Wall Street to Silicon Valley Is a Sequel To An Old Film

Back in the late ‘90s, Goldman Sachs created what was known inside the firm as the "Coolness Committee." By Goldman standards, the Committee's creation was very odd, particularly to long-time employees. While generally a very cushy place to work (I was there from 1997-2001), Goldman was then and remains a quantitative institution. Those who survive and find it "cool" do so because they're performing at a quantifiably high level.

Memories of Goldman's "Coolness Committee" resurfaced recently with the departure of Ruth Porat from Morgan Stanley to Google. Porat will be chief financial officer for the technology giant, and her departure predictably generated all manner of commentary about the implications of her move west.

Most surprising was New York Times columnist Andrew Ross Sorkin's assertion that Porat's leap marked the end of Silicon Valley's historically "uneasy relationship with Wall Street." By Sorkin's estimation, Valley skepticism of Wall Street was before now quite long in tooth; according to him at least "three decades" old.

Sorkin missed with this one. This was strange simply because he's generally known as a fairly thorough reporter. Whatever his understanding of economics and/or finance, Too Big To Fail was seemingly well reported, and as I said in my review of it, surely a good read. That Sorkin has such prominent Wall Street contacts raises the question of why he so misreported what has been a long and fruitful relationship between Wall Street and Silicon Valley. While a read of his April 1 piece would bring the uninformed to the conclusion that the technologists on the left coast haven't historically seen eye-to-eye with the capital allocators at the banks, the actual truth is that they've long been joined at the hip.

In the late '90s veteran Goldman employees would tell newer ones of actually having seen Microsoft co-founder Bill Gates at 85 Broad Street well before he was a billionaire, or even a centi-millionaire. Though he departed Goldman several years ago, it was well known that analyst Rick Sherlund made Partner at the firm by virtue of his close relationship with Gates. Before it was a high-flying public company, Dell Computer received financing from one of Goldman's early mezzanine funds. During my time at Goldman, Amazon's Jeff Bezos was among the presenters at One New York Plaza.

Over at Morgan Stanley, analyst Mary Meeker made a career and a global name for herself based on what investors presumed to be her deep knowledge of Internet companies. So when Sorkin wrote that "Silicon Valley's entrepreneurs and venture capitalists have done their best to avoid letting Wall Street too far inside their club," this reader was dumbstruck by an assertion that has always been so observably false.

Far from an uneasy relationship, technology firms have long kept their doors wide open to Wall Street mainly because the very venture capitalists whom Sorkin oddly described as guarded toward it have always needed an exit strategy for successful investments. Capital markets desks have often been the personification of that exit strategy. Secondly, and this represents an even bigger reason why Silicon Valley has forever been welcoming to Wall Street: entrepreneurs regularly face the possibility of their company dying due to lack of funds.

The above is what technology entrepreneur Joel Trammell discussed at length in his excellent book from last year, The CEO Tightrope. Financing is the ever-present worry for entrepreneurs who are by their very description pursuing a vision that has never before succeeded. As such, tech firms aren't guarded about Wall Street; rather they're endlessly eager to get its attention. If not, the venture capitalists backing them force them to curry favor with financiers. As Trammell put it,

"I'll be honest: my track record for providing capital is not great. Raising money is hard (my emphasis). Over my career of leading multiple companies, I have talked to more than a hundred institutional investors and have reached a deal exactly once. For this reason I advise companies to take the money when they can, because it often isn't there when you really need it."

Sorkin mentions Google's floating of shares without Wall Street help, acknowledges that its IPO didn't go very well for the company's shareholders, but his reference to the "Dutch auction" of Google's shares further underscores why Wall Street and Silicon Valley have long been so close. They have been because funding is truly hard to get; Google an outlier mainly because even by Valley standards it was a major highflier. Notable there is that Facebook didn't mimic Google's auction when it eventually went public. It hired top investment banks to handle its offering.

To put it plainly, there wouldn't be much in the way of Silicon Valley without Wall Street, while Wall Street wouldn't be nearly as prosperous without Silicon Valley. They desperately need one another in a very healthy way. Whatever venture capitalist Tom Perkins' derisive musings about how "the investment bankers will outlive the cockroaches," he paid those same bankers their high fees because they earned them.

Furthermore, was Sorkin around in the early 2000s after a healthy cleansing took place in Silicon Valley (much the same occurred in the early part of the 20th century with carmakers as my new book, Popular Economics, points out) such that many internet companies went belly up? Without excusing the hideous actions of Eliot Spitzer for even a second, his anger toward Wall Street had everything to do with its very tight relationship with the Valley, not the distant one that Sorkin would have readers believe has long been the norm.

Regarding the flow of Wall Street talent to the Valley, readers of this column have seen this coming for quite some time. As I argued in a speech for the University of Southern California law school in March of 2012, California and its knowledge economy were suffering financial and human capital outflows at the time thanks to a weak dollar. A weak dollar suffocates knowledge simply because animation of same requires investment in wealth (through stock and bond income streams) that doesn't yet exist, and investors are buying future dollars when they provide the capital. In that case, it was no surprise that California was dragging in a relative sense not too long ago.

But as was easy to predict, a weak dollar (gold was trading at $1700/ounce in March of 2012) that was crushing the knowledge economy wouldn't last forever. The dollar would eventually recover, and as I put it amid major gloom for the Golden State,

"When this occurs the talent outflow from California will morph into an inflow, and unemployment will fall in concert with greatly increased investment."

So while President Obama hasn't made the dollar his main focus, Treasury jawboning of the dollar downward has ceased, and with the dollar's resuscitation, the knowledge economy that most animates California has taken off again. A dollar that bought as little as 1/1900th of an ounce of gold in 2011 buys 1/1200th of an ounce today. A stronger dollar has quite predictably served as a major lure for investment in the technologies of the future.

Back to Goldman and its "Coolness Committee," what's taking place is merely a replay of the late ‘90s. Goldman instituted the Committee, gave out generous restricted stock awards, and even turned Casual Friday into Casual Week back then precisely because Silicon Valley was booming such that the giant sucking sound pulling financial minds west was particularly loud.

Given his close ties to Wall Street, Sorkin quite surprisingly wrote last week as though this rush west is a new phenomenon. As he strangely put it, "the foxes [Wall Street, get it?] are now guarding the henhouses." No, this is merely a subdued sequel to a 1999 film when the Valley similarly (for those who watch the dollar, it was really strong then: $300/ounce) poached lots of Wall Street talent. How Sorkin missed all this is kind of mysterious.

Looking into the future, just as former Valley highfliers went bust by 2001-2002, much the same will healthily take place again. Economic growth, per George Gilder, is about the leap, and a stronger dollar is making more leaps possible.

Failure in a capitalist society is a good sign, and we're much better off today thanks to an information surge that began twenty years ago, and that left many failures in its wake. Far from something new as Sorkin suggests, we've seen this before and we'll be better off for it.