Google has hired Morgan Stanley CFO Ruth Porat to be its new CFO. Neil Irwin notes that this is part of a broader trend of talent shifting from Wall Street to Silicon Valley.
In Irwin's view, this is a positive trend. Obviously, Wall Street performs an important function in channeling investments to companies that need them. But Irwin argues this is still a "back-office function," like legal services or human resources, that doesn't directly create wealth for consumers. On this view, an overgrown finance sector acts as a drag on the economy, so talent shifting to Silicon Valley is a positive sign.
A contrary view, expressed by Tim Fernholz, is that big Silicon Valley firms are simply becoming more like big Wall Street firms. Fernholz suggests that instead of creating innovative new products and services themselves, technology firms are increasingly acquiring technology companies that would have succeeded anyway and then claiming credit — and a bunch of profits — when they do.
There's some merit in both perspectives. But I think it's a mistake to draw a sharp distinction between innovation on the one hand and Wall Street–style financial engineering on the other. It's absolutely true that a lot of what Wall Street does — like, say, buying a company, loading it up with debt, and then reselling it — doesn't create value for society.
But most high-tech dealmaking isn't like that. There are a lot of ambitious startups in Silicon Valley that have a kernel of a good idea but lack the resources — both financial and otherwise — to turn that idea into a successful product. Like Wall Street banks, big Silicon Valley companies bring cash to the table. But unlike banks or conglomerates, technology giants also bring other things, like technical infrastructure, ownership of complementary products, and a brand that helps push little-known technologies into the mainstream.
Android and Siri prove the value of smart dealmaking
Two examples help make the point. One is Android, which Google acquired in 2005. You could say Google "merely" bought Android and then managed it well as it grew into the world's most popular mobile OS. Yet it's hard to imagine almost any other company doing this so successfully. Google brought a lot to the table, from apps like Google Maps and Chrome to a corporate culture and reputation for innovation that made it easy to hire and retain the best programmers.
The same point applies to Siri. It was an innovative technology before Apple acquired it in 2010, but it wasn't obvious how it could succeed as a stand-alone product. Making Siri part of iOS not only put it in the hands of a lot more customers, but also made it a lot more useful, since it could be deeply integrated with other features of Apple's mobile OS.
Bankers can play a valuable role
Of course, a finance person like Porat isn't the most important ingredient in this kind of deal: the key decisions — which companies to buy and what do with them — need to be made by people with more technical expertise. I'd be worried if Silicon Valley companies started to hire Wall Street bankers to be their CEOs.
But people like Porat can expand a company's capacity to make deals like this. Lawyers aren't the key to building a successful technology company, but a successful tech firm is going to need smart lawyers to write contracts. Similarly, they need people to make sure companies have the capacity in place to make acquisitions quickly and efficiently.