Bubble, bubble, bubble. Are we in one, are we already done with one, are we getting closer to one? These questions have the dual benefit of being completely impossible to answer while having a high enough salience to tech readers to ensure that the almighty advertising machine gets stoked for another cycle.
Let’s throw some more coal into the fire.
We already had our massive discussion of the Great Burn Rate Spurge of 2014 and the great $1 Million Signing Bonus Give Away, but now we need to engage with the next possible sign of the apocalypse: MBA students. Or more specifically, whether these spreadsheet-wielding graduates are turning up in the Mission these days or heading back to marble-covered offices in places far to the east.
Representing perhaps the most glaring trailing indicator of San Francisco bubble excess, the percentage of graduating MBA students who decide to give up a career in finance to join entrepreneurial ventures represents perhaps the most conservative risk-adjusted judgment of the potential for startups to make the world a better place (or at least, to make petabytes of cash).
MBAs flocked to San Francisco in increasing numbers in 2013, driven by a mix of idealism (not really) and the sense that startups were about to conquer the world. As Kevin Roose wrote earlier this year, “Now, many of the hottest startups in the Bay Area bear the distinct mark of Wall Street’s profiteering impulse,” and that familiarity encouraged a Wall Street exodus to the West unlike anything seen since, well, the last bubble.
Well, there is good news my friends: the MBAs aren’t arriving anymore, and that means cheaper tee times for all of us.
That’s according to newly released employment data from Stanford’s Graduate School of Business, which is a particular bellwether of the state of startups given the school’s proximity to Silicon Valley. About 24% of MBA graduates in the class of 2014 headed to tech jobs, down from 32% in 2013 and equal with the proportion back in 2012. Of course, those profiteering graduates are returning right back to where they belong in finance and consumer products, which each saw notable upticks in employment.
The silver lining (depending on your perspective) is that the rate of entrepreneurs coming out of Stanford GSB has remained mostly stable the past two years at about 17% of students, up from 13% in 2012.
As the Great MBA Bubble of 2013 comes to a close, it is worth considering just what the costs are for going into the technology industry. For the median employee coming out of the business school, technology employers paid about $165,000 ($125,000 in salary, $20,000 signing bonus, and $20,000 in other guaranteed bonuses).
For those going into finance, the median compensation was $290,000 ($150,000 in salary, $40,000 signing bonus, and $100,000 in other guaranteed bonuses).
Ok, I think it’s time to move from Python to Excel macros.
Granted, there is a lot more leverage for an MBA to make money in finance, where the right investment and technical wizardry can essentially provide a key to the mint, while the same hours at a startup might generate a couple of sales leads. But I think there is something more fundamental about values that describes why people are making these career decisions.
I know very few engineers or product friends of mine that would willingly accept the harshness of a suit and tie at an investment bank or private equity firm instead of the SF lumbersexual’s de rigeur uniform of plaid shirts. Nor do I know many who would sacrifice their cooked-to-order meals using all organic ingredients like quinoa and almond milk rather than Chinese takeout delivered to the bank lobby.
That sense matches Sam Altman’s, who wrote this last week in the Financial Times about what makes Silicon Valley work. “The focus in Silicon Valley on long-term compensation is also important. Nearly everyone wants to get rich but they’re willing to wait to do so. Conspicuous consumption isn’t that cool; not too many people drive Ferraris or talk about their vacation homes.”
Altman is speaking from his experience as President of YCombinator, but he could be describing any creative industry. In Hollywood, young workers wait tables while developing their screenplays or acting in plays, dreaming of one day making it big in a blockbuster. In Washington, young graduates filter into politicians’ offices as vastly underpaid aides in the hope of securing a plum job with the Congressional leadership or the President. And in Silicon Valley, young entrepreneurs forego current income to build companies they hope will one day grace the front page of the Wall Street Journal in a a splashy IPO.
Judging creative prowess is fundamentally qualitative – it’s practically impossible to distinguish between the masses of young scriptwriters, young aides, and young entrepreneurs since there are initially very few metrics for success. But some of these people do win in the end, and they win really big. These industries form a tournament market, as they would say in economics.
It’s finance and New York that is an aberration here, where the pursuit of cash and compensation outranks nearly every other ambition. In finance, every person and every team can be rank-ordered based on profits and losses. And while there are certainly qualitative aspects to the job, ultimate success is just making more money, more profit, and repeating that as much as possible. That transparency is one of the reasons why labor compensation costs are so high at banks, often 25–50% of total firm earnings.
So while it might be fun to rejoice that the pesky MBA students are once again heading to greener, more financial pastures, consider that the MBAs who are still coming to tech companies probably had more lucrative options, and yet made the decision to come to Silicon Valley anyway. These are people who share the values of a creative industry like tech innovation, and are definitely not the sign of the next bubble. Instead, we should use their skills however we can – we certainly know the engineers aren’t going to build models in Excel.