Among the byproducts of the Republican primary campaign is that Bain Capital, and as a result financial firms in general, have drawn new attention, becoming a more substantive part of our conversation. And then there was that November piece by Huffington Post’s Amanda Terkel detailing how financial firms suck up our best and brightest college grads. What she described is nothing less than a brain drain with significant long-term implications for American competitiveness. Finally comes the long expected announcement of the impending and potentially record breaking Facebook IPO.
In some respects, these three — Bain, the brain drain and Facebook — may appear unrelated. But they are. Together they raise a very important issue for our country and its economy, namely the role and relative importance of money and invention. Since the retrenchment of our manufacturing base, service and most specifically the financial kind has become a more dominant force in our economy. New York City, but also places like Charlotte North Carolina, see them as core enterprises, essential to both employment and their tax base. When Facebook goes public, Mark Zukerberg will emerge at 27 as one of America’s richest citizens and many of his co-workers will be multi-millionaires. The Times dubbed his COO, Sheryl Sandberg, The $1.6 Billion Woman. But also making many millions will be a group of venture capitalists and of course the investment banking firms who are bringing the offering to market. This is all part of the capitalist system.
It is easy, and often well deserved, to castigate financial institutions. Wall Street and the big banks especially have contributed greatly to our current problems. Their thirst for profit often at the expense of others has been well documented. Interestingly Terkel suggests that it has employed its brilliant top university recruits to dream up the very esoteric financial instruments that are at the heart of the matter. But that’s not the subject of this writing. Rather what concerns me here is the relative value we place as a society on money, specifically those funds put against the development of new enterprises, and on the enterprises themselves. In our focus on how essential seed money and finances in general may be, have we come to overvalue finance and undervalue what that money is claimed to have facilitated.
To put this in concrete terms, Bain Capital (and I’m using them here only as an example) put seed money in Staples and that undoubtedly was very important, perhaps even critical, at the time. Likewise, Facebook, but also Microsoft, Apple and Google, relied on venture capital resources to help move their businesses from idea into reality. The financial people involved, as we have seen in Romney speeches, look at these successes with some rightful pride. Thomas Stemberg, Mark Zukerberg, Bill Gates, Steve Jobs, and Larry Page wouldn’t deny their contribution or minimize its importance. It is also true that beyond money, some VC’s offer valuable strategic and management advice, both of which might make the difference between success and failure. But in the end, what really made these innovative companies and others like them? I’d say, it’s the creative idea seeds and vision to see what could be realized, not the money seeds. There is a good reason we all know the names of these inventive icons but would likely be hard pressed to identify any of their investors or bankers.
The reason Mitt Romney is feeling the heat these days is not because of what he or Bain did, but because of the claims he has made. To hear him one might sometimes think that private equity firms are in an essentially altruistic business — saving companies and creating jobs. But private equity, and for that matter Wall Street and VCs, have a one fundamental goal — to increase wealth for themselves and their investors. That may not make for a good presidential campaign message, but it would be refreshingly honest and, as such, might be subject to less criticism. Warren Buffet, the much admired Oracle of Omaha, controls Berkshire Hathaway that owns lots of companies, each run by professional managers. I’ve can't remember Buffett claiming that he creates jobs; though using Romney’s model he may be among the nation’s top job creators. Buffett is an investor — the über investor if you will — and his primary objective is to increase Berkshire’s share value and his own net worth. He’s done pretty well at that and few of us begrudge his success. The VCs of Silicone Valley may enjoy working with all those brilliant entrepreneurs and may share their enthusiasm for technology, but make no mistake; they are in it for the money. They don’t make computers or write software. I’m not making a valued judgment about what they do here, which is obviously substantial, just stating a fact.
The role and objectives of the people who create businesses is totally different. Of course they hope for a payday and, looking at what’s in the works for Zukerberg and his colleagues, that’s where the really serious money lies. But these enterprise inventors, and that’s a word that fits many of the, are in it for whatever the business does. That’s where all of their energy and passion lies. For many of them, that business is not only devoted to delivering a product or service, but to changing the game. Office products were sold long before Stemberg and his partners came on the scene, but their stores were disruptive changing the way we buy those products. By the way, bricks and mortar Staples is second only to Amazon as an online retailer. Perhaps Bill Gates didn’t invent the OS, but he made the personal computer it ran accessible and pervasive. So, too, Steve Jobs may have picked up on a Xerox Parc invention but he brought the mouse in its various iterations into our lives. Others may have preceded Google into market, but Larry Page and Sergey Brin made search a verb without which many of us could not function, or at least as well. These people, along with the thousands who work with them, are change agents who touch our lives in a direct and profound way.
Now there is no doubt that there is interdependency between those who supply seed money and those who inventively create seed ideas. But both their objectives and staying power are vastly different. The money people may have some ongoing interest in the many businesses for which they provide capital, but it is a finite and timely interest. Perhaps more important, they provide no direct service to the businesses’ customers or users. Business creators and the management who succeed them are in it for long-term; their work (much as that can be for any mortal) is timeless. The millions of people who lend their talent and give their working lives to the enterprise join them in this. But the real point is that financial engineering of any kind doesn’t keep an economy vibrant. We may well have achieved some supremacy in global finance, but it has been our innovation that really makes the difference. Think of it, the functional computer, making information accessible and, most recently, social networking were all created in the USA. That isn’t meant as a boast, though we should have some pride, but to explain why we are such a central force in the world. Our inventions are far more important than our financial or military superiority.
The real problem ahead, the one of which Terkel wrote, is that the brain drain that we are witnessing as the best and the brightest enter the financial world rather than becoming inventors of the next Facebook is heading us in a very dangerous direction. It is also somehow turning our values on their head. Perhaps we don’t make that much stuff any more, but that doesn’t mean we aren’t making things of equal value and could do so in the future. If we don’t address that issue in a serious way, the often-exaggerated downward slide of America might be more than just how we feel in challenging times, it may become a self-fulfilled prophecy. The relative value we place on money and doing does matter. Some seeds are moree valuable than others.