As if we didn’t have enough problems.
Now we learn, through the Kauffman Foundation’s recently published research, that the ever-expanding financial sector is depleting the talent pool of potential high-growth company founders.
While all entrepreneurs need capital and an effective financial sector to fund the start-up and growth of their businesses, they’ve never received the support, or access to capital that allows them to contribute their maximum potential to our economy.
We now find that the financial industry’s growing size is potentially suppressing entrepreneurship. The financial services industry and new companies compete daily for many of the same staff, The Kauffman Foundation’s study found.
Recently, the financial sector has generated enormous profits by creating virtually no value through collateralized debt obligations. The research noted that, “These new products require such sophisticated engineering that the industry now focuses its recruiting on new master’s- and doctoral-level graduates of science, engineering, math and physics, and pays them starting wages that are five times or more what they would have earned had they remained in their own fields.”
“Because these new hires are often the very individuals who otherwise would have comprised the most robust pool of prospective founders of high-growth companies, the financial services industry’s steady rise has had a cannibalizing effect on entrepreneurship in the U.S. economy,” said Paul Kedrosky, Kauffman Foundation senior fellow and one of the paper’s authors. He continues: “Excessive financialization exacerbated and distorted the flow of capital in the economy, potentially suppressing entrepreneurship by drawing away entrepreneurial talent.”
New ways, you might not have known about that the world of finance has become a weapon of mass destruction.
I spent fifteen years financing the lower middle market and couldn’t agree more. Our companies would all come to us for flexible and patient capital but what drove our interest were forces outside of their well-being. In our case it was getting to a quarterly dividend yield to our shareholders that drove price. When the model collapsed so did our commitment to the portfolio. I saw much worse as well – lenders using covenants to drive up costs to the borrower and increasing risk of failure to earn a nominally higher interest return in the short-run. Our capital markets are now structured in such a way as to destroy start-ups and make the funding of businesses that are in cyclical spaces in the economy nearly impossible. For all the talk about the “recovery” on Wall Street it is not something that benefits Main Street and no one seems willing to change the game. The break-up of the banking system is required but the lobby that sustains it in Washington is too powerful. Finance is now the largest lobby force in the US. We can’t even get the votes for consumer credit protection. The only real solution will be driven by innovators at the local level who create new financial insitutions and expand proven ones like credit unions.
We need to hope that the values of the best of those top students – those most likely to generate the ideas that we need for the future – outweighs the temptation of money.
And in what ways do we all contribute to this? We raise stressed out children to be high achievers so they have a shot at a degree from a big brand institution so they can have a a shot at a big paycheck and supposedly ‘happy’ life. How can we expect our children to resist the temptation of money when that’s been the driving force of their lives and education? I hear this as a constant theme in families.
Maybe if this is true, that financiers are luring the collegiate away with the almighty dollar, it might be time to look outside of the university system for innovators and entrepreneurs. Many of the brightest individuals/entrepreneurs I know – are not college grads. That system does not produce great innovative thinkers in my experience. They usually lean on looking back to understand rather than looking ahead with vision.
well said Teresa, everyone is too much “inside the box” system driven by $. And look where it has taken us…
As a real engineer, I reject the notion that the financial sector is performing engineering. An engineer could never state that the future performance of his work is not guaranteed, as every investment prospect does. The engineer and everybody else who creates real assets, buildings, bridges, cars, trains, airplanes, machinery have to insure that they will work and that will not do any damage to people using them. I don’t think there has ever been a case when engineers have brought down an economy by increasing systemic risk to the point of massive failure. “Mathematizing” speculation does not give finance a legitimate claim to being scientific.
If the investors of today would have financed the first industrial era, it would not have existed. The entrepreneurs and financiers of the XIXth century were preoccupied with inventing, producing and selling real things, new and exciting things. I wish the history of science and industry would be taught in schools, at all levels, but in particular in business schools. Where is the Boeing of today who was freezing in an open shed together with his workers building the first commercial airplanes. Where is the Sikorsky flying his one helicopter? Probably sitting in front of several screens writing differential equations and pretending to understand how they apply to valuing real work. However, there are people like Jeffrey who prove that a pioneering, visionary and generous spirit is still alive in contemporary business.
As in every domain of human activity, there are always people ready to sell their expertize not for the benefit of the majority of people and of their particular field, science, mathematics, engineering. It is possible because of what Teresa described as our contemporary definition of success and fulfillment in life. We can and should change that.