Wall Street and Silicon Valley Form an Uneasy Alliance

By April 1, 2015Bitcoin Business
Click here to view original web page at www.nytimes.com
Credit Daniel Hertzberg

Silicon Valley has always had an uneasy relationship with Wall Street.

Tom Perkins, the longtime venture capitalist, once offered a derisive description of the function of bankers. “The term fee-charging middlemen is clearly less attractive, but it’s a much closer to an accurate description of their actual function,” he wrote in his memoir.

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 its club. Remember Google’s unusual “Dutch auction” I.P.O. that was heralded for wrestling 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.

More than a decade later, it appears the relationship between Wall Street and Silicon Valley has thawed. You could say it has even matured. It now appears that a new sort of symbiotic relationship has finally begun to develop as the latest Digital Gold Rush presses on.

The newest new, new thing is a full embrace of the East Coast financial types by putting them squarely in the middle of the entrepreneurial action in a meaningful way. Indeed, the foxes are now guarding the hen houses.

John J. Mack, the former chief executive of Morgan Stanley and an old-school trader if ever there was one, is now a board member and investor in Lending Club, a start-up that could one day upend the mortgage and lending industry. Last week, Ruth Porat, the finance chief at Morgan Stanley, another old-school investment banking firm, was named the chief financial officer of Google. Twitter, too, looked to Wall Street for its chief financial officer, hiring Anthony Noto from Goldman Sachs.

To the big banks, losing talented executives to successful technology firms isn’t considered a loss. Quite the opposite. To Goldman or Morgan Stanley, it could mean more future fees, as its alumni in vaunted new posts steer business back to them.

Many of Wall Street’s biggest firms have also become pseudo-venture capitalists, investing their clients’ money in start-ups. In January, Goldman Sachs said it had invested $1.6 billion of it private wealth management clients’ money in Uber.

The investment allows Goldman to offer its clients access to a start-up early; it also helps Goldman develop its relationship with Uber as the firm jockeys for position to help underwrite an eventual I.P.O., which will create a huge stream of fees. This practice, which some say is conflict-ridden, is played by virtually all the banks to great effect. (Goldman used a similar move with Facebook ahead of its I.P.O.)

Wall Street is especially keen to get into Silicon Valley companies early because so many of them aren’t rushing for the I.P.O. exit so quickly anymore. Many are staying private for years as valuations skyrocket. JPMorgan helped Jawbone and SurveyMonkey with a special financing instrument it calls “Stay Private Longer.” If and when those companies go public, JPMorgan hopes to land that business, too.

The money at stake for all sides is huge. Last year, JPMorgan and Goldman Sachs collected more than $8 billion in fees from initial public offerings. Getting a close relationship with a successful start-up early on can become a never-ending spigot. The I.P.O. is just the opening act. There are follow-on offerings, debt offerings, money management of executives, mergers and acquisitions, and spinoffs. That’s why Wall Street has long tried to court Silicon Valley so aggressively.

Goldman Sachs set up its first office in San Francisco in 1968. In the 1990s, Wall Street banks sought out “the Four Horsemen,” a contingent of local boutique investment banks that had cornered the market on virtually all the tech start-ups. JPMorgan bought Hambrecht & Quist (Mr. Perkins has long said the only banker he ever liked was Bill Hambrecht of Hambrecht & Quist); Deutsche Bank bought Alex. Brown & Sons; the predecessor to Bank of America bought Robertson Stephens; and Montgomery Securities was bought by NationsBank (which later merged with Bank of America).

The technology boom in the late 1990s prompted Frank Quattrone, a banker regarded as a legend in Silicon Valley, to jump from Morgan Stanley to Deutsche Bank to Credit Suisse in a matter of a little over two years, with each bank bidding ever higher for his services.

Today, the hierarchy of power in Silicon Valley is still up for grabs as financial institutions do just about anything to gain entree to sought-after tech clients.

Morgan Stanley, which is angling for its own role in a potential Uber offering, announced late last year that it was signing on as an early client to Uber’s business service. It published a news release about its use of Uber in a public effort to ingratiate itself with the company. (Barclays and Deutsche Bank also piloted Uber’s business services early and offered testimonials on Uber’s website.)

And Goldman Sachs recently held a party at the South by Southwest Music Conference and Festival in Austin. Fortune magazine said Goldman “came to tech geek nirvana to make new friends. Specifically, ascendant-tech-startup-entrepreneurs-who-might-consider-retaining-the-services-of-a-certain-investment-bank-when-they-sell-or-IPO friends.”

Those efforts at new client relationships pale in comparison to some of the more aggressive moves to land business.

Mr. Quattrone, in a story that has become a legend in Silicon Valley, once sent a live mule to the office of a prospective client. The chief executive had earlier complained about being “dragged around to meetings like a mule.” (His brash efforts paid off; he got the client.)

The courting of would-be clients is getting more complicated, as some of Silicon Valley’s most-promising upstarts are jumping into the financial world that, if they have their way, would eat away at some of Wall Street’s core business.

The New York Stock Exchange and Vikram S. Pandit, the former Citigroup chief executive, recently invested in Coinbase, a Bitcoin company. James D. Robinson III, the former chief executive of American Express, is on the board of OnDeck Capital, a small-business lender that could one day make the established players obsolete.

The old guard is also trying to join the upstarts in their game. Last week, the staid insurer Northwestern Mutual bought the financial planning start-up LearnVest in an effort to be more innovative.

Even as the East and West Coast hubs of business power seem to coexist in a newfound friendship, how long it will last is an open question. Mr. Perkins had his doubts.

“You may well ask: ‘If you are so disgusted with investment bankers, why do you continue to deal with them?’ You have a good question there,” he wrote in his book. “It’s because they are the S.E.C.-licensed gatekeepers to accessing the public market for capital; they are a necessary evil. Maybe, somehow, eventually through the Internet there will be a way around the bankers.”

Tom Perkins, the longtime venture capitalist, once offered a derisive description of the function of bankers. “The term fee-charging middlemen is clearly less attractive, but it’s a much closer to an accurate description of their actual function,” he wrote in his memoir.

Mr. Perkins added, “At the end of the world, after all the sharks have long gone, the investment bankers […]

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