you in person. I'm going
Speaker 2: to shake your hand and I'm going to look you
Speaker 2: in the eye. And that has a lot of currency
Speaker 2: with the people who are selling these un sexy businesses.
Speaker 1: Right because these are people who have built businesses over
Speaker 1: years and they are the owner, but they also like
Speaker 1: work closely with the employees, and they are not just
Speaker 1: maximizing shareholder value. And if they were to sell to
Speaker 1: a private equity firm that laid off all the employees,
Speaker 1: they'd be sad and like they live in the community,
Speaker 1: they'd be looked down upon. So if they can sell
Speaker 1: to someone who gives them a firm handshake and looks
Speaker 1: them in the eye, and so they'll take care of
Speaker 1: your employee. You know, it's a very family business oriented,
Speaker 1: you know, kind of tool making environment, and you're not
Speaker 1: just paying the highest price to maximize shareolder value. You're
Speaker 1: kind of taking over a business that has lies to
Speaker 1: a community.
Speaker 2: Yeah, I do want to talk about how Schweber is
Speaker 2: going to get this big payout. The business insider says
Speaker 2: that he's in for so if all of this goes
Speaker 2: according to plan, he's in for a big payout. Of
Speaker 2: the search entrepreneurs who eventually sell their business, just under
Speaker 2: a quarter of them get nothing. Another twenty seven percent
Speaker 2: get less than four million dollars in equity, twenty eight
Speaker 2: percent get four million dollars to ten million dollars. The
Speaker 2: luckiest eighteen percent get more than ten million dollars. So,
Speaker 2: you know, after I buy the horse barn, I have
Speaker 2: to stay there and make it better and grow it.
Speaker 2: And then the idea is that I'm going to sell
Speaker 2: it in like a decade and make a big profit.
Speaker 1: I can imagine some people go into it thinking like
Speaker 1: I'm going to make my life in p area running
Speaker 1: an HRC company. But you know, most of them are
Speaker 1: like business school people, and like they're choosing between this
Speaker 1: and private equity, and yeah, they want to do a flip, right.
Speaker 1: They want to like buy a sleepy family business that
Speaker 1: isn't you know, optimizing everything, and they want to spruce
Speaker 1: up the financials and maybe do a few like tuck
Speaker 1: in acquisitions and then sell it to you know, a
Speaker 1: sort of more scale buyer, sell it to you know,
Speaker 1: private equity roll up or something for you know, if
Speaker 1: you can buy it at like one time's revenue and
Speaker 1: sell it at you know, five times revenue, then they
Speaker 1: you know, make a lot of money.
Speaker 2: And so the investors who.
Speaker 1: You know, or you retire or something on it.
Speaker 2: Or you become an investor in search funds. Sure, so
Speaker 2: if you invest in a search fund, you're in it
Speaker 2: for the long haul. You're in it until there's a flip.
Speaker 1: I don't really know the terms, right, Like you could imagine,
Speaker 1: you know, the investors just getting a share of the
Speaker 1: cash loough and being happy with never flipping it. But no,
Speaker 1: most of them want to cash out, and yeah, you're
Speaker 1: in it for a flip, and you know, you say
Speaker 1: the long term. I don't know what the holding periods are.
Speaker 1: But like you know, again, the sort of alternative to
Speaker 1: this is private equity funds. And so yeah, you might
Speaker 1: think I'm going to take over an HVAC company. I'm
Speaker 1: gonna learn hvac, I'm gonna do some deals. I'm gonna
Speaker 1: spruce things up that won't take me more than five
Speaker 1: years until I can flip the company, right Like, it's
Speaker 1: not necessarily your family business for the rest of your life.
Speaker 2: I have to imagine a lot of these fail I
Speaker 2: don't know.
Speaker 1: I don't know what fail means. I mean, right like,
Speaker 1: probably some of them, at least of them, they don't
Speaker 1: scurce them up, and then they get bored and then
Speaker 1: they're like, I were shutting this down and I'm going
Speaker 1: back to New York. But right like, you're taking were
Speaker 1: like a stable business with customers, and you know, you
Speaker 1: like that, You're not founding a business, right like, your
Speaker 1: downside is not as bad as if you were founding
Speaker 1: a business from scratch, right you know that this company
Speaker 1: already has a business and customers and you know, revenue
Speaker 1: and employees, and probably in many cases it could operate
Speaker 1: on its own that much from you, So you might
Speaker 1: not be able to do a flip. You might like
Speaker 1: get bored and close it down rather than eke out
Speaker 1: a very small profit for yourself every year. But like
Speaker 1: you're not going to lose all your money.
Speaker 2: Yeah, that's true. I mean to your point that they're
Speaker 2: not founding a brand new business. So I was thinking
Speaker 2: about this in terms of, like, you know, maybe these
Speaker 2: smart young people with these big degrees, maybe their brain
Speaker 2: power would better serve the economy by putting that towards
Speaker 2: new ideas.
Speaker 1: Why degrees are not in astrophysics, right, there's there masters
Speaker 1: of business administration, right, they've learned to administer businesses. I
Speaker 1: think it's like a really good thing for the economy
Speaker 1: if like the local sort of mid sized businesses get
Speaker 1: really good business administration, Right, if like the Harvard MBA
Speaker 1: is instead of just going to work in finance, like
Speaker 1: actually go and work for real companies that do you
Speaker 1: know HVAC.
Speaker 2: This reminded me, I know these people who there was
Speaker 2: a bed and breakfast for sale in a small Pennsylvania town,
Speaker 2: really charming, and it was an existing business with existing
Speaker 2: customer base who they had a lot of repeat customers
Speaker 2: and the owners were retiring and they bought the business
Speaker 2: and it's going really well.
Speaker 1: And those people are named.
Speaker 2: Bob and Julia. And Friday is my dad's birthday, So
Speaker 2: happy birthday, Dad, Happy.
Speaker 1: Birthday, Bob. I meant to tell you that I saw someone.
Speaker 1: Hold on, that's you, Okay, that is me. I mean
Speaker 1: it's your's your home studio. You need to go to
Speaker 1: the ville.
Speaker 2: It's literally a hairball. He's fine, he's fine. Windsurf windsurf
Speaker 2: man buying companies, Yeah, but not really, not really buying
Speaker 2: the company. Well kind of set the scene.
Speaker 1: Windsurf is like an AI coding assistant company, and of
Speaker 1: course it was in talks to be acquired by open
Speaker 1: Ai for a while. The rumor was that open Eye
Speaker 1: was going to pay three billion dollars to acquire it,
Speaker 1: which I think means to acquired in the normal way,
Speaker 1: like buy all the stock of the company. But they
Speaker 1: couldn't get to an agreement on some weird terms, including
Speaker 1: like sharing the technology with Microsoft. It's open I walked
Speaker 1: away and then Google did this weird deal where it
Speaker 1: paid two point four billion dollars to Windsurf for basically
Speaker 1: like some but not all, of Windsurf's employees. Like basically
Speaker 1: Google was trying to acquire like the top talent from
Speaker 1: Windsurf to feed into the mall of like having AI
Speaker 1: researchers do AI at Google. And they've got like a
Speaker 1: non exclusive license to Windserf's product. But it seemed pretty
Speaker 1: clear that it was a talent acquisition, but they didn't
Speaker 1: buy the company. They got no stake in the company,
Speaker 1: but the shareholders of the company mostly got cashed out,
Speaker 1: like the venture capitalists got paid off for their stock.
Speaker 1: So Google paid for the stock of the company, but
Speaker 1: didn't acquire the stock of the company. They just got
Speaker 1: the talent and like left of the company on its own.
Speaker 1: And this is kind of a weird outcome, in particular
Speaker 1: for the employees of Windsurf who didn't go over to Google,
Speaker 1: because they were kind of left in this company that
Speaker 1: had some cash and like a business, but no more
Speaker 1: of its founders. And it's kind of like it loose ends.
Speaker 1: And then a couple of days later, Cognition, another AI company,
Speaker 1: bought the rest of Windsurf for an unspecified price that
Speaker 1: might have been just like here, you're gonna have a job,
Speaker 1: and so yeah, that was the deal. It was like
Speaker 1: quite controversial. There'should a lot of the deals kind of
Speaker 1: like this in the AI space, where you know, you
Speaker 1: have very big tech companies that want to pay a
Speaker 1: very large amount of money for AI talent, and the
Speaker 1: top AI talent often has their own startups, and their
Speaker 1: startups often have the effect of proving that their founders
Speaker 1: are good at AI stuff but do not have products
Speaker 1: that the big tech companies want. And historically the way
Speaker 1: that ended was the big tech companies would buy the startup,
Speaker 1: shut down the product that they didn't want, and like
Speaker 1: give the employees jobs. But that has changed, like that
Speaker 1: aqui hier model has changed, and I don't quite know why.
Speaker 1: Like the leading theory for why it has changed is
Speaker 1: that in the Biden administration there was a lot of
Speaker 1: anti trust scrutiny of big tech companies buying even small startups,
Speaker 1: and so they stopped doing aqui hiers and started doing
Speaker 1: just hires. Yeah, but the other thing that is happening
Speaker 1: is if you're Google or Meta whoever, it's sort of
Speaker 1: dawning on you, like, well, we don't really have to
Speaker 1: acquire the company. We just have to pay the founders
Speaker 1: to come work for us. And we have to pay
Speaker 1: them a lot because they have the startup. I have
Speaker 1: equity in the startup, so like they have to give
Speaker 1: up the equity in the startups, we have to pay
Speaker 1: them a lot. But like, do we need to acquire
Speaker 1: all of the employees. Do we need to pay the
Speaker 1: vcs the full value of the company or can we
Speaker 1: just like acquire the founders and like let the rest go.
Speaker 1: So there's a lot of talk about like the social
Speaker 1: contract of startups and vcs being violated by these deals,
Speaker 1: and I feel like, so far, actually the social contract
Speaker 1: holds up pretty well. We're like the vcs who fund
Speaker 1: it Windsurf. You know, they got several times their money, right,
Speaker 1: Like they got rewarded for funding Windsurf, even though I
Speaker 1: think people would say in a sense like the product
Speaker 1: isn't what's making the money. It's just like the founders
Speaker 1: are going somewhere else is what's making them the money.
Speaker 1: But you know, and the employees ultimately ended up his jobs,
Speaker 1: although not at Google, So like the social contract sort
Speaker 1: of held, but it's like it just feels like it's
Speaker 1: a little bit under pressure, where like, you know, the
Speaker 1: next deal Google could just be like, we're going to
Speaker 1: pay the founders, you know, a billion dollars each, and
Speaker 1: we're not going to cash out of the vcs.
Speaker 2: Yeah, reading this and just thinking about similar circumstances, my
Speaker 2: thought was, why don't they just try to poach people
Speaker 2: the normal way? Like why is tech this special, weird
Speaker 2: place where there is acqua hiring, Like why can't they
Speaker 2: just offer the founder one hundred million dollars or something
Speaker 2: like that, similar to what Mark Zuckerberg is doing. Why
Speaker 2: do we have to go through all the hoops of
Speaker 2: you know, buying the company or doing whatever Google just did.
Speaker 1: I think that part of it is like you can
Speaker 1: now pay AI researchers one hundred million dollars, but you
Speaker 1: can't pay them five hundred million dollars because all the
Speaker 1: other A researchers would be mad. And like if they
Speaker 1: have a startup, you know, that has raised money at
Speaker 1: a four billion dollar valuation and they own you know,
Speaker 1: whatever they own twenty five they own a billion dollars
Speaker 1: worth of it, right, you have to lure them away
Speaker 1: from that startup by giving them a lot of money.
Speaker 1: Maybe it's not a billion dollars, maybe they don't think
Speaker 1: it's worth what, you know, what it raised that, but
Speaker 1: you have to give them something like a billion dollars.
Speaker 1: And the way to do that is to have some
Speaker 1: sort of M and A like transaction. Right Like, if
Speaker 1: you're just saying I'm going to give you a salary
Speaker 1: of a billion dollars, that's tough to sell to your
Speaker 1: other employees. But if you say I'm going to do
Speaker 1: an M and A transaction that technically doesn't involve buying
Speaker 1: any of the company, but like there's a licensing deal
Speaker 1: and it's like an agreement with Windsurf, then you can
Speaker 1: do a transaction that effectively gives the founders a billion dollars.
Speaker 1: And so I think that's part of it. Where Like,
Speaker 1: the going rate for poaching an employee from like open
Speaker 1: Ai to Meta is you know, one hundred million dollars.
Speaker 1: But the going rate for poaching a founder of a
Speaker 1: startup that like was valued at a lot of money
Speaker 1: by a VC, the going rate for that might be
Speaker 1: billions of dollars. And the only way to pay that
Speaker 1: is in something that looks like an MNA transaction.
Speaker 2: The other thought I had was that there is still
Speaker 2: some acquihiring going on. If you think about the recent
Speaker 2: example of also Meta with skill AI.
Speaker 1: These are the same thing, Like these are not quite acquisitions. Yeah,
Speaker 1: sometimes they're like state acquisitions, but not one hundred percent acquisitions.
Speaker 1: And sometimes they're more like the Windsurf deal where it's
Speaker 1: like a commercial license and a big payment, but not
Speaker 1: one hundred percent acquisition.
Speaker 3: Yeah.
Speaker 2: I was just thinking about the employees who didn't get
Speaker 2: picked to go to Google, and that's probably a pretty
Speaker 2: lousy feeling, but maybe they're happy a cognition.
Speaker 1: Yeah. It's like there's this incredible gold rush for AI,
Speaker 1: and there's incredible variance in people's perceived market value, right,
Speaker 1: Like there are people who are you like, there are
Speaker 1: people who are multi billionaires because they like were in
Speaker 1: earlier and AI, and then there are people who are
Speaker 1: paid like, you know, six hundred thousand dollars a year
Speaker 1: and they're like, oh my god, I'm so poor, like
Speaker 1: like there's a huge range. And some of that is
Speaker 1: the sort of classic startup like were you there at
Speaker 1: the founding of a hot company? But some of it
Speaker 1: is like people's perceived value to the big tech companies,
Speaker 1: where like, if you are really really good, a big
Speaker 1: tech company will pay you, you know, much much, much
Speaker 1: more than one hundred million dollars if they have to.
Speaker 1: And then if you're less good, it's like, yeah, you're
Speaker 1: on salary. It's fine.
Speaker 2: And where we are in the world right now, I mean,
Speaker 2: is this uniquely a tech industry phenomenon and specifically in
Speaker 2: AI industry.
Speaker 1: Phenomenally, Like given in tech people have normal jobs like
Speaker 1: this is very localized to AI, you know, like they're
Speaker 1: not these kinds of bidding wars for people who do
Speaker 1: non AI tech business man.
Speaker 2: If I had any practical skills, I'd be thinking I
Speaker 2: need to be an AI person somehow, But I think
Speaker 2: search fund founder is more realistic.
Speaker 3: Yeah.
Speaker 2: You know who else is in the business of buying
Speaker 2: up a lot of companies is it's Vanguard. They are
Speaker 2: an index company all the companies. As much as Vanguard
Speaker 2: likes to talk specifically to me and everyone else about
Speaker 2: their you know, active management ambitions, they are huge. That
Speaker 2: means that they own a lot of the shares outstanding
Speaker 2: of a lot of companies, including companies that you might
Speaker 2: not expect I.
Speaker 1: Would expect, Wait, can I ask you, are they the
Speaker 1: biggest total stock market index fund? Oh my god, God
Speaker 1: runs you know, a big S and P five hundred
Speaker 1: and index fund, and so does everyone else. But like,
Speaker 1: I definitely own some of the Vanguard Total stock Market
Speaker 1: Index fund, which is not the S and P five hundred.
Speaker 1: It's everything, including small companies and including bigcern treasure companies.
Speaker 2: I'm trying to find out because I don't want to
Speaker 2: miscall myself, but I think that the Vanguard Total stock
Speaker 2: Market Index fund is the largest. I mean, it's it's
Speaker 2: in the trillions, so I would imagine that that's it.
Speaker 1: So when you say Vanguard owns is one of the
Speaker 1: biggest sholders of companies, you wouldn't expect. I would expect
Speaker 1: them to be the big sholder of every single public company.
Speaker 1: That's what I.
Speaker 2: Would and they are, and they are, including Strategy in.
Speaker 1: Particular, I'd expect them to be one of the biggest
Speaker 1: holders of every non P five hundred company because like,
Speaker 1: there are a lot of SMP index funds, but like, yeah,
Speaker 1: Vanguard is really into total stock market index ones. But anyway,
Speaker 1: but yeah, they're the biggest holder of Strategy micro Strategy
Speaker 1: now called strategy.
Speaker 2: I guess I did not appreciate that strategy isn't in
Speaker 2: the S and P five hundred, but we're also talking
Speaker 2: about a non S and P five hundred tracking fund.
Speaker 2: Because I don't know, it just feels like increasingly the
Speaker 2: whole world revolves around the S and P five hundred,
Speaker 2: but the Vanguard Total Stock Market funds biggest shareholder of strategy.
Speaker 2: I say that you might not expect it because the
Speaker 2: personality of Vanguard is an asset manager that is deeply,
Speaker 2: deeply skeptical slash repulse by cryptocurrencies.
Speaker 1: I know. This is the thing about running index fund.
Speaker 1: It's like it doesn't matter what you think, you just
Speaker 1: buy it. Yeah, It's like a really good, like disciplining mechanism. Right,
Speaker 1: Like you consider that and be like, wow, I think
Speaker 1: this company is overvalued, but it doesn't matter to buy
Speaker 1: it because you're an index one manager and like that's
Speaker 1: what people are paying you for, and they're not paying
Speaker 1: you very much. Right, If they're paying you a lot,
Speaker 1: then you might be like, well, I'm going to short
Speaker 1: this company because like I think it's overvalued and I'm
Speaker 1: you know, getting paid a lot from my wisdom. But
Speaker 1: they're paying you like two basis points to buy every company,
Speaker 1: so you buy every company. It's a really good pass.
Speaker 2: The thing that's slightly different here is that Vanguard obviously
Speaker 2: has control over what products that it launches.
Speaker 1: Yeah, but like it's it's products or index ones.
Speaker 2: I know, I know, but this is a relatively new
Speaker 2: phenomenon where you have equity companies that just hold bitcoin
Speaker 2: and you think about like commodities. For example, Vanguard for
Speaker 2: a long time would not launch a commodities fund. They're
Speaker 2: never going to launch their own cryptocurrency funds. And okay,
Speaker 2: yes they're going to buy every single stock out there,
Speaker 2: but it's a new phenomenon where that means you're also
Speaker 2: buying crypto indirectly.
Speaker 1: Yeah. Well, the things I like about it is that
Speaker 1: a little inside baseball but not really. Bloomberg has this
Speaker 1: like view that you shouldn't own stock in companies that
Speaker 1: you write about. So like I don't own stock in
Speaker 1: you know, Goldman or Apollo or whatever, but I own
Speaker 1: index funds they own stock in those companies, and so
Speaker 1: I e right, and like in some ways it would
Speaker 1: be weird if I didn't. Right, Like to me, like
Speaker 1: I should have my savings in like the global financial portfolio,
Speaker 1: and if I owned like all of the stocks except Goldman,
Speaker 1: then like in theory, that would create a financial bias
Speaker 1: against Goldman. I would be like, well, I don't want
Speaker 1: any of their stock, but I own every other stocks.
Speaker 1: I want their stock to go down relative to the
Speaker 1: rest of the market. And then like crypto is kind
Speaker 1: of the same, right, Like, you know, we have like
Speaker 1: sort of rules that you shouldn't own crypto if you're
Speaker 1: writing about it, but like if I own zero crypto,
Speaker 1: then I'm sort of biased against crypto, right Like I
Speaker 1: you know, I own like all of these stocks, and
Speaker 1: I want the stocks to go out, but I don't
Speaker 1: want crypto to go because I don't want any crypto.
Speaker 1: But now, because on the Vanguard Total Stock Market Fund,
Speaker 1: I own some bitcoin indirectly, but like I have some
Speaker 1: exposure to bitcoin through strategy, and I think, like more generally,
Speaker 1: like it is good for ordinary investors to be able
Speaker 1: to get low cost access to like market cap weighted
Speaker 1: ownership of like the entire global financial portfolio, right like,
Speaker 1: just as like it's probably good for you to not
Speaker 1: have to pick which stocks will go up and just
Speaker 1: buy all the stocks, like you shouldn't even have to
Speaker 1: like pick like which asset classes will go You just
Speaker 1: like be able to be like I'm going to buy
Speaker 1: the market right, And you can't really do that that
Speaker 1: It's not really a thing like people try. It's not
Speaker 1: really a thing because like, you know, how do you
Speaker 1: decide how much real estate to have in that? But
Speaker 1: by smuggling a little bitcoin into your you know, total
Speaker 1: stock market fund, it means you have like a little
Speaker 1: bit closer to exposure to the entire financial portfolio. And
Speaker 1: if you don't like crypto, you'll be mad about that.
Speaker 1: But if you're buying the total stock market fund, your
Speaker 1: thesis has to be I don't know what I want
Speaker 1: to buy. I have no strong views about which companies
Speaker 1: will go up, So like you have some bitcoin, why not?
Speaker 2: Yeah? Occasionally Tom Keane invites me on radio and just
Speaker 2: kind of bullies me about crypto for a couple of minutes,
Speaker 2: and then I get off air and super I don't
Speaker 2: I would not describe him as pro christ I'm not
Speaker 2: surprised yet he famously calls it bitdog. But in trying
Speaker 2: to make him care, I have tried to make the
Speaker 2: case that you should care because it's probably in your
Speaker 2: retirement account through this sort of indirect exposure, Like your
Speaker 2: fortunes in a small way are tied to bitcoin now, right.
Speaker 1: I would reverse that. I would say that, like, if
Speaker 1: you don't have a strong reason to be short crypto,
Speaker 1: you should be long crypto in proportion to it's like
Speaker 1: weight in the market, right, and like that weight has
Speaker 1: gone up a lot in the last ten years, right
Speaker 1: now trillion dollars. And if you are just like completely
Speaker 1: on a blank slate, completely agnostic about everything, like your
Speaker 1: weight should not be zero and now it's in your
Speaker 1: retirement fund. Great problem solved. I'm not saying you should
Speaker 1: buy crypto of like by all means, this is not
Speaker 1: investing advice, but like you know, I'm just saying, if
Speaker 1: you have no views, like the default weight in your
Speaker 1: portfolio for every asset is not zero. The default weight
Speaker 1: is like it's market weight, right, And so if you're
Speaker 1: just setting it to defaults, you should have some crypto.
Speaker 1: And the way to have some crypto is either like, ah,
Speaker 1: you go create an account on coinbase, or like you
Speaker 1: just you know, own a total stock market index one
Speaker 1: that happens to have some crypto.
Speaker 2: So you're a marked cap weighted guy.
Speaker 1: I'm not saying that's the best way to invest. I'm
Speaker 1: saying that's the neutral way to invest. I'm saying that,
Speaker 1: like anything that you do to deviate from like the
Speaker 1: market cap weighted global financial portfolio, should ideally have every
Speaker 1: reason ideally not that, not that I you know, follow that.
Speaker 1: I'm just you know, as a theoretical matter, like you
Speaker 1: should own the market unless you have some reason to
Speaker 1: think that something else is better.
Speaker 2: And that is investment advice.
Speaker 1: No, I mean, I don't know how I could get
Speaker 1: suit over that, but no, it's not investment advice. The
Speaker 1: bitcoin treasury companies are interesting in part because they give
Speaker 1: you away to own crypto if your only investment is
Speaker 1: the total stock market. But more broadly, they're interesting because
Speaker 1: they are a way for equity investors to own crypto
Speaker 1: without owning crypto. And I think that there's a lot
Speaker 1: of demand for that. Some of it is from like Vanguard, Right, Vanguard,
Speaker 1: which let's hypothesize does not want to own crypto, nonetheless
Speaker 1: owns a lot of micro strategy. It's like that's like
Speaker 1: a good arbitrage, right, Like you have like bitcoin, which
Speaker 1: like Vanguard doesn't want to buy and you have micro Strategy,
Speaker 1: which Vanguard, against its will does want to buy, and
Speaker 1: so like you can like transport bitcoin into Vanguard and
Speaker 1: make some money on it. But like, more broadly, I
Speaker 1: mean there's a lot of like equity investors who for
Speaker 1: one reason or another can or want to buy micro
Speaker 1: strategy for bitcoin exposure, can't buy like just bitcoin for
Speaker 1: bitcoin exposure. They get an email from one guy saying,
Speaker 1: like my hedge fund, our prime broker will give us
Speaker 1: sixteen to one leverage on micro strategy, and they'll give
Speaker 1: us no leverage on I bet like the bitcoin ETF. Right,
Speaker 1: So if you want to get exposure to bitcoin, getting
Speaker 1: it in the form of a stock, like a real stock,
Speaker 1: not an ETF, like a corporate stock. Getting in the
Speaker 1: formu of a corporate stock is in many ways preferable
Speaker 1: to other forms of owning it. And that's why that's
Speaker 1: part of why the bitcoin treasury companies often traded a
Speaker 1: premium to their underlying bitcoin, because like there's a whole
Speaker 1: class of investors who can get crypto that way, but
Speaker 1: can get it as easily or as efficiently in other forms.
Speaker 2: That's really interesting because after the spot bitcoin ETF's launched,
Speaker 2: I think a lot of people, perhaps myself, questioned what
Speaker 2: the use case for micro Strategy was.
Speaker 1: Yeah, and the number one answer is index funds. Vanguard's
Speaker 1: total stock more good fund does not own ETFs. Yeah,
Speaker 1: it owns companies, and micro Strategy is still a company
Speaker 1: even though it's a pot of bitcoins. Like that's the
Speaker 1: number one answer. There are other answers, because like someone
Speaker 1: at some prime brokerage is like, we'll give more leverage
Speaker 1: on corporates than we will on ETFs, even though the
Speaker 1: corporate is like more volatile than the ATF. But like
Speaker 1: the number one answers index ones, and like, yeah, micro
Speaker 1: Strategy is not in the S and P five hundred.
Speaker 1: It wants to be in the SP five hundred. That's
Speaker 1: like the next that's the next frontier.
Speaker 2: It did make it into the NASTAC one hundred, and
Speaker 2: that's a big d. It was somewhat controversial.
Speaker 1: Yeah, because like these indexes don't include ETFs, They don't
Speaker 1: include investment vehicles with like rare interesting exceptions, right, Like
Speaker 1: there's like an argument that Berkshire Hathaway is an investment
Speaker 1: vehicle and like you know and then you I don't
Speaker 1: if you remember, but friend of the show Bill Ackman
Speaker 1: of perching Square Capital Management. Uh, when he.
Speaker 2: Found his way into another episode when he was so not.
Speaker 1: The bird but the actual Bilackman when he was.
Speaker 2: Trying to trow Yeah.
Speaker 1: I haven't even talked about that long. When he was
Speaker 1: launching his clothes un fund, he's like, it's going to
Speaker 1: be in the S and P five hundred. It was
Speaker 1: not going to be in the S and P five
Speaker 1: hundred because the S and P five hundred does not
Speaker 1: include clothes down funds, but it does include Berkshire Hathaway
Speaker 1: because it's not quite a closed un fund, it's a
Speaker 1: company and microshrate is the same deal, right, Like, if
Speaker 1: you're like, I'm going to launch a fund that holds bitcoin,
Speaker 1: that will not be in the S and P five
Speaker 1: hundred or even the Nazak one hundred. But if you're like,
Speaker 1: I am a tech company, I'm going to almost exclusively
Speaker 1: hold bitcoin and talk about it a lot, you can
Speaker 1: be in the S five hundred at least the Nazak
Speaker 1: one hundred, and that's different.
Speaker 2: Well, that was the controversy around its NASDAQ one hundred.
Speaker 2: NASTACK one hundred does not hold financial companies and it
Speaker 2: feels like micro strategy. It was micro strategy at the time,
Speaker 2: like it was sort of grandfathered in because it is
Speaker 2: nominally still a tech company, very nominally.
Speaker 1: Yeah, you're right, that's the arbitrage, right, It's like, we're
Speaker 1: not a financial company, we're not an investment company. We're
Speaker 1: just the tech company that happens own seventy billion dollars
Speaker 1: a bit quin. Yeah, it's a good trade. I'm sorry
Speaker 1: that Bill Lackman caught so many strays at the end
Speaker 1: of this episode.
Speaker 2: It's okay. I don't think he listened to the end
Speaker 2: if you want to say that.
Speaker 1: Like when we mentioned last week that we're going to
Speaker 1: name your bird friend of the show, Bill Lackman, we
Speaker 1: got approximately twenty emails saying of Perching Square Capital Management.
Speaker 1: A lot of people will I know I did that joke,
Speaker 1: and we did not, and I'm sorry.
Speaker 2: But very clever.
Speaker 1: We'll do better next time. Perching Square. Yeah, he just
Speaker 1: learned to perch. And that was the Money Stuff podcast.
Speaker 2: I'm Matt Livian and I'm Katie Greifeld.
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