I had a flashback recently, but only to the late 80’s.
I am walking through Harry’s at Hanover, a crowded NY bar, and there are tables and tables of 20 and 30 something bond and stock traders, each in blue custom-made Paul Stewart dress shirts with white collars, and yellow paisley power ties, everyone of them drinking gin see-throughs. As I walked passed, the eavesdropped conversations are all the same, each ending with “I stuck him for a teenie,” and “yeah, I nailed him for a teenie.”
What caused this flashback was a walk through Caffe Verona, a Palo Alto latte bar. There were tables and tables of 20 and 30 somethings, each in Gap khakis, blue denim shirts with www.getalife.com embroidered on them, a fresh goatee, each drinking $4 double low fat with mocha steam jobs. Conversations all ended with “I’ll stick you in our C round,” and “yeah, the IPO will be big, I’ll stick you in the C.”
It’s only been a decade, but the culture shifts are telling. Sticking someone for a sixteenth or a teenie means you made 6 cents on say a $50 stock trade, or 60 cents on a $1000 30 year bond trade. It’s almost like clipping coupons, customers want to trade pieces of paper, and your firm pockets 6 pennies. Scale that up to trillions of shares and it starts to be real money. There is occasional risk, if you can’t move the trade from one client to another fast enough, but the profit is almost a sure thing in good markets or bad. The trillions of dollars sloshing around the Street creates the Tom Wolfe-ian Master of the Universe mentality.
On the other coast, in Silicon Valley, a successful CEO creates a universe of masters, a company filled with the best and the brightest at specific tasks. Sticking someone in your C round meaning allowing them to invest money in that company, in the C or third round of financing. $50,000 might get you a teenie of a percent, or .06% of the almost $100 million valued company, not a heck of a lot. Of course, this could be a giga-startup, if the first trade on the IPO puts the company over a $1 billion value. It could also be worth less than a teenie, a goose egg, nada, nothing, zilch.
That is the risk profile, clipping coupons vs. what seems like a lottery ticket, 60 cents on $1000 vs. 1000 times on a 60 cent option. A sure thing vs. a long shot, but strangely, the personalities of the players couldn’t be more in the other direction. On a trip to Las Vegas, you’d find the Wall Street guy at the craps table and the Silicon Valley guy in the arcade playing video games.
If you think about it, Silicon Valley is an entire industry of people with 540 verbal, 760 math scores on their SATs, who future MBAs used to cheat off of in algebra (note to self: maybe this is why PE multiples are so high). They couldn’t care less about tee times vs. T-1’s, country clubs vs. networking hubs. The Wall Street guy upgrades his house to one train stop closer to Grand Central Station. The Silicon Valley guys gets excited about being one networking hop closer to MAE West (if you have to ask what that means, you don’t want to know!)
Don’t get me wrong, without Wall Street, Silicon Valley wouldn’t exist in its current form, growth industries need access to capital and lots of it. Wall Street has been more than kind (at their usual 7% fee) to have money thrown at the techno-communications complex (sounds cooler than .com’ers).
Occasionally during the IPO road show, the twain shall meet. 10 years ago, it was a gray haired CEO, who might own 4% of a company with a $100 million valuation, giving the pitch. The traders would peak their heads into the presentation and smugly note they were worth more than this guy. Today, a disheveled 31 year old who owns 47% of a $2 billion valued company gets Wall Street man pissed off, that kid doesn’t deserve it!
The trader got paid a $300,000 salary and a $1.3 million bonus last year (and paid a 50.1% marginal rate) and complained to management he was underpaid. The entrepreneur got a $50,000 salary, but made $5.5 million from a previous option exercise (at a 20% cap gain rate) and was annoyed there was an extra form to fill out in Turbo Tax.
One’s desk is littered with Rolaids and a collection of Lucite tombstones from past junk deals, the other is littered with Star Wars collectibles and empty Jolt cans. The trader is responsible to his boss, the Valley dude to the board, who over funded the C round.
So, do these folks have anything in common? Sure, they both stare at screens all day. One in a football field size room from 9:30 to 4 PM sharp, with the day broken up by an occasional fist fight, (I’ve seen them) and the other in a dingy cubicle from 3 PM until 4 AM, with the brightness on the monitor turned up high and sunglasses on, interrupted nightly by a Nerf Gun attack (Supersoakers ruin PCs).
And of course, Wall Street uses all this new fangled technology to invent new instruments, Lyons, and Spiders and Webs (oh my) to shave those coupons even thinner, and Silicon Valley is inventing an infrastructure to shave the latency of a transaction between Sheboygen and Shanghai to under a millisecond. It is important to understand both types, as these two uniquely American cultures are helping to capitalize and build out the foundation of the world economy, a teenie and a C round at a time.