Bear Stearns and the PSD spirit

Steve Brotman — Thu, 10 Apr 2008 10:14:44 -0700

There is a huge story about Bear Stearns that has gone unreported in the press. It is not about the money lost, risks taken, financial carnage or the Fed and JP Morgan coming to the firm's rescue. It's about another sort of loss, but one that is nevertheless very relevant to the success of the venture capital industry. It also explains why New York's Silicon Alley is a second center of U.S. entrepreneurial activity after Silicon Valley.

This also a personal story, about the start of my career in New York, and how I got to know Bear Stearns.

In 1994, I was attending business and law school, getting a joint JD/MBA degree at Washington University in St. Louis. While attending classes, I held a part-time position for a small, local investment bank, Pauli and Co. Chris Pauli was a Bear alum, and he had come to St. Louis to set up his own investment bank in Bear's image. Working with him at Pauli and Co. convinced me that my career lay in venture capital. I took part in two public offerings, met a wide range of CEOs, and was inspired to get into the business of funding small companies that wanted to do great things.

Some VCs and entrepreneurs might find this humorous, but Chris told me that the path to a successful VC career meant going to New York and getting hired by an investment bank, as he had done. He gave me the name of a Bear senior investment banker, Humbert Powell.

After haranguing him for several weeks, Humbert agreed to meet with me on my next trip to New York. I got a single interview, but it didn't lead anywhere. But this only made me more motivated -- there seemed to be a willingness on the part of investment banks to put me in their recruiting processes, as long as I made the requisite effort.

So, I decided to take a calculated gamble in time and money, neither I which I had much of, paying for my trips to New York myself, and putting my studies on the back burner. I ended up visiting New York about a half-dozen times over the next few months. I also sent at least a hundred letters, and made dozens of calls every day before, during and after classes and work, trying to break into the investment banking industry. Merrill, DLJ, Goldman, CSFB, Morgan Stanley -- I contacted just about every one of the big banks and a lot of small ones as well. I still have all the rejection letters in my attic to prove it, and to remind my kids of some of the challenges they may face when they get older.

In 1994, I was only able to find two Washington University alumni working on Wall Street. One of them worked at Goldman, and didn't return my calls (later, I heard that he became a partner there, and eventually made so much money he left the business).

The second alum was working for Bear. His name was Joe Swanson, and it just so happened that he was connected to folks on the Collateralized Mortgage Obligation (CMO) trading desk. He took my call, and we met. I kept up the connection and called him each time I was in town. Finally he said, "Steve, I'll give you a shot." I got a full interview with the CMO junior traders and a job offer a few days later.

From my perspective, this was a minor miracle. Bear has a reputation of hiring "from the mailroom," or bringing up people from the lower ranks of the organization. The firm was especially interested in those people whom the senior Bear execs called PSDs, which stands for Poor, Smart and having a strong Desire to succeed financially. I was hired as a summer associate and was not "poor" in the financial sense of the word, but I was essentially one step above the mail room, hand-delivering inventory sheets each morning, and running the calculations at night. However, I was poor in another sense -- I didn't have the right connections or pedigree to get my foot in the door of most Wall Street firms. Investment banks have traditionally hired from just a handful of Ivy League business schools, and "WashU" wasn't in that class.And this is what made Bear so special. It was one of the few places a PSD kid could get a break on Wall Street. So the biggest loss in the Bear Stearns collapse is not the equity of the company. That's just been transferred to others, including JP Morgan shareholders and firms that will absorb some of Bear's most talented employees. No, the biggest loss is the end of an era for one of the most entrepreneurial firms on Wall Street. This was a place that truly believed in building a meritocracy based on achievements and performance. A place that gave some very hard-working and smart people a shot at making a difference.

Sound familiar? It should, if you run an early-stage technology company. This is exactly the sort of attitude that prevails at successful startups. A large amount of the success I've had as a venture capitalist is the direct result of backing PSD founders, and encouraging those founders to hire PSD staff. Young companies need PSDs to fill their ranks. It may mean taking risks on hires and look beyond pedigree, but it breeds fierce loyalty, a hard work ethic, and empowers employees with the drive to do everything in their powers to help the startup succeed.

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Mark V. Cannice, Ph.D.: The impact of Bear Stearns' collapse on entrepreneurs
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