Don't let the title of this post fool you - I'm not saying that Silicon Valley is better than Wall Street. I am, however, commenting on the seismic shift in power that has been happening since the Dot Com bust. Nerds have a long memory and they're very sensitive to shabby treatment.
There was a time when every tech entrepreneur's wet dream was to be taken public by a big Wall Street firm. It was the pot of gold at the end of the rainbow. Now Wall Street is viewed by the geeks as the ugly girl at the dance whose dad has a lot of money. And, like most ugly girls, Wall Street is falling all over themselves to get Silicon Valley to look their way. Nowhere is this more evident than with the Facebook IPO and Zuckerberg's refusal to do things the "Wall Street" way.
From the sidelining of the banks through the registration process to the dithering of Mark Zuckerberg, Facebook's co-founder and chief executive, over whether or not he will turn up for the investor roadshow, the message has been clear: whatever the normal rules governing Wall Street initial public offerings, Facebook is the one calling the shots. The notion that Mr Zuckerberg has even considered steering clear of such a key event in the build-up to an IPO that investors have long been waiting for, is just one illustration of the bargaining power he and his social networking company, with 900m users and counting, wields over some of the world's most dominant banking institutions.
Silicon Valley has figured out that they don't need aggressive New York bankers when they've got their own financial ecosystem on Sand Hill Road. Who wouldn't prefer to do a deal with their former Stanford prof instead of a greaseball in a Hugo Boss suit whom you know doesn't give a shit about your innovation and is just in it for the money?
These guys don't even need the public stock market anymore. SharesPost has become the de facto stock market for the cool kids. So what if you have to be an accredited investor to buy in? It keeps the rubes out.
And if you look at the deals that have gone public lately, you'll see a disturbing trend. LinkedIn, Zynga, and Groupon have all been unmitigated disasters for investors. To be fair, LinkedIn has stabilized a bit and has the most viable business model, but Zynga and Groupon are just a joke. And I'm sure there are plenty of folks on Sand Hill Road laughing about it as we speak.
It's like the Dot Com bust in reverse. Back then the bankers made all the money taking bullshit companies public. This time around it's the bullshit companies that are foisting their dubious stock on Wall Street.
If Wall Street is going to value Facebook over $100 billion (the Instagram deal valued Facebook stock at $103 billion for those trying to keep up), Zuck and the gang would be fools not to take their money. But it doesn't mean they have to dance to Wall Street's music.
I'm interested to see how this power shift plays out over the next decade. Most consumers (and certainly ALL Facebook users) see the value-add coming from the Silicon Valley side and not the Wall Street side. Maybe Wall Street is going back to being simple deal facilitators. That certainly wouldn't be the worst thing in the world.
But what about the glamour and prestige of being a banker? Are the big banks ready to see that disappear as they move into the role of Silicon Valley's bitch?
We are kind of in a web 2.0 bubble. Start ups are getting such generous funding because investors believe the potential for growth is so high. But the prospect for "growth" is high because it is just a matter of time until Google/Facebook/Apple/MSFT steps in to buy the company outright.
It is the "greater fool" theory, with the tech giants being the ultimate fools. They have so much cash, they can afford to buy an Instagram or an OMGPOP somewhat regularly.
As for Wall Street, if there is money to be made, they will find a way. Banks will acquire VC firms if they must. But what is stopping Goldman from just creating a VC arm?
If they could create a VC arm, they would have already. The Silicon Valley VC shops have both the connections and know-how. Goldman doesn't.
There too many business and cultural impediments for the northeast to ever be a serious player in tech.
New regulation.
Honestly, Morgan Stanley would have the clear upper hand between the two, but I don't even think they could pull it off. It's strictly a cultural thing. You didn't see geeks mixing with the jocks in high school, and now the geeks have their own funding sources that understand them better than the jocks ever could.
Of the founders I've spoken to about this, they've viewed their interactions with bankers as distasteful at best.
Are you saying underwriters are jocks? Most of the bankers I know are wannabes.
Also, while many of the Web 2.0 IPOs were wildly hyped, the market saw through it. Either they're trading sideways or down from their IPO price.
The acquisition of start-ups by tech giants is entirely different animal though. There is a talent acquisition component to it that is rarely discussed. For example, in finance it is feasible that a group of senior bankers, each with their own book, could collectively be worth 50 million or so. The same goes for a team of engineers with their own technology. The technology of the start-up company itself may be only worth 40% of the total buyout price. But the cost of acquiring a world-class team of engineers for future software development could easily be worth the remaining 60%.
The reality is that many of these startups are likely undervalued. If more non-tech companies understood the importance of the technology and had the culture to utilize the talent, you would see more hundred-million dollar buyouts and fewer non-tech companies blindsided by disruptive change.
Actually I interned for a company that practiced this policy. Within tech companies, there exists the idea that the best engineers will be orders of magnitude more useful than mediocre engineers.
But, looking at the products of some of these companies, I am not particularly impressed. I mean, OMGPOP? It is a fun app, but not exactly a technical marvel. I would not feel compelled to buy that talent.
As for the question of why GS hasn't created a venture capital arm, I don't think it is a cultural issue. They have been hiring those same "nerds" for years to run their quant groups.
There probably hasn't been demand- VC is outside their core business, and does not generate the same profits for owners as PE/Investments. But, if the money is there now, GS could buy off a few VC partners, and let them run their own fiefdom at Goldman.
Not all nerds are the same. Look at Wall St and you see Harvard/Wharton/Princeton/MIT grads, but very few CalTech/Berkley/Illinois/Stanford grads. Yet, it's the latter schools, particularly Stanford, that produce an overwhelming number of SV founders. To paraphrase Paul Graham, MIT kids want to work for Google; Stanford kids want to create the next Google. I can't even think of a single famous MIT founder, which is odd considering MIT's STEM enrollment dwarfs Stanford's.
This bleeds over into the general business and social environment as well. If your start-up flops on the West Coast, it's considered part of the game. Try telling someone on the East Coast you even want to start a technology company. Outside of Boston or Raleigh-Durham, you might as well tell people you're trying to become a rapper. And good luck getting funding, which brings us too...
The cultural difference is most glaring on the financial side. West Coast VC's, likely because of their background, connections, and geographic proximity, are completely immersed in the technology and almost always first to the punch. Maybe for an IB it doesn't make sense to go wading into venture capital, but it is a natural fit for private equity. What is to keep Blackstone, Berkshire, or Bain out? We're talking about investments in the tens of millions and payouts potentially in the billions. Very odd Wall St is nowhere to be found.
Why isn't GS in Silicon Valley? It's probably for the same reason there is not a single recent tech company on the east coast: IME, it's culture.
PE firms profit by fiddling around with numbers and financial engineering, they don't really need domain expertise. For instance BX's portfolio has everything from camera makers to candy makers.
To be successful in VC you actually need to know your shit. Try investing in an early stage company without understanding the technology.
I'm of the opinion they throw a lot of darts out there and hope one of them hits a bullseye
You've actually just described venture capital.
Yeah I was talking about the latter part of his post "To be successful in VC you actually need to know your shit. Try investing in an early stage company without understanding the technology."
For early stage it's not like they randomly pick companies to invest in. You need to have a good idea of technology/market. For example Y Combinator received nearly 1000 applications and 38 enrolled in their cohort. It's still throwing darts, but not nearly as random as it's made out to be.
You have a good point, but the fact is that many (not all) of the new tech start ups aren't really that technology intensive, many of the web 2.0 investments operate with more or less basic technology.
I believe there are quite a few solid and reputable VC in the west coast, but the fact is that many new inexperienced VC shops have popped up and these new shops have to place money in a limited set of deals, and given their lack of experience they end up driving prices (valuations) way up to a point where they make no economic sense. Given all of this, I'm sure competition for the VC web 2.0 type deals has increased dramatically over the past few years to the point that it would not make sense for a large PE firm to get into the game at this point because they would end up placing their money post fund raise within the next 2-5 years right when the market is expected to go pop! Thus these guys are already to late to the party, that's why they don't get in. If you don't think so just look at all the 1998-2002 vintage fund returns for VCs.
Personally I think a East cost blue chip shop could get into the business as many of them have funds that invest in growth type deals that are very similar to the VC deals (not all shops are LBO shops, on the contrary!) all they would have to do is acquire more human resources (team members) which I'm sure they could get given the right incentives. That's just my opinion, I guess time will tell whether I was wrong or right.
Lots of MIT founders; an example off the top of my head is DropBox. Culture is one thing, but a puny factor compared to the fact that Harvard, Yale, Somewhat Princeton, and Penn have pretty shitty engineering programs compared to the second group. Good tech needs good tech talent, simple as that.
I came to this site 2+ years ago because I was interested in a career switch to wall street, and this site has led me to pursue a tech career.
12-24months after fb ipo bubble bursts investors withdraw money and gg silicon
Bubble
With all the talk about social networking what people are forgetting is the real money is made by solving enterprise problems. In general Big data + specific vertical = $$$. Enterprises always lag consumers and there are a ton of services companies are overpaying for now that have to move to a more equitable model. For example: Concur (a company that handles expense management, that many haven't even heard of) is worth a billion dollars.
One good thing to come out of this boom is hosted services like AWS. Now, even non programmers with little more than a business idea can get something up and running (and in many cases) a prototype ready with some effort.
If you're a hot shot ex banker / MBA looking for a "code monkey": http://whartoniteseekscodemonkey.tumblr.com/
EB i agree that at the end of the day it becomes the clash of the personalities. Geeks vs jocks. In the coming decade I see less and less reliance of banks in the IPO process as companies will have the capacity to take their shares public with a click of the button. All tech companies have finance depts. and they will start to attract the wall street talent. I really don't understand why banks don't outsource the pitch books to India, Indonesia, Pakistan, Bangladesh etc. You can get more monkeys with handing out less bananas. Wall street will have to come with an innovation to start making easy money again. And by innovation i mean a carefully designed scam. Bankers should think ahead of the curve, start lobbying hard and setup a "carbon credits" trading. Or even less ingenious, wait for the President to pass some idiotic regulation like "College education for all" and start slicing and dicing that shit.
How foes google and fb make money?
Advertising for both
and Zynga (among others) pays a fee to use FB as a medium for its games.
just for the record, I'm long LinkedIn, Amazon and Goog... I think with FBs IPO and inevitably insane valuation, people will look to other social networks that are not as insanely valued = LinkedIN. Plus, I would argue they have a MUCH better, more sustainable business model that does not depend on ads (like FB)
I agree with you to an extent on LNKD, Patrick. It's that 920 P/E I just can't get my head around.
ha, well for a company that has a NI that is barely positive, don't you think that might be the wrong metric to lean on? I agree that the Revenue / EV multiple is still rich at 20x, but when people are lining up to pay 25x revenue for a platform that I think has less $ per user potential...
I'd also argue that LinkedIN has much more room to grow than FB, just given the # of people in the world on the internet. FB has almost saturated the world market, LinkedIN could still grow 4x it's current size. of 200+ mill...
Points well taken, however, just because one stock is relatively less overvalued than another stock doesn't mean it still isn't overvalued. As a short term momentum play it might make sense but momentum plays can burn you
LNKD worries me for the following reasons 1. Accounting shenanigans http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/604
Governance structure http://dealbook.nytimes.com/2011/05/12/a-deeper-look-at-linkedins-struc…
Costs that are entirely too high Facebook has much high profit margins and still just makes a buck per user per year. Linkedin will need to see ridiculous growth of PAID subscribers / PAYING companies to achieve anywhere near what it is currently valued at.
It seems pretty clear that were in Bubble 2.0 "too much hype", the only ones that are going to end up benefiting from all the money that's currently being thrown around are the companies that will surface post bubble 2.0 crash. These companies will be able to leverage on the remains of all the infrastructure investment that's currently going on (probably non of them will be internet companies) which most of it is obviously not going to pay off for current investors just like the last time around.
Investing in Bubble 2.0 at this moment = GAMBLING not investing!
Gotta get you fundamentals right, don't follow the herd or you'll end up in the slaughter house just like all the cows
In the end the real money was already made, everyone else is just late to the party...
this is a bubble, you'll know it's beginning to pop when you see vc firms blowing up
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