Key Ideas: Which Hold Up the Test of Time?

European Straits #246

Mar 14, 2024

🎙️ Exciting news 🔥 I recently had the honor of being a guest on Solenne Niedercorn-Desouches's Finscale podcast, a French-language program. Based in Luxembourg, Solenne is a seasoned financier and versatile interviewer renowned for her engaging and warm interviewing style. Our discussion spanned topics such as Europe, alternative assets (especially venture capital), and The Family, featured in the episode titled Hors-Série #20 - Détours Européens avec Nicolas Colin. You can find this episode on Apple, Spotify, and other listening platforms. If you're fluent in French 🇫🇷 I highly recommend giving it a listen! 🎧

As for today's essay, it reviews nine key ideas that have been central to this newsletter over the past seven years, including topics discussed with Solenne in the podcast. We'll explore how much these ideas are still valid in 2024. Letting go of ideas can be challenging, especially when they've helped shape our identity. Many ideas have contributed to my identity as an entrepreneur and a writer. However, not all ideas withstand the test of time. Read on 👇

1/ The Age of the Multitude

My initial exploration of technology's impact on the world was through a book co-written with my friend Henri Verdier, now the French Ambassador for digital affairs, during 2011-2012 (title: L’Âge de la multitude, with the second edition published in 2015). Guided by Henri's vision, we centered the book on the premise that technology empowers individuals, enabling them to surpass the influence of organizations—a concept we believed explained the current paradigm.

A dozen years later, I wonder if our thesis still stands. My doubts are inspired by two main observations. Firstly, we assumed this empowerment would compel companies to prioritize exceptional user experience. However, has this idea turned to ‘shit’? Cory Doctorow captured the shift in the concept of the “enshittification” of platforms (a topic I recently discussed (in French) with my wife Laetitia Vitaud on our Nouveau Départ podcast).

Secondly, the emergence of artificial intelligence challenges our thesis further. If companies can harness large language models that mimic the collective power of individuals, the dynamic between the multitude of humans and large organizations could shift dramatically. All in all, though not the focus of this edition, it's clear that the concept of the Age of the Multitude requires a substantial revision.

2/ The Age of Computing and Networks

Between 2012 and 2015, while working on the second edition of L'Âge de la multitude, I was greatly influenced by Venezuelan-British economist Carlota Perez's thinking. Her 2011 interview with Fred Wilson is essential viewing for understanding the technology-led “Great Surges of Development,” which every 70 years or so redefine production, consumption, and labor around pivotal technologies—currently computing and networks.

Henri and I had effectively applied these concepts to explain the rise of the “Multitude” as the driving force of our age: the evolution of personal computing devices, from the 1971 microprocessor to the 2007 iPhone, and the growth of networks that exponentially boost individual power.

However, the current debate (including my own views on the door closing on startups) questions whether we're now moving beyond the Age of Computing and Networks. Though advancements in energy, space, healthcare, and agriculture hint at a new, different technological revolution, the AI boom—powered by advanced computing (credit to Nvidia) and networks (think large language models functioning as virtual ant colonies)—suggests we're still navigating this era, with still much to leverage.

3/ Capitalism and the Corporate Contract

In 2019, I discovered historian Fernand Braudel's insightful perspective on capitalism. He views it as the process of integrating capital into the production system, allowing companies to surpass the limitations of the merchant economy and achieve precious increasing returns to scale. This concept refined my understanding of corporations as entities balanced precariously among three stakeholders: customers seeking better quality at lower prices, employees demanding higher wages and improved working conditions, and shareholders aiming for greater returns on their investments, with the distinct ability to change top management if dissatisfied.

Over the past five years, the dynamics within the corporate contract, particularly in the tech sector, have shifted significantly. Amazon, as an example, has grown to become the second largest employer in the US, trailing only Walmart. This spectacular HR expansion has empowered employees, leading to rampant unionization and stronger bargaining positions that advocate for higher wages.

Meanwhile, shareholders have also asserted more control, demanding that rapid growth yield higher returns. This has manifested in activist campaigns for control over companies like Twitter, Google taking a stance against politically active employees to prioritize value creation, and tech giants like Apple, Microsoft and Meta increasingly rewarding shareholders with long-awaited dividends.

In these recent developments, I observe that customers/users often appear to be the disadvantaged party. Braudel’s vision of capitalism and the framework of the tripartite corporate contract definitely stand the test of time, and highlight a significant evolution in the balance of power within corporations.

4/ Tech Companies Are Different

In exploring the evolution of techno-economic paradigms, my belief was that the new era would spawn a distinct type of company. These companies, born from the Age of Computing and Networks, would differ significantly from their predecessors in the Age of the Automobile and Mass Production, not only in their products but also in their organizational structure, culture, and stakeholder relationships, including with customers, employees, and shareholders.

Initially, major tech companies seemed to embody this new paradigm by prioritizing exceptional customer service, treating their highly skilled employees incredibly well, and placing shareholder interests lower on their agenda, often accumulating large cash reserves without paying dividends. This led me to define a model for what I considered a true tech company: one that delivers an outstanding customer experience, consistently monitors user engagement, and strives for increasing returns to scale.

Yet, this model now feels outdated. Amazon, once the pinnacle of seamless service, has become bloated and is now crowding its platform with advertisements, compromising the user experience. Meta has just started issuing dividends, and Google has restricted its historically open work culture, indicating a movement towards traditional corporate models. As these behemoths age, they increasingly resemble 20th-century companies, challenging the idea that tech companies are fundamentally different.

5/ The Great Fragmentation

In my experience with the European tech ecosystem, it has become clear that we have all been misled by the illusion of globalization. Growing up in the 1980s and 1990s, we believed the world was becoming flatter and more interconnected. Yet, tech entrepreneurs and investors encounter significant barriers: regulatory, linguistic, and above all cultural, leading to a preference for working with similar backgrounds, and effectively limiting any company’s international expansion.

There are exceptions, of course. The trade of tangible goods benefits from robust global infrastructure, like shipping containers, reducing the need for direct communication, often facilitated by brokers. And certain more intangible industries have developed a universal culture, making them globally accessible for people with diverse linguistic and cultural backgrounds. Financial services and sports like football and Formula 1 integrate diverse talents through a common culture and language. The English language, in particular, acts as a unifier within global industries, facilitating connections and partnerships.

However, the tech industry has yet to embrace a universally accepted culture and language, resulting in what I’ve termed the Great Fragmentation: borders matter in tech, now more than ever in 2024! This situation demands a strategic pivot for entrepreneurs, acknowledging the world's fragmented nature. Europeans, in particular, should be well-equipped to adapt to this harsh reality, yet it's disappointing how we've fallen short of fully realizing our potential.

6/ The Rise of a New China

This thesis is due for an update. I was initially captivated by China's rise in the Age of Computing and Networks, especially after Alibaba's 2014 IPO. My interest grew from bullish views on Chinese tech, like Mike Moritz’s op-ed in the Financial Times and my visits to China in 2017 and 2019 for firsthand research. My 2018 book, Hedge, even predicted China might surpass the West.

However, my view has shifted. While China isn't performing poorly—highlighted by Huawei's successful launch of a 5G smartphone despite US trade restrictions—it has turned more inward than anticipated, moving away from projecting a globally friendly image. While I remain cautiously optimistic about China amidst its governance and geopolitical challenges, I no longer see it as the global beacon in the Age of Computing and Networks that I once envisioned.

7/ Europe in the Middle

The concept of Europe's distinct identity from the tech-dominant US and China is central to my discussion with Solenne and remains especially relevant in 2024.

For a decade in the 2010s, Europe aspired to cultivate its tech startups into giants by adopting the Silicon Valley approach: securing large funding rounds at high valuations to minimize founder dilution, and aggressively expanding beyond initial markets. However, this strategy largely failed to produce tech giants, with Spotify and perhaps Revolut as rare exceptions.

This outcome doesn't mean success is unattainable. The rise of Chinese tech demonstrates that Silicon Valley's model isn't the only viable strategy. The existence of vastly different successful approaches in America and China suggests the potential for numerous others, including a uniquely European model.

Yet, Europe has not yet found its specific playbook. The journey begins with Europeans introspecting to pinpoint their continent’s unique qualities distinct from the US and China. My newsletter will focus more and more on identifying Europe's optimal strategy and fostering successful companies based on that insight, reinforcing my belief in Europe's unique, unrealized position in the tech landscape in 2024.

In short, my idea of the necessity for a European path has stood the test of time, but time has proved it's even harder than we thought! 😓

8/ Entrepreneurial Ecosystems Worldwide

During the 2021-2022 bubble, startups globally raised funds at high valuations, spreading the Silicon Valley model across India, South America, Southeast Asia, and Africa. This seemed to signal the emergence of many supportive entrepreneurial ecosystems worldwide, presenting significant investment opportunities for global investors.

This struck a chord in me. Many players, including The Family, have worked to foster startup communities across Europe, proving that creating supportive environments for entrepreneurs is possible globally. This inspired me to aim for a global investment initiative to support developing countries' emerging entrepreneurial ecosystems, which in 2021 I thought would be the next iteration of my career.

However, by 2024, this outlook appears outdated. The Great Fragmentation has all but intensified, complicating connections with early-stage startups and local investors without a regional presence. Furthermore, tech entrepreneurship is increasingly seen as a science with clearer principles for ecosystem success, diminishing the need for cross-border support at the local level.

In summary, while emerging entrepreneurial ecosystems do exist and thrive, the notion that they collectively create a global playing field for investors remains uncertain as of 2024.

9/ The Diffraction of Venture Capital (VC)

Refer to the previous edition (The Year Ahead for Alternative Assets) and my French-speaking podcast with Solenne for detailed views on the future of VC. However, the developments since 2022 have fundamentally challenged my earlier prediction that VC would dominate the financial services sector.

I had described this shift as The Diffraction of Venture Capital, anticipating that all asset classes would evolve to incorporate the VC model, characterized by embracing significant losses in pursuit of high returns, driven by technological advances.

Yet, just a few years on, this prediction appears out of step. Generally, VC has faced widespread criticism for its overextension and the persistent herd mentality that still dominates the asset class. In addition, it seems VC is returning to its roots, focusing on funding high-tech innovations and perhaps SaaS companies. Meanwhile, both companies and investors are shifting towards prioritizing profitability and more consistent returns across portfolios, favoring a model that resembles traditional private equity more closely than the traditional VC approach. As I discussed with Solenne on the podcast, companies that masqueraded as startups will continue to secure funding from investors previously posing as VCs. However, all will shed the misleading labels and, in doing so, bring clarity to the business landscape!

10/ What Does the World Look Like in 2024?

It seems increasingly fragmented. Technology has become mainstream and normalized, paralleling the investment industry’s shift away from the VC-led era towards a renewed emphasis on funding sustainable companies with positive cash flows.

To me, this indicates an era of accelerating productivity gains in a mature, perhaps even saturated, market reminiscent of the 1970s. The victors will be entrepreneurs who can harness the mature technologies of computing and networks, fulfill the demands of discerning investors, and carve out strong strategic footholds in any market that’s accessible, big or small. Similarly, investors who can identify teams equipped to navigate these unique challenges will also come out on top.

In this context, we might be on the cusp of a golden age for building successful European companies, different from the Silicon Valley tech startups of the 2010s that prioritized blitzscaling across borders, fueled by deep-pocketed VCs in a time of low interest rates and plentiful capital. The emerging strategy emphasizes laying solid foundations locally, focusing on defensibility and positive cash flow as the primary objectives for today's entrepreneurs. A typical European approach, indeed!

As for me, I'm open to new ideas as always, and eager to see how they might influence my path forward. I believe the readiness to learn and adapt is a humble but essential part of any intellectual journey, underscoring a belief in the value of ongoing personal growth. What do you think?

From Ottobrunn, Germany 🇩🇪

Nicolas