Wednesday, July 27, 2022

Noah Smith: The financialization of tech vs Chinese industrial policy.

The financialization of tech

China is racing ahead in semiconductors and drones while we're building better ways to separate retail investors from their savings.

Fifteen years ago, if you wanted to make it in America — if you wanted to get in on the ground floor of that smooth upward escalator — you went into the finance industry. Lots of people were upset about this. Our best and brightest, they said, were dedicating their effort and their intelligence to finding new ways to sell each other complex financial products instead of building the technologies of tomorrow. When the financial house of cards collapsed in 2008, everyone who complained naturally felt vindicated.

In the decade that followed that crash, it seemed like the problem was fixing itself. Wall Street crashed, and the Dodd-Frank legislation tamed the high-flying sector. Talent streamed out of investment banking and headed west, to Silicon Valley and the burgeoning tech industry. Google and Amazon and Facebook were the new Goldman and Morgan Stanley and Merrill Lynch, and startups were the new hedge funds.

And it seemed to work to society's benefit. Sure, some folks groused about Facebook ads and the occasional goofy startup. But the second tech boom gave us electric cars that actually sold, smartphone cameras good enough to make professional movies, e-commerce that sustained us through the pandemic and helped create a small business boom, video conferencing and workflow apps that made remote work a reality, convenient payment apps, cheap rockets that can take off and land, better batteries, mRNA vaccines, and much more. We had successfully redirected national resources from finance to tech, and we were getting tangible benefits. And most Americans appreciated those benefits.

During the later years of the second tech boom, however, I started to notice another trend. Tech companies were increasingly getting in on the finance game. Not so much in the lending space, but in payments and trading. Payments are a utility — the plumbing of the financial world — and here the tech industry was producing a lot of real value (a prime example being Stripe, which lets me receive payments for this blog). But trading — which along with lending drove much of the finance industry's expansion from 1980 to 2008 — is another matter entirely.

In recent years, trading has taken an increasingly prominent place in the fintech world. Platforms like Robinhood have onboarded a whole ecosystem of retail investors (that's finance-ese for "regular folks") into the markets. And cryptocurrency and web3 are hard at work creating new assets for people to trade, and new markets in which to trade them. Both fintech and crypto/web3 saw enormous, record inflows of VC funding in 2021. Here's TechCrunch on the fintech boom from January 2022:

In 2021, global fintech funding jumped to a new record of $131.5 billion across 4,969 deals. That compares to $49 billion across 3,491 deals in 2020. As you can see, the pace at which capital was invested into fintech startups in 2021 grew much more rapidly than total deal count, leading to larger rounds on average. The CB Insights data that we're citing here also helps put the pace of fintech investing into context compared to its peer startup groups, with financial technology companies raising one in every five venture capital dollars last year, or some 21%.

And here's Blockworks on the crypto boom, also from January 2022:

In 2021, venture capitalists invested over $33 billion into crypto and blockchain startups, according to a report by Galaxy Digital…

About $22 billion, or 67%, went into rounds with deals over $100 million. Companies that focus on digital asset trading or building in Web3 raised the most capital overall, the report found. 

And of course these numbers are proxies for the real resources being redirected toward trading tech — smart engineers, bold entrepreneurs, high-end computer chips, and so on.

Of course these numbers will come down — along with everything else — in the wake of this year's tech crash. But when I look at the redirection of the technology industry's resources toward trading, I see an uncomfortable echo of the financialization boom of the 2000s. Finance — especially behavioral finance — gives us plenty of reasons to question whether trading, past a certain point, is simply a way to separate foolish retail investors from their hard-earned savings. And it's disturbing to think that while China is leaping ahead in semiconductors and leading the world in drone technology, America's brightest minds are spending their time and energy thinking of new ways to trade tokens back and forth.

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