Geopolitics Are Changing. Venture Capital Must, Too.

Summary. For decades, the tech industry thrived based on a set of unique macroeconomic and geopolitical conditions. U.S. hegemony, globalization, and cheap money combined to allow tech startups to spread their products around the world. That era is ending and tech will… The era of American hegemony is ending. It is being replaced by a new geopolitical world order defined by great power competition and increased nationalism, a transition that will have enormous consequences for the global economy. This new environment will mean the end of, or at least a shift away from, the unique conditions that fueled global growth and development for the past 30 years, and will introduce increasingly complex, systemic challenges that will require new types of technology, innovation, and collaboration to solve. Simply put, the technologies and companies that will thrive in this new era will require more capital, more patience, and greater levels of governance than before. In order to build and support the next generation of enduring businesses, we need to develop a new approach to company building, one that transcends, and ultimately redefines, venture capital. The Return of Politics and Rise of Re-Globalization The fall of the Berlin Wall in 1989 seemed to mark what Francis Fukuyama termed the “end of history,” meaning the end of centuries of contestation over the best political and economic model for nations. Soon after, the collapse of the Soviet Union reconfirmed the U.S.’s role as the world’s sole, uncontested superpower, and for nearly three decades thereafter, the world experienced something very rare: the absence of great power competition. This led to the adoption of American policy preferences in many parts of the world — free market economics and trade, democratic politics, and open technology platforms. These developments fueled enormous global growth, leading countries to de-prioritize their national political interests in the pursuit of economic prosperity, a phenomenon that Thomas Friedman called the “golden straitjacket.” Even China prioritized economic reform over centralized government control during this period by opening its economy to foreign investment and global trade — a tectonic shift in the Chinese Communist Party’s governing ideology. This period of free market reform, globalization, and technological transformation also had the effect of lowering prices and dampening inflation. These forces, as well as generally accommodative monetary policy around the world, produced a very unusual macroeconomic environment — one that was conducive to new financial products that spurred innovation and growth. For industries like private equity, and even venture capital, the ability to buy, refinance, and sell assets became a powerful profit multiplier that allowed even marginal investments to generate strong, positive returns. In an otherwise low-yield environment, these returns attracted new levels of investment and an abundance of capital, fueling a new generation of companies and technologies. Like all holidays, however, the world’s “holiday from history” has ended. American dominance has begun to wane and great power competition is on the rise — evidenced most clearly by the rise of China, but also with regional blocs like the EU and countries such as India and Brazil. At the same time, the impact and increased frequency of global crises have laid bare the critical vulnerabilities of a tightly connected system that prioritized openness and speed over safety and stability. In their own ways, the East Asian financial crisis, the bursting of the tech bubble, September 11th, the global financial crisis, the Covid-19 pandemic, and most recently, the war in Ukraine, all demonstrated the risks of a dynamic, globalized world, where local events quickly become global crises with enormous economic, social, and geopolitical ramifications. As countries around the world sought to recover from each of these challenges and protect themselves against the next, and as great power competition rose, countries began to look beyond economics and global efficiency and re-prioritize domestic politics and global resilience. Examples of such behaviors abound, from Brexit and immigration controls to economic sanctions and supply chain reshoring. While many have posited that such shifts will result in a period of de -globalization — with countries attempting to undo all of the interdependencies of the past 30 years in order to fortify their own national systems — such predictions miss a basic truth: most national economies depend on globalization to sustain their domestic industries. The trade-to-GDP ratios of both Mexico and Germany, for example, hover over 80%, compared to just 25% for the U.S. It is both too late and too undesirable to entirely unwind globalization, but a renewed focus on national politics will cause […]

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