Coverage: Silicon Valley and Wall Street

There have been several stories recently about Wall Street executives moving to Silicon Valley for better paychecks and more relaxed lifestyles. Much of this was promoted by Ruth Porat’s move from Morgan Stanley to Google. But the coverage of the battle between the coasts continues.

The Wall Street Journal story by Douglas MacMillan pointed out that some in Silicon Valley are beginning to look like Wall Street investors, riding a wave of higher valuations:

Silicon Valley insiders are taking advantage of soaring values for technology startups by creating a potentially lucrative side business.

Venture-capital firms such as Andreessen Horowitz and FirstMark Capital, along with a cast of prominent entrepreneurs and executives, have each raised tens of millions of dollars for impromptu funds that take a direct stake in a single startup.

These funds, which often come together in a matter of days, give institutional investors, friends and business associates exclusive access to highflying companies. The funds also let the venture capitalists invest far more money in a company than they otherwise could. In many cases, the funds are blessed by the startups, which see them as a way to raise big sums quickly.

While the investments are usually billed as exclusive, can’t-miss opportunities, the funds aren’t without risk. Their investors—which include fund of funds, family offices and pension funds—are usually offered limited financial information about the companies. They are also charged a performance fee that is typically about 20% of any investment profits on top of already rich prices.

Andrew Ross Sorkin wrote for The New York Times that Silicon Valley has intentionally tried to keep its distance from the East Coast bankers:

Mr. Perkins added, “At the end of the world, after all the sharks have long gone, the investment bankers will outlive the cockroaches.”

For nearly the last three decades, Wall Street has sought to overcome Mr. Perkins’s skepticism, often shared by others in the technology sector. The banking industry has tried to befriend — or, at times, wished it could colonize — Silicon Valley, perhaps the world’s greatest birthing ground for start-ups, billion-dollar initial public offerings and tech conglomerates, all of which need financial services (which in turn, generates those fees Mr. Perkins was complaining about).

Silicon Valley’s entrepreneurs and venture capitalists have done their best to avoid letting Wall Street too far inside their club. Remember Google’s unusual “Dutch auction” I.P.O. that was heralded for wresting power from Wall Street and putting more of it in the hands of investors? In hindsight, that offering in 2004 didn’t work out so well, and the Dutch auction never became the future of tech I.P.O.s.

But Kathleen Elkins wrote for Business Insider that many top financiers are moving West, particularly women:

Goldman Sachs has lost several top people to West Coast tech companies over the past few years, including Anthony Noto and Sarah Friar. Noto took over as Twitter’s CFO, and Friar left for Salesforce and is now the CFO at Square.

It’s not just veterans who are making a change; more elite college graduates and MBAs are foregoing pinstripes and moving West.

Only 10% of MIT undergraduates went into finance last year, according to a recentNew York Times article — a startlingly drop from the 31% who took Wall Street jobs in 2006. “Software companies, meanwhile, hired 28% of graduates in 2014, compared with 10% in 2006,” it reports.

Similarly, in 2014 San Francisco and the Bay Area drew slightly more Harvard Business School graduates than New York.

Gillian Tett wrote for The Financial Times earlier this week that all the moves showed a shift in the power base of the American economy:

It also shows where power in the American economy is moving. The revolving door of the capital’s financial bureaucracies is spinning more slowly: Wall Street has become cynical in recent years about whether Washington can ever get anything done. The allure of finance is also dimming, since hedge funds are struggling to make good returns in a low-interest rate world, and large banks are growing more like boring utilities as post-crisis regulations bite.

Silicon Valley, by contrast, seems to be bathed in sunshine in every sense. Not only is cash flooding in and not only are tech companies jumping into all manner of new businesses but there is also a giddy optimism about the future.

At least half a dozen senior Wall Street (and Washington) figures have made similar moves in the past year — including Anthony Noto, who last year went from Goldman Sachs to become Twitter’s chief financial officer; as well as others from Goldman and Credit Suisse who have headed for Facebook and fellow tech groups. And, as Glenn Hubbard, dean of Columbia Business School, recently told me, the favoured destination of bright MBA students is no longer just Goldman Sachs and other banks. They increasingly prefer to work for tech companies, such as Google.

Is this a good thing? Many non-bankers will cry “yes”. The finance industry has become excessively big in recent decades — and well paid. But there are signs this pattern is shifting. And some rebalancing might yet create a more productive economy — or so the argument goes.

As Tett went on to write, Silicon Valley could be in danger of repeating some of Wall Street’s past mistakes. While a shift in power away from the establishment is likely a good thing, it isn’t without issues. And if women keep leaving banks, it will do little to open the door for future generations.