This week: Governments vs tech; Chinese dream or Chinese nightmare; how to make venture capital work; and more…

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The Washington Post published an interesting op-ed by Katherine Boyle, a VC at General Catalyst, that argues power is ebbing away from Washington DC to Silicon Valley. A lot of tech people make this argument these days, and not just in the US, but even if Silicon Valley is in the ascendant, the government counter-revolution will not be painless for the tech world.

This week saw a number of striking developments on this front. In a little noticed move, the US Department of Commerce published “advanced notice” of potential restrictions on US firms’ exports of emerging technologies, such as AI. If that sounds ludicrous, remember that the US restricted the export of cryptography for many years - though whether it’s feasible in a world of cloud computing is an open question. At the same time, the US has been actively exhorting its allies to drop Huawei, the Chinese firm that is arguably the leading manufacturer of 5G equipment. Not to be outdone, the UK Parliament sent a serjeant-at-arms to a London hotel to seize documents relating to Facebook’s business.

This is going to be a key theme of the next decade: nation states using their international clout to shape or cripple technology standards as a tool of both intra- and international competition. Henry Farrell, in a long but superb overview, calls it “weaponising interdependence”. Expect this to intensify.

The New York Times published an article showing that social mobility is now higher in China than the US, under the provocative headline, “The American Dream is Alive. In China”.

Quite apart from the critique that there are some pretty fundamental human rights caveats to this argument, the bear case on China is actually getting easier to make. According to Bloomberg, missed 2018 bond repayments in China have exceeded all previous highs (It’s worth reading the piece for the observations on the interconnectedness of Chinese firms and the risks of contagion). Relatedly, Christopher Balding estimates that debt service in China is now 18% of GDP! If that becomes unsustainable, Western China-envy will reverse quite quickly.

Semi-related: on the topic of mobility/inequality, Noah Smith has a great thread on the failure of US wages to keep up with productivity gains. Quiz question for UK readers: do you think the same is true in the UK? I’m guessing that most people, like me, would say yes - but the opposite is true. Perhaps an interesting example of how much US discourse shapes the global debate.

It’s been a good week for big thinkpieces on venture capital. My friend Ahmad Butt has an excellent series of posts on where alpha (i.e. excess return above the market) comes from in venture capital. Fred Destin provides a great tweetstorm-length summary here. Separately, Neil Devani has a long but excellent series on the history and future of venture capital that starts here (but don’t miss the finale, which covers some predictions for the future).

I am probably biased to find Ahmad’s conclusions compelling, as they are a strong fit for the thesis that underpins my day job: VC works best in capital constrained strategies that focus on the early stage; it is a human capital-driven business, both at the investor and founder levels; and it’s striking how little venture firms have innovated or even been pushed to innovate by their investors.

There’s lots to dig into here, but I want to highlight one little understood point that Ahmad mentions: there’s much more evidence of individual investor-level “returns persistence” (i.e. you’re good, not lucky), than firm-level returns persistence. This reminds me of one of the most striking academic studies I read this year: the angel portfolios of VC partners tend to perform better than their fund investments. LPs beware!

Thanks for reading. I love getting your comments and feedback, so do hit reply if you have thoughts. Equally, I love getting new readers, so if you know someone who might enjoy TiB, just forward this on.

Until next week,

Matt