The Breakdown

Explaining Southern California's economy

Ivy League-Wall Street connection opens space for California entrepreneurs

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UPDATE: The time is now, California grads! This is from Gabe Sherman's big New York Magazine piece on the end of Wall Street's bonus bonanza: "'If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now,' says a hedge-fund executive. 'You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.'"

NPR ran a piece today about how too many graduates of the nation's elite universities are going to work in either finance or consulting. At some prestigious schools, such as Harvard, Yale, and Princeton, the percentages are alarming. The story cites a survey of 2010 Harvard grads that found close to half of graduates were planning on heading for the green meadows of big money. 

California's top schools aren't immune to this trend. Far from it. Stanford sends plenty of students into finance, as does Cal-Tech. However, they aren't yet at quite the same levels as their East Coast brethren. 

You actually have to take the NPR report with a grain of salt. Although many top graduates may head to Wall Street, it would be worth finding out how many stick with finance and consulting. Many grads head in this direction for three understandable reasons:

  1. High salaries: Why waste time joining the upper, upper echelon of earners?
  2. High salaries: When you have tens of thousands in student loans, it makes sense to get a job that enables you to, you know, pay them off.
  3. The MBA. Many finance and consulting grads will spend two years on Wall Street in order to get their firm to pay for their MBA. Alternatively, these grads may sock enough money away to pay for it themselves. The MBA is something that you really need to get relatively early in your career, if you want to extract the benefits. 

None of these factors will necessarily keep elite grads on Wall Street. Because, when you get right down to it, Wall Street is HARD. This is from "Yves Smith," who blogs at Naked Capitalism, but in a previous life (as Susan Webber) worked on Wall Street:

Wall Street jobs have long been the prime objective at the top of the MBA food chain, and that has always been a function of the money. Aside from looking for people who are well groomed, articulate and reasonably numerate (image is important, given the fees charged to corporate clients), firms screen job candidates for money orientation and what is politely called drive. At Goldman, the word “aggressive” was used frequently a term of approbation.

But the firms are white-collar sweatshops with glamorous trappings. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme and unrelenting time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have many bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The sense of urgency is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. On a quick run home en route to the airport after an all-nighter, a co-worker tried to shower fully clothed.

[...]

And the dynamic doesn’t change much over the course of one’s career. The drill of being a medical resident (or pre-Iraq, a tour of duty) has a known endpoint. But investment bankers have signed a Faustian contract: You have no right to personal boundaries. The business says how high to jump, and you are expected to deliver. Yes, more senior people have more dignity, but the idea that your needs are second to those of the business never changes.

This kind of pressure, not to mention the nature of the work, does drive plenty of folks away. Last week, I attended a conference at the USC Marshall School of Business (more on that in another post). No shortage of MBA candidates there. But on one of the panels, two of the four panelists were investment-banking refugees who had moved over to the entertainment business.

So in a sense, those years on Wall Street can be like a tour of duty — defined by the graduate's ultimate ambition. And that ambition may not, in the end, include the finance industry. Still, the sheer number of kids going into the money game has provoked some worry. This is from the NPR report:

Economist Paul Kedrosky with the Kauffman Foundation says elite schools sending a bigger share of their graduates into finance and consulting is not new; they've been doing it for at least two decades.

Kedrosky tells NPR's Raz that what's different now is that those students have essentially used their talents to grow the financial sector in ways that are unhealthy for the overall economy.

"It's grown as a proportion of the economy in a way that we haven't seen since the years leading up to the Great Depression," Kedrosky says.

The other thing that is happening, Kedrosky says, is that the financial sector is drawing in scientists, engineers and mathematicians and moving them to a use that no one really ever imagined. He says it is one of the reasons why the rate at which new companies are created in the U.S. has flatlined.

"These entrepreneurs ... [are] getting yanked off into the financial sector never to be seen again," he says.

This is a potential competitive opportunity for California, home to both the tech industry and the bulk of major venture capital firms, which are clustered in Silicon Valley. Modern VC emerged as an alternative to investment banking. Even in the 1970s, Wall Street lacked investment patience; VC offered longer time frames for companies to pay off. Meanwhile, entrepreneurship has never ridden higher. The impending Facebook IPO is an excellent example of the kind of career path it represents. You could spend your days crunching numbers and wrestling spread sheets. Or you could enter the far riskier but more fun realm of startups. And eight years later be a multi-millionaire.

It's entirely possible that California should make this a priority. We don't want to lose Stanford and Cal-Tech grads — or UCLA grads or Berkeley grads — to Wall Street if we can divert the finance-minded folks into VC and the tech-minded folks into entrepreneurship. We just need to overcome the lure of easy riches. 

Not an easy thing to do. But definitely worth it.

Follow Matthew DeBord and the DeBord Report on Twitter.

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