Following Obama’s reelection, many (myself included) thought that Democrats were about to tighten their grip on US politics for several more decades. They had found reliable allies in the increasingly dominant industry of the day. Their electoral base was now firmly located in urban areas, which bring together those more prone to tackle the challenges of the new paradigm. They appeared ready to make inroads in the difficult field of radical institutional innovation. And Hillary Clinton was setting out to cement Obama’s legacy—just as Harry Truman had done for Franklin D. Roosevelt from 1945 onward[22]. Allied with entrepreneurs and prepared to imagine a better future, a new lineage of liberal, forward-looking US presidents was about to move decidedly towards the advent of the new age. US Democrats were about to lead the world out of the darkness and back into the light.
Obviously something went terribly wrong along the way. One worrying signal had been there since at least 2010: Democrats controlled the White House, but they were at their weakest in every other part of the complex US political system. And while tech executives overwhelmingly endorsed Hillary Clinton for the presidency, Obama’s successor as Democratic nominee was from a different era. She may have been successful in a pre-digital political world, where her qualities might have been better rewarded. But she found insurmountable difficulties in a world where technology makes it possible for candidates to connect directly with the voters. The era when it was enough to compromise on a centrist agenda and court big corporate donors was gone. You could say that American voters supported Donald Trump for the same reason that they had elected Obama before him: now technology made it possible for them to make their voice heard and go against big donors and the establishment[23].
It appears Silicon Valley has lost a lot during this process. The Democratic Party has failed to stick to power and the piling up of revelations about technology contributing to the outcome of the 2016 presidential election is creating major problems for the largest tech companies. Tech’s role in Trump's election has created suspicion in Democrats and greatly degraded Silicon Valley’s image in the rest of the Western world. Meanwhile, its coastal progressivism makes it equally suspicious for Republicans.
And so the “tech backlash” is not about to subside, especially now that the US tech industry also has to deal with an enemy from within: its own government. The Trump administration is renouncing free trade. Legacy industries are winning battles against tech companies, as seen in the energy industry or with the fight against net neutrality. And the US government is cracking down on immigration, which is one key to prospering in the current paradigm shift.
All in all, technology almost became mainstream with Obama and the Democrats. But now that Trump and the Republicans have the upper hand, it’s in danger of being labelled the enemy and sidelined in the political system. The US tech industry has squandered the opportunity to remain the center of the new age of ubiquitous computing and networks.
And so the clock is ticking. Silicon Valley is not alone in the world. China is gearing up to match American power and push its own model forward. What we’re currently going through is a very complicated game being played out on the global stage. And it will decide the prosperity and stability of the Western world in the coming years and decades.
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The shifting balance of international power
Alice Zagury, Oussama Ammar and I founded our firm The Family to pursue a simple mission: provide entrepreneurs with all they need to overcome the many obstacles encountered while trying to build great tech companies. Advancing the cause of tech startups requires building a healthy ecosystem. A key part of that is garnering support (or at least not too much hostility) within government, academia, the press, and the traditional business world. Lacking the sheer size and power of the US venture capital industry, European entrepreneurs cannot afford to make too many enemies.
In that regard, the interests of European startups and the US tech industry are aligned. The fear and anger of the European elite is primarily targeted at US tech giants and their supposed overreaching. But the ones who pay the highest price are local entrepreneurs. They find it harder to grow their businesses because what they do is deemed a threat for incumbents, jobs, and existing institutions.
The Family was initially designed as an entity dedicated to nurturing ambitious entrepreneurs based in France. But when it was only two years old, my partners and I became convinced that we needed to expand internationally. The reason was that early stage investing had already become a global market, with an ever-increasing level of competition. It was impossible for us to compete at that level if our portfolio was confined to only one country. If we wanted to keep working with the best and most ambitious entrepreneurs, Europe had to become our playing field.
Unfortunately, Europe is not on the map yet. It’s true that some entrepreneurs have had some success in certain European countries. But none of their companies has reached the level of a continental player. In theory, Europe is a single market. In practice, though, it appears that linguistic, regulatory, and, above all, cultural barriers make it extremely difficult for European entrepreneurs to rely on the continent as the domestic market that will jumpstart their global ambitions.
Meanwhile, there’s a lot of talk about China rising as a developed economy and matching the US as the other world power of our time. Prominent authors such as Henry Kissinger[24] and the British scholar Martin Jacques[25] have published landmark books to tout the idea that China is about to reconnect with its glorious, imperial past. Journalists observe that the Trump presidency, with its avowed goal of pulling America back from world affairs, is effectively a boon for China. As written by Evan Osnos in an in-depth piece for The New Yorker, “China has never seen such a moment, when its pursuit of a larger role in the world coincides with America’s pursuit of a smaller one”[26].
Technology is one of the battlefields on which China and the US are effectively pitted against one another. Like in the US, the Chinese digital economy is now dominated by continental giants, among them Tencent, Alibaba, Baidu, and Didi Chuxing. And as with their US counterparts, it’s difficult to tell exactly what industry these Chinese tech giants belong to. Most of them diversified into various sectors—both to generate revenue margins when they couldn’t do it on their original market and to compete with each other and secure a stronger alliance with the vast multitude of Chinese internet users. Their appetite for growth is unlimited, and they appear to be formidable competitors.
The reason why Chinese entrepreneurs are so good at this game was once explained by Henry Kissinger:
“Americans think a stable world is normal. And so, when the world isn’t stable, then it’s a problem. And if there’s a problem, you solve it, and then you go on to something else. Chinese leaders think that resolution of a problem is an admission ticket to another problem. So almost every Chinese leader that I’ve ever met has wanted to think in a conceptual way of policy as a process rather than as a program.”[27]
Replace “policy” with “business” and you get the point. Chinese entrepreneurs were trained by their unique history and culture to evolve in the permanent instability that characterizes the current age. And so as part of the process of doing business in today’s highly competitive economy, the Chinese giants diversify; they buy out other tech companies; they innovate constantly; and at a certain point, they seek to expand to other countries. That is when they might challenge US tech companies.
Expanding Chinese companies can count on their government. As laid out by Chinese leader Xi Jinping, the famous Belt and Road Initiative is about reviving the old trade routes that once linked China to Europe and Africa. And as once explained to me by a Chinese economist advising the government in Beijing, it’s also about turning places such as Djibouti and Vladivostok (and maybe Tehran) into entrepreneurial ecosystems comparable to Shenzhen—all financed by Chinese capital and relying on Chinese infrastructure. As China records a perennial surplus in capital and financial acc
ounts, it has all the resources needed to push forward such an ambitious plan.
With this initiative, backed by the newly formed Asian Infrastructure Investment Bank, China is becoming more of “a shaper and maker of globalisation”, as stated by Martin Jacques[28]. It’s not that the Chinese want to colonize other countries. Like the Portuguese in the sixteenth century[29], China isn’t interested in conquering land and submitting entire peoples to its power. Rather their goal is to pursue a trade-, investment- and connectivity-driven exploration strategy designed to confirm China’s superior approach to innovation, expand their economic reach, and support the growth of their businesses in the process. If this all seems to resemble the US strategy following World War II, well, that’s because it does.
Indeed the Belt and Road Initiative is not only a brand encompassing various investments in tangible infrastructures. I believe it’s also a process by which Chinese tech giants such as Tencent and Alibaba will be able to expand their operations throughout Asia, Africa, and Europe. There are already ways through which popular Chinese applications such as WeChat and Alipay are adopted beyond the Chinese domestic market, mainly the Chinese diaspora and the growing number of Chinese tourists travelling abroad. But once the same applications are adopted in Central Asia, Africa and Eastern Europe, with the experience curve that comes from expanding to new countries and adapting to their particular customs, how long will it take for Western Europeans to get interested in WeChat and Alipay, too? Belt and Road could be to China what the Empire was for Britain in the Victorian era: an instrument to secure long-term global leadership—only this time it’ll be in technology instead of finance.
Because they think in Western-centric terms, many people in the West thought that the first step for the expanding Chinese giants would be to try and enter Europe. Few realized that before considering the European market, the Chinese would warm up in Asia and Africa. Lifted by the Belt and Road Initiative, the underlying network infrastructure, and innovative trade and consumption practices, Chinese tech giants will eventually be able to spread their wings everywhere else. The technological and economic power accumulated in the process will then be harnessed to break onto the pan-European market, which will ultimately lead to a showdown between US and Chinese tech companies in Europe.
This is a challenge for us Europeans. The European continent becoming a battlefield for US and Chinese tech giants, all driven by superior technology, abundant capital, and powerful network effects, will make it harder for European startups to impose products on their own market. What’s more, if China comes to dominate the economy both in Asia and Africa, Europe will be one of the last foreign markets left for the faltering American Digital Empire. Desperate US tech companies will tighten their grip, making it more difficult for European tech champions to emerge.
But beyond Europe, the rise of networked China is an even bigger challenge for the US tech industry itself—and for the US as a whole. So far America has had an extraordinary journey through economic history since the Industrial Revolution. While it was still a young, developing republic in the nineteenth century, it emerged as the core of two consecutive surges of development: that which led to the age of steel and heavy engineering (at the end of the nineteenth century), and that which led to the age of the automobile and mass production (during most of the twentieth century)[30].
This extraordinary outcome was made possible by a mix of trends and events. One was the wealth of the US as a seemingly infinite pool of land and other resources. Another factor was the disintegration of Europe, with Germany focusing more on its military than its industrial capacities from the end of the nineteenth century onward, and then the entire continent being wiped out by two consecutive world wars. A third factor was immigration. While Europe was losing itself to war and fascism, a massive influx of immigrants provided the US with an unrivaled entrepreneurial drive and an abundant workforce willing to fill the positions offered by the new industries of the day.
Until the 2008 financial crisis, it sure looked as if the US was going to strike for the third time in a row. It had once grown a world-class steel industry and then the mightiest car manufacturers in the world. Now America seemed poised to dominate the new age of ubiquitous computing and networks as well. It had invented the microprocessor, deployed the Internet, and given birth to what appeared to be the dominant corporate players of the age—the likes of Apple, Amazon, Google, and Facebook.
But the financial crisis turned the tables. For the Chinese, it first came as an unpleasant surprise. They, too, thought that we Westerners were firmly in control. Yet the events of 2008 proved we didn’t have a clue how to manage the global economy in a sustainable way. In comparison, the Chinese financial system proved much more resistant than did that of the West, precipitating the dramatic power shift we’ve been witnessing ever since[31]. And so the 2008 crisis looks very much like a recurrence of the Great Depression, with China replacing the US as the emerging power. They have the stability that has deserted both the US and Europe. They’re also racing ahead when it comes to growing the new businesses of the day and imagining the institutions that the new age calls for.
And that’s really what is at stake here. Being the dominant power in a given techno-economic age is not only about nurturing the dominant corporations of the day. It’s also about building the institutions needed to bring about economic security and prosperity. America has been the hotbed of three consecutive technological revolutions. But now that we’re deep into the current age of ubiquitous computing and networks, it’s entirely possible that the US will know the same fate as Germany at the dawn of the age of steel and heavy engineering. Despite having a headstart and everything needed to succeed, it could come up short and, taken aback by its own demise, experience the worst decades in its history. And if the US is the new Germany, then China is obviously the new US—and in that case we’re not even sure what will become of Europe and the Western world as a whole.
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Key takeaways
● Technological progress was long seen as a boon for the Western economy. But since the 2008 crisis, it’s been perceived more negatively, leading to the current “tech backlash”.
● Now that tech companies are in a bind, it appears they’ve missed a once-in-a-lifetime opportunity: allying with the Democratic Party and building a better future together.
● While Donald Trump seemingly leads the US into the ground, China is rising as an economic and technological powerhouse. Now the dominant position of the Western world is at stake.
Chapter 2
Technology and Institutional Change
“The corporation managed the risk so well… that it created an innovation known as the steady job. For the first time in history, the risks of innovation were not borne by the poorest. This resulted in what economists call the Great Compression, when the gap between the income of the rich and poor rapidly fell to its lowest margin.”
—Adam Davidson[32]
Modern history is a succession of paradigm shifts
I’m an engineer by training. So when I look at things I tend to see them in terms of a system. I divide what I see into elementary components. Then I hunt for the forces that explain the relationships between those components. This provides me with a model that I can reuse in many other situations.
Systems come with rigidity and they can thus become a mental trap that narrows your view of the world. But when you combine them with frequent reality checks, systems are a most powerful tool to interpret the world and share your interpretation with others. When you’ve crafted your own system to comprehend things such as politics, history, technology, the economy, or business, you can harness it to push in favor of radical, positive change and get things in motion.
Another systems lover that I’ve discovered in recent years is Carlota Perez. I first encountered Carlota’s work by reading William H. Janeway’s landmark work, Doing Capitalism in the Innovation Economy[33]. I then had the opportunity to m
eet her thanks to an introduction by Yann Ranchère of the investment firm Anthemis, which supports Carlota’s work through the Anthemis Institute.
Carlota was born in Venezuela in 1939. Her first career there was as a civil servant specialized in energy and innovation policy[34]. Later in life, she switched to academia, settling in the UK where she started to focus on the relationship between technological change and financial markets. Almost by coincidence, her only book to date, Technological Revolutions and Financial Capital[35], was first published in 2002, right after the bursting of the technology bubble of the 1990s. In the post-bubble context, the book caught the attention of influential venture capitalists such as Fred Wilson[36], Marc Andreessen[37], and Chris Dixon[38], who then used it to nurture their understanding of the market.
It has since triggered a positive feedback loop. A significant part of the venture capital community has adopted Carlota’s system as the bedrock of their investment theses. In turn, investors echoing Carlota’s ideas in their day-to-day practices have had the effect of getting her even more interested in technology. As of now, Carlota has become one of the most important living authors of the new age as she contributes to revealing and even directing the current paradigm shift.
In Carlota’s system, a “great surge of development” is a phenomenon that only happens once or twice in a century. The sequence always goes through two different phases. The “installation phase” is dominated by financial speculation and revolutionary entrepreneurial drive. In the “deployment phase” that follows, governments take the lead and set up the institutions that are needed for the new economy to enter a “Golden Age”. A “major technology bubble”[39] always marks the turning point of the surge. The exuberance of a bubble is necessary to attract capital, explore the many applications of the new technology of the day, and finance the infrastructures necessary to sustain the transition from one great surge to the other over the long term.
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