American capitalism is in the midst of a remarkable transformation. For decades, Wall Street has been the beating heart of the American system. Its great investment banks have driven the financialisation of the globe. It has become a byword for extravagant salaries, amoral deal-making and, infamously, nearly precipitating its own collapse.
The financial “masters of the universe” have made money from money on a scale never before witnessed, their values and priorities cascading over the US and the west. The ambitious graduates from the great American law and business schools have unquestioningly put a Wall Street career as their number one objective. US finance rules, or ruled, supreme. But the rise and rise of Silicon Valley and the second industrial revolution it represents has launched a challenge to the old order. It is becoming ever more obvious that digitisation, the internet and the supercomputer are reinventing the entire industrial, financial and business landscape in a process that is only just beginning.
Fortunes can be made not only from the fees and charges of buying and selling financial assets. They can also be made from building companies that, by deploying these new technologies, turn the world on its head – often for the better – and do some real good. Better Facebook, Apple and Microsoft than Goldman Sachs.
Silicon Valley entrepreneurs have never trusted or liked Wall Street and its values very much. They always knew they needed its money. But from the beginning they have been anxious not to cede control of their precious startups too soon – if ever. They don’t want to become pawns in Wall Street deals, enriching east coast bankers and relegating their passion for innovation to the priority to hit absurdly demanding short-term financial targets. Almost all the great west coast hi-tech giants – from Google to Linked In – have ensured that, while Wall Street can buy their shares, it can’t buy the accompanying controlling votes. Control stays with the founders, whose privileged shares often have 10 times the voting rights of the ordinary shares offered to Wall Street.
It’s a ploy that works. Indeed, it has become so successful that west coast hi-tech companies are now big and rich enough to be able to choose Wall Street expertise on their own terms. In the last few weeks, Google has hired Ruth Porat, the finance chief at Morgan Stanley, to become its chief financial officer with a total pay package of a mindblowing $70m. Last year, Goldman Sach’s Anthony Noto filled the same role at Twitter for a cool $64m. Power is shifting from Wall Street to California – from finance to the world of innovation, which as Google’s chair Eric Schmidt says, at least does some real good in return for the pay.
Meanwhile, JP Morgan has even developed a financial product it calls Stay Private Longer; essentially the bank payrolls the hi-tech company while it stays private and builds its business on a promise the bank will one day be repaid if and when the company ever issues shares on Wall Street. If banks want some of the Silicon Valley action, increasingly they have to do it on the valley’s terms. The numbers of law and business school graduates from Harvard and Stanford leaving to work in technology companies is nearly the same as those choosing finance; on current trends, the crossover will be reached within two years.
It is a rebalancing of a power relationship between finance and business. Part of this is hard-headed calculus of where money can be made. In a low interest rate environment, the overcrowded hedge fund world is finding it ever harder to make good returns – and banks, in part through regulation and in part through their own necessary newfound caution, are not the money-spinning, high-risk takers they once were. Hi-tech companies are where the financial action is. But that is also because a second industrial revolution is genuinely happening. From machine learning to the printing of synthetic human tissue, human capability is being transformed. Small wonder investors are excited.
There are echoes of this in Britain. In Cambridge, more than 53,000 people work in hi-tech companies whose aggregate turnover is £13bn. Oxford boasts the densest concentration of life-science startups outside the US. London bustles with hi-tech life. Bristol is at the centre of so-called Silicon Gorge. Ingenuity and energy abound, but they are trapped within traditional financial power structures. British startups have none of the protections in the US. Indeed, there is a disheartening string of great startups now in American hands, US banks doing here what can’t be done at home. For example, too many of Cambridge’s vibrant companies, including Autonomy and CSR, are no longer in their British founders’ hands.
There are responses. Fund manager Neil Woodford has set up the Woodford Patient Capital Trust to invest in British high technology startups. The Big Innovation Centre (declaration: I am chair) is well advanced with its entrepreneurial finance hub that will allow entrepreneurs to better value their technology in order to get improved and faster deals from financiers. There is the government’s Business Bank and loan programme for startups. Change is afoot.
But it needs to be part of something bigger, a national awareness that there is a great prize to be secured. There needs to be an insistence on action and a recognition that, without it, the UK is drifting into a world of mega-trade deficits that can’t be financed, low productivity and a desperate lack of opportunity. The general election campaign could be brought alive by politicians vying with each other in their ambition to build the next generation of great hi-tech British companies as a national imperative.
The Tory manifesto would have been a very thin document if it had not been able to commit to a continuation of Vince Cable’s industrial and science policy as if it were the Tories’ own. Tories, you are reminded, are not natural challengers of finance and its mores. Labour is prepared to go further, challenging and recasting financial power with some innovative ideas and creative new institutions.
But Ed Miliband could transform his relationship with business if he could say his purpose is both to create a new class of British hi-tech companies and high-wage jobs, and also a generation of seriously rich, hi-tech entrepreneurs on the American model. This is about enfranchising capitalists both to make fortunes from daring and to do good. It would electrify the campaign. It could even win him the election.