changed already for those who would build to last.
As Peter Thiel pithily outlined in Zero to One, today's tech markets are defined above all by a winner-take-all dynamic. Victory belongs to the “last-mover”, the first company to innovate and get something “just right”, which almost never is the first company to enter the category. At the zenith, the sum of the value of all the competitors in a given category often adds up to less than that of the dominant leader. And what's more, it takes at least a decade to incubate and mature such winners.
As a result, today's winners are seemingly more mature, definitely much larger, and yet imbued with an awkward, permanent adolescence that belies their power. Gone are the shotgun IPOs and retail market boomlets. They've been replaced by vast sums of private capital fleeing depressed interest rates for the promise of enduring growth. And once successful, each of these champions begets well-funded corporate treasuries and large cohorts of successful employees, both of which become engines to fund yet another generation of transformative ideas.
Today's tech leaders are also more global, both in their reach and in their origins. Silicon Valley might host an outsized proportion of startups, but it is increasingly a state of mind divorced from location. And here lies a bigger story. For tech startups are scarcely the only time machines in this chronicle.
Before a teenaged immigrant journey that took me to Canada, and eventually to Silicon Valley, I grew up in what felt very much like a Time Machine. 1980s Abu Dhabi was at its core a startup city on a single-minded mission to pull the future forward as fast as humanly possible; where nothing was constant save rapid change and growth. As the best founders will attest, progress cannot happen without taking risk. Success depends on the unlikely combination of vision, focus, skill, drive, and endurance. And on being right. It was so for Abu Dhabi.
Once a small oasis dependent on pearling, Abu Dhabi transformed in the span of just a few decades into one of the world's most modern city-states. Hailing from India, I found myself living between two very different worlds: An ancient, deeply spiritual native land whose industrious people champed at the bit of the License Raj; and a bustling metropolis that seemed to arise from nowhere, its own economy the marriage of nature's gifts, global talent, and its leader's vision.
Similar dynamics unfolded elsewhere, both presaging and following Abu Dhabi's journey: Post-War Japan and South Korea, Lee Kuan Yew's Singapore and its neighboring Asian Tigers, and of course China under Deng Xiaoping. Each was rebooted into a startup mode designed to inspire a whole society to pull the future forward. As with startups, there were spectacular successes among the countries who tried; and yet many more failures. At the peak of their transformative journeys, each of these successes were defined by a strong sense of mission and competent execution that transcended governments and led to widespread prosperity. And once successful, each of these economic champions beget well-funded national treasuries and large pools of sovereign capital designated to sustain that prosperity for generations.
But more prosperity comes with a price. The cost of short-term incremental growth is rising due to greater competition within well-established industries; and low-hanging yields have been obliterated by a decade-long program of financial repression across the developed world. The economies who worked so hard to “arrive” into the developed world have found that they, and those whom they joined, are both faced with the Sisyphean paradox of constant and disruptive change. Further, as a country or company evolves into “developed” status, it becomes inured to set ways of doing things, comfortable in its newfound financial prowess and shockingly vulnerable to insurgents better able to harness the next generation of competitive innovations.
Meanwhile, even as low-hanging yields disappear, competitive pressures within tech mean that the next generation of blue water innovation often involves the transformation of healthcare or materials science, or of physical goods and services employing software and automation. These concepts embody a higher level of risk and complexity, and an intrinsically longer gestational period than traditional software or consumer Internet companies. An investor cannot harness these innovations and their associated equity premia unless it develops a capability to assess novel ideas from first principles and is able to underwrite productive risk capital with the time horizon appropriate to each project. This is what classic venture capital firms like mine are designed to do, mainly because they are small and nimble.
But, as Winston and Paul ably show, it is this reality that has caused the sovereign funds — large, long-term, and naturally defensive organizations — to remarkably evolve into some of the most prolific and capable investors in transformative technologies.
The underlying irony, unsurprising to my venture investor's gaze, is that several of the most capable funds are themselves startups, often mirroring the national developmental dynamic that begat them. Some, like Mubadala of Abu Dhabi or CIC of China, are young, dynamic organizations that simply didn't exist before 2002. Others, like Temasek of Singapore or CDPQ of Quebec, date from the 1960s and 70s but, much like the Microsoft and Apple of recent years, have been imbued with a progressive leadership that “gets it”. The net result is that my peers in venture capital, who fifteen years ago would likely not have recognized any of the major sovereign funds save a few who made passive fund investments, find themselves happily partnered with them in everything from cancer therapy to cybersecurity, microsatellite constellations to nuclear fusion.
It would seem, therefore, that we are at an “End of History” moment in the growth of tech champions and sovereign investing, the categories and winners declared and enthroned.
But history is unkind to the complacent monarch.
In February 2020, the novel coronavirus pandemic definitively ended the remarkably smooth bull market that started in March 2009. Finance ministries and central banks worldwide unleashed a formidable fiscal and monetary fusillade. These acute measures can help in the near-term and potentially stanch bleeding in the financial economy. But the virus has exploded an economic neutron bomb across the real economy. Infrastructure is seemingly intact, but there are few humans in sight. Because of lag effects from the shock, widespread human suffering, continued epidemiological risk, and the general inability of supply chains to easily bounce back, this book will appear in a year where there is nary a prospect for a quick- V or W shaped recovery.
Several constructs that we have become comfortable with in recent decades have suddenly become open to debate. And startups and sovereigns alike will play critical roles in determining the outcomes.
Here are just two such questions:
Deglobalization vs. Globalization. The virus has closed even the most open borders, such as between Western European countries, and reopened what was thought to be a debate long settled in favor of more free trade and common standards. It is likely that economies become increasingly autarkic, both for reasons of political belief and physical need. As such, investors and founders alike must plan for a form of deglobalization. This calls for an openminded approach to unique approaches that originate from outside the ideas-bubble that spans Silicon Valley and its mimetic global proxies. Equally, the effort to universally vaccinate against or cure the virus might lead to more, not less, global cooperation; and more of an impetus for common approaches to shared resilience.
Decentralization vs. Centralization. The virus has disrupted the powerful, vital networks that animate modern life, creating an instant preference for technologies that increase local choice and push power to the edge of the network, thus reducing concentrated points of failure. Examples include distributed power generation and storage, efficient micro-factories, portable digital medical devices, and distributed trust applications like Bitcoin. One might think of this as a form of autarky expressed in product design. But there is also an argument to be made for even more centralization; that economies of scale for critical safety and productivity goods cannot be achieved without more, not less, coordination among countries and companies.
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