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Value Creation Is The Key To Everything
Today: Asia is different, macroeconomics & industrial policy, bigger funds but fewer deals.
The Agenda 👇
Governments: spending is not enough
European founders looking to Asia
Current trends in European VC
China doing industrial policy right
Alice Zagury interviewing James Vincent
Startups expanding internationally
Building bridges across Europe
🤑 Why Fiscal Stimulus Doesn’t Get the Job Done Anymore 🥺
The pandemic crisis has led to some of the largest government stimulus packages ever. Yet all that money flowing into the system isn’t doing much to make people feel more secure, whether as individuals or businesses. In part that’s due to the unique economic shock caused by lockdowns across the globe. But it’s also largely a reflection of how value is added into today’s economy, with global supply chains and a preponderance of digital rather than physical goods.
Just look at how money flows: if the government of France or Spain or the UK provides money to its citizens and businesses, some of it is saved (thus slowing down the velocity of exchange, and doing little to boost the economy) and some of it is spent. But the lion’s share of what’s spent today goes toward physical goods produced in Asia or digital goods produced in the US. The end result is that relatively few jobs are created (or even protected) locally.
It’s yet another example of why Fernand Braudel’s writing on “the market economy” vs. “capitalism” is so critical. If everyone in one geographic area is stuck playing in the market economy, thus being subject to massive competitive pressure that continually squeezes prices downward, they’ll find themselves pushed into evermore difficult positions by companies that excel at doing capitalism. Of course, the answer isn’t less capitalism—it’s finding ways to grow both successful capitalist companies and market economy players within a given area.
Read more in The Geography of Value Creation.
🌏 Want to Expand in Asia? Make Investments or Build an Algorithm 👩💻
In the 20th century, there were some European companies that succeeded in expanding into Asian markets: LVMH, L’Oréal, Airbus, just to name a few. That kind of expansion seems to be less and less of a possibility these days. But why?
There was certainly a more favorable context for global trade back then. But there was also the fact that most of that trade occurred in tangible goods, which no one expects to be tailored to a local context. Digital goods, however, are very different: if you don’t adapt your product to local tastes and customs, you’ll quickly find that no one’s using your product.
Lately I’ve been noticing the ways that companies are expanding internationally now. It’s not happening with local teams on the ground, but rather via two key avenues: investing in a major local player, such as has been happening with Reliance Industries in India, or creating an algorithm that’s so powerful that it can overcome cultural boundaries and national borders, à la TikTok.
I went further on all of this and mentioned some recent European companies that have been able to expand in Asia in Should European Founders Look to the East?
🤝 More VC funds raised, but fewer deals?
In a zero-interest-rate world desperately seeking returns, it shouldn’t be a surprise that venture capital funds have been raising more and more money lately. Still, some people are a bit confused as the big headlines about big new funds raised from LPs seems to be disconnected from the generally bad mood that founders feel when it comes to actually getting some of that VC money invested into their startup.
The key, though, is to remember that venture capital is a two-sided business, where GPs can make a solid argument with LPs that now is the right time to raise a larger fund, while still holding back (relatively speaking) on deploying that capital given the ongoing pandemic and economic crisis.
And it’s also good to remember that the same kind of thing happened in the wake of the dotcom bubble bursting 20 years ago. Just as investors such as Fred Wilson and Brad Burnham at Union Square Ventures saw that moment as the beginning of something new rather than the end of the ride, our current crisis will eventually be seen as an accelerator in the transition to the Entrepreneurial Age.
I got into it all in Two Things About Venture Capital These Days.
🏭 Industrial Policy for the Entrepreneurial Age
Why did France invent the cinema, while the US invented Hollywood? Well, it’s because creating the positive feedback loop of value creation requires numerous players interacting (directly or indirectly) with one another. And if you’re missing one of the key links, your economy is going to see most value being created—and benefited from—elsewhere.
What are the key fields supplying those players? To keep it simple, let’s focus on three: basic research, government support, and public and private organizations looking to use efforts from the first two in advancing specific goals. And indeed, it’s these organizations who are able to turn potential into reality, and to further guide both government policy and academic research in the pursuit of their goals.
Today, the one country that’s really executing this playbook is China. With major organizations such as Huawei, Tencent, Baidu and Alibaba down the stream, all able to convert resources and research into value-adding products, the Chinese government can generate significant returns and a technological advantage in the budding Second Cold War. Europe, on the other hand, hasn’t yet figured out the importance of having those downstream champions to direct the other players’ efforts.
Keep going in Industrial Policy: China Gets It, We Don’t.
Sounds interesting? Subscribe to European Straits and let me know what you think!
🌴 My cofounder Alice has an exceptional guest joining her on Good Vibes tomorrow afternoon: James Vincent worked with Steve Jobs for a decade, crafting the narrative for arguably the most famous tech products of this century, including the iPod and the iPhone. He then worked with Brian Chesky at Airbnb and has now created his own agency, FNDR, to help founders tell their own stories. Grab your free ticket here.
🌐 A lot is happening these days around the topic of startups expanding on foreign markets. A few weeks ago, I already mentioned Index Ventures’s landmark Expanding to the US handbook, brought to you by Dominic Jacquesson.
More recently, Brett Bivens, a Paris-based venture capitalist with TechNexus launched Landed 🎧 a podcast dedicated to interviewing founders and operators on everything regarding international expansion. Brett had already written about it in his excellent Global Like Goldman. Now he’s going further by bringing in the full audio experience. Have a listen!
🎧 Finally, tomorrow my wife Laetitia Vitaud will publish the very first podcast interview of Building Bridges, a Substack newsletter dedicated to matching inspiring English-speaking thinkers with our fragmented European audience, with Leslie Kern, the Canadian author of Feminist City.
We’ve decided that these podcasts will be syndicated on European Straits as well, and that I will contribute by lining up and interviewing more interesting thinkers. In addition to Leslie Kern, our lineup already includes conversations between Laetitia and James Crabtree (author of The Billionaire Raj), Vaughn Tan (author of The Uncertainty Mindset), Andrew Scott (author of The New Long Life), and Bruno Maçães (author of History Has Begun: The Birth of a New America).
Again, that will be syndicated here on European Straits, but if you don’t want to waste a minute, subscribe to Building Bridges to listen to Leslie’s interview tomorrow!
From How Fred Terman Turned Stanford Into an Entrepreneurial Powerhouse (July 2020):
More than a Stanford faculty member, Terman was a hacker—a hacker of American taxpayer money. He didn’t really care about what the US government was trying to achieve. But he had a taste for entrepreneurship and for supporting entrepreneurship, combined with a sense of how to attract government money. Terman hacking his way into the procurement maze of the Department of Defense gave us Silicon Valley, the cradle of the current great surge of development. Will others, in other places in the world, learn from his playbook and turn into hackers themselves?
All recent editions:
Industrial Policy: China Gets It, We Don’t—for subscribers only.
Two Things About Venture Capital These Days—for subscribers only.
Should European Founders Look to the East?—for subscribers only.
The Geography of Value Creation—for subscribers only.
A New Great Divergence?—for everyone.
Does Every Country Need Their Own DARPA?—for subscribers only.
On Trains and Geography—for subscribers only.
Round 2 on Liquidity & Exits—for subscribers only.
Is Going Global Still a Thing?—for subscribers only.
Venture Capital Is Hard—for everyone.
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From Normandy, France 🇫🇷