Hi, it’s Nicolas from The Family. I’m beginning a series focusing on specific countries, how they’ve been faring so far in the Entrepreneurial Age, and what the COVID-19 crisis reveals.
⚠️ The paid version of European Straits launched four weeks ago. In addition to this free edition, my paying subscribers receive a Monday Note as their work week is about to begin and a set of Friday Reads that dig deeper into various topics related to investing in tech startups, especially in Europe.
If you’re not one of those paying subscribers, here’s what you’ve missed lately 😉
My take on how venture capitalists are adapting to the new COVID-19 context: Venture Capitalists and the Choices They Make.
An in-depth discussion of why and how governments can support startups through venture capital in the current context: Supporting Venture Capital During the Crisis.
A primer on the discussions related to surveillance and privacy when it comes to fighting the pandemic: Big Brother or Chaos? Is There a Third Way?
If you don’t want to miss the next paid editions, it’s time to subscribe! In the next Friday Reads, I will focus on how the current crisis is impacting the education industry.
As for today, I’d like to kick off a series focusing on specific countries in the context of the shift to the Entrepreneurial Age and the acceleration brought about by COVID-19. Let’s start with the US 🇺🇸👇
1/ One of the most important questions for European tech these days is the future relationship between the US and Europe in what I used to call the “global digital economy”. Indeed, most of us grew up in a globalized world where the US and Europe formed a single, solid bloc in which ideas, content, and most goods and services were freely traded back and forth across the Atlantic.
However, the rift between the two sides is growing as we speak, deepened by the COVID-19 crisis. An immediate conclusion is that the digital economy is not global anymore. Not only is there a widening gap between the Western and Chinese worlds. There’s also a growing rift between the US and Western Europe, which up to a recent point were considered faithful allies.
2/ There are two signs of that expanding rift. One is the complete disappearance of any kind of US leadership at a global scale. Here’s Ian Bremmer of the Eurasia Group:
The other is the contrast between two things we take for granted. On one hand, there’s such a thing as the Internet Nation and its strong global network of like-minded tech people. Yet the actual working relationship between Silicon Valley and Europe is tenuous at best. As I explained in a recent issue, The Future of Silicon Valley,
Venture capitalists in the Bay Area are not interested in Europe in a systematic way. A few firms now have outposts in Europe, but the reasoning seems to be as random as “One of our partners wanted to spend some time in London with his wife, so we figured we should have a look at some startups there.” More often than not, those who have invested in European startups did so because founders came to the Bay Area to pitch them.
And so this phenomenon has been occurring for quite some time: the US is becoming more and more inward looking. The most enlightening author on the topic is geopolitical strategist Peter Zeihan:
We stand at the end of the era that began with the Cold War. It’ll be less like the messiness of the early 2000s or the raw potential of the 1950s, and more a disastrous combination of the battle royales and displacements of the 1870s against the economic backdrop of the 1930s. It. Will. Suck. A mad scramble for the scraps of the era just ending. Compared with the safety and wealth of the past several decades, it may seem like the literal end of the world. But the end of an era isn’t the same as the end of history. Something new is coming. Something that, historically speaking, is far more “normal” than anything the Americans created. Just keep in mind that “normal” is far from synonymous with “comfortable,” much less “favorable.”
3/ Zeihan’s views predate the election of Donald Trump, but they sure have been vindicated by it. And now he’s everywhere, delighting both his fellow experts in geopolitics and those on the American right who like to hear a consistent explanation of why they are right to see the world as they see it.
It sure can sound good to hear that Americans will be OK once they’re on their own—if you’re American. But Zeihan’s grim view of how the US relates to the rest of the world is painful for people like me.
I love the US as a nation and it’s still hard for me to accept the fact that we Europeans and Americans don’t have much in common anymore. Even worse, I have invested quite a lot of time and resources over the past 20 years in getting to know the US better, figuring out how the US and Europe can complement each other, and developing a network on the other side of the Atlantic.
So when things happen that point to that whole investment now becoming worthless, I have both losses to recoup and wounds to lick. (Here’s the whole story of my passion for the US: The Fall of the American Empire.)
4/ It’s likely that the COVID-19 crisis is the last nail in the coffin. Consider all the implications for Europe:
The US has been missing in action when the time came to design a global response to the pandemic, and most people outside the US won’t forget it.
With the lockdown on both sides, travel has come to a halt and there are reasons to think that it will never return to what we had come to see as normal.
The crisis has also widened the gap between the US and China, which forces Europe to pick a side, such as is seen when it comes to using Huawei to deploy 5G networks.
All things considered, if you’re in Europe, would you choose to ban Huawei to please Donald Trump? Why should you, considering that he’s been completely useless (and even destructive) in fighting COVID-19? If you can’t trust him when lives are literally on the line, how can you trust him in business?
5/ The current context of being confined at home is a good opportunity to re-read old books and try to understand what has led us to the current situation. There’s a lot to be learned from history—in this case, what once led the US to turn outward and get so deeply involved in European affairs:
It hasn’t always been like that. Given the origins of the American republic, the US was quite wary regarding Europe. Here’s what George Washington famously asked in his farewell address as president: “Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor or caprice?”
Then for most of the 19th century, the US was nothing more than a developing economy lagging behind most European nations and seeking to protect its nascent industries with high tariffs. Hardly a favorable context for looking outward—the US was busy doing what developing nations do, including stealing intellectual property (in this case, from Great Britain)!
Even into the first half of the 20th century, isolationism was the dominant approach in the US. Woodrow Wilson’s internationalism, which got the US engaged in the First World War and then provided the inspiration for the League of Nations, was a clear break from the norm—that advocated by staunch isolationists such as Charles Lindbergh on the right and Hiram Johnson on the left.
6/ Things only started to really change after World War I. A new generation of American businessmen began expressing an interest in doing deals in Europe because the post-war reconstruction created many opportunities for capital-intensive businesses that needed to expand.
W. Averell Harriman is a good example of that breed. The heir of a railroad empire, he saw that his family’s business had reached its peak on the US domestic market. So he set out looking for opportunities to expand internationally, founding a merchant bank in the process.
The pull of Europe was made even stronger by many of these figures’ deep cultural connections with the Old Continent. Everything in their cultural background and their education in New England’s most select boarding schools led them toward Europe, especially England. In addition, learning foreign languages, starting with French, German and Russian, was part of their gentleman’s education.
(W. Averell Harriman later became a diplomat and one of the architects of the post-WWII international order. His third wife, the fascinating Pamela Harriman, was once the US ambassador in Paris.)
7/ All of this accelerated after World War II. As explained in the book I’m reading these days, The Wise Men, by Walter Isaacson (who wrote the famous biography of Steve Jobs) and Evan Thomas, there were three reasons why the US decided to engage so deeply with Europe and the rest of the world:
Like after the First World War, the US business elite was attracted to Europe and thought that rebuilding entire countries such as France and Germany would provide many opportunities. And this time, instead of it being a collection of individual initiatives like Harriman’s in the 1920s, it was a grand strategy supported by the Marshall Plan.
There was the threat represented by the USSR, a country whose system and values were so radically different that it was practically impossible to find common ground. As written by Henry Stimson back then, the US “cannot be sure of getting on permanently with a nation where speech is strictly controlled and where the government uses the iron hand of the secret police”.
And then there was the UK! In the aftermath of WWII, Germany was in ruins, France wasn’t in much better shape, and the UK was the dominant power in Europe, engaged in a power struggle with the USSR over their respective spheres of influence. The British really needed the Americans to come to their rescue and help give them the upper hand over the Soviets.
8/ If you’re interested in today’s state of transatlantic relations, you’ll see that none of the situations above exist anymore. For starters, Europe is not really a significant consideration for most of the US business community. The reasons are complex:
In part it’s because economic growth has been slowing down since Europe caught up on the US in the 1970s. This led to the end of the international system designed at Bretton Woods and opened a period of globalization which, paradoxically, led American companies to become less interested in what was happening on the ground in various regions of the world. I talked about it all in this 2015 paper: The Power of the Tongue: English in the Digital Economy.
Another aspect is because there’s too much of a cultural gap when it comes to doing business. I love one anecdote about legendary hedge fund manager Julian Robertson, who was expecting great investment opportunities in Germany following the fall of the Berlin Wall in 1989. But Robertson was astonished to discover that German managers “were running the companies for the sake of the employees rather than the shareholders” and that they “couldn’t care less about returns on equity”. He left without doing any deals (quote from More Money Than God).
Even Silicon Valley, whose capital-intensive tech companies have a direct interest in expanding their business abroad, is quite aloof when it comes to Europe. They’ve already adapted their operations to a post-Trump world in which free access to European markets is disappearing. Read these two pieces to learn more: What Trump Did to Silicon Valley and Big Tech in a Fragmented World (with an in-depth discussion of Peter Zeihan’s work).
9/ The Soviet threat has disappeared as well, and has not yet been replaced. I’m writing “yet” because China could end up as the global foe that forces the US to look outward again:
The state of the US-China relationship is similar to what the US-USSR relationship was in 1945. The two countries wanted to get along and do things together, but cultural and linguistic differences made it impossible to understand each other. We’re coming out of a period in which the US was generally benevolent toward the Chinese, similar to the attitude toward the Russians during the Second World War. Now the US realizes that it hasn’t obtained much in exchange.
Like the Soviet Union, China wants to have a sphere of influence. Peter Zeihan makes the case that it will be hard for China to maintain this sphere. Still, in the meantime they’re working hard to assert their power close to their borders (the First Island Chain) and expand their influence along the Belt and Road Initiative, which leads all the way to...Europe.
Before China emerges as a newly equal superpower, however, it will be hard for American leaders to convince their fellow citizens that there’s a need for the US to engage with the rest of the world. And if such an engagement does occur, the new Iron Curtain will probably be in Africa, the fastest-growing region in the world, rather than slow-growing, aging Europe.
10/ Finally, here’s one interesting question: What about the UK? Wouldn’t the British have an interest in leveraging the US so as to increase their influence and power in Europe, like in 1945?
As much as it amazes me, it seems that Britain is doing exactly the opposite. With Brexit, they’re emulating the US in an isolationist move rather than using the Special Relationship to become more powerful in Europe. I’ll discuss this in more detail in the coming issue dedicated to the UK, but in the meantime there are interesting implications as to what will become of American interests in Europe—that is, the UK becoming a mere proxy that the US will selfishly use to defend their residual interests on the continent. Let me quote Peter Zeihan on that one:
Post-Order America won’t be in the business of supporting allies that cannot support themselves. To that end Britain has location and hardware arguing for it. Great Britain’s position just off the European mainland has made London the European arbiter for the bulk of the past four centuries. Britain’s geography couldn’t be better designed to drive the French mad. It acts as both an effective barrier to large-scale attack while also giving the English a redoubt from which to interfere on the mainland. Close enough to participate in Eurovision, separate enough that armies marching across Europe isn’t reason enough to leave tea early. That’s useful to America.
In conclusion, what are the lessons for tech companies and tech investors? Three things:
Doing business in the US will still represent a huge opportunity, but very few European companies will be able to operate there. As explained in a previous issue (echoing Ian Bremmer), the main rewards will be for US tech companies that focus on their domestic market (Amazon) as opposed to those who count on global demand and/or foreign supply chains (Apple).
The US itself will keep on growing as an economy, but in a very different way from what we’ve been used to. Being isolated from the rest of the world, with so many domestic resources to rely on, will lead to a slowing pace of technological progress. And the weakening of the US middle class, a pure byproduct of globalization, will change the political economy of the nation. Expect even more brutal polarization and the return of class warfare in America!
Finally, the disappearance of Old America means that the world order we’ve been used to is about to disappear as well. As a result, the world will become more fragmented and more dangerous. This has profound consequences when it comes to the opportunities we should pursue and the threats we must hedge against. Subscribe to the paid version of my newsletter if you want to dig deeper into that topic over the coming weeks!
🖊️ Given that we’re all in confinement, I was pleased to have an in-person interview with the only person I can these days: my wife, Laetitia Vitaud ❤️! We talked about the impact of the crisis on the startup world (in English) for European recruitment site Welcome To The Jungle 👉 “Crises aren't just problems that require solving, they're also opportunities to reshuffle the game”.
🦊 At my firm The Family, we’ve been working hard to make the transition to not only remote work, but also online events. Last week marked our first efforts, with an all-day Remote Summit on Friday and a meet-your-cofounder event on Saturday morning. My cofounder Alice Zagury is also hosting a daily “Good Vibes” talk with entrepreneurs we love, a daily dose of optimism and realism regarding how they’re facing the crisis. You can check everything out and register for upcoming events on our newly updated homepage, right here.
The comprehensive reading list attached to the European Straits weekly essay is part of the Friday Reads paid edition. Subscribe if you want to receive that list on Friday!
From Normandy, France 🇫🇷