Building Up Venture Capital in Asia
European Straits #111
Dear all,
This is a quiet week, a bit of rest between my last week and travelling to Singapore 🇸🇬 next week with the Cercle des économistes (+ a few additional meetings to learn more about that intriguing country). By the way, many readers of this newsletter have been sending me reading suggestions about Singapore, which I’m currently working my way through. And others have pointed out that they are living there, and so I very much look forward to meeting you. Thank you everyone 🤗!
Right before Singapore, I’ll spend 36 hours in Paris 🇫🇷 to attend the OECD’s Going Digital Summit. As you may remember, I was a supporting Andy Wyckoff, Dirk Pilat and their colleagues while they were writing the Going Digital report. The report will be released next week, not without some celebrations and a long list of panels that you can watch online (alas, being there live is invitation-only). I’ll be participating in the one titled “Making digital transformation work for all businesses”, which is on Monday, March 11 from 15:35-16:30.
The Venture Capital State
I recently met Robyn Klingler-Vidra, a researcher at King’s College in London and author of the recently published The Venture Capital State: The Silicon Valley Model in East Asia. The book is about how the governments of Taiwan, Hong Kong, and Singapore tried and orchestrated the emergence of a local venture capital industry similar to that of Silicon Valley in its practices—and, hopefully, its outcomes (that is, fueling the growth of dominant tech companies).
At first, I was surprised at the book’s focus. When you think startups in Asia, you don’t usually think about those three countries/regions. The real action seems to be more in China, South Korea (see this issue of my newsletter) and Southeast Asia (read this article about Steve Yegge’s joining Southeastern tech giant Grab). Taiwan is usually included on the global map of tech hubs, but not Singapore or Hong Kong.
I’ve been in Hong Kong several times, and I’ve been actively preparing my stay in Singapore next week. In neither case have I heard that there was a particularly vibrant startup community. Those two tiny countries/regions are more shipping and financial hubs than startups. And in both cases there seem to be obvious obstacles to building startups. Neither place sounds like they reward rebellion, a key feature of any startup community. Also, you have the direct competition with other sectors, such as financial services, that are far more financially rewarding over the short term and thus attract the most talent.
By the way, in his masterful How Asia Works, Joe Studwell dismisses both Hong Kong and Singapore as irrelevant to any generic reflection on economic development. For him, both are too small, not dragging along the overhead of larger countries. They’re specialized in attracting foreign investments, notably by foreign corporations, rather than growing their own champions. Both are convincing cases of how you make the journey “From Third World to First”, to borrow Lee Kuan Yew’s words. But they’re really not on the map when it comes to nurturing great companies.
And so why should we care? The case that Robyn makes in her book is “contextual rationality”. Here are four conclusions that I’m drawing from my reading so far.
1/ Venture capital in the US didn’t become an industry through market magic. It turned into a specific professional field attracting talented people because the US government’s SBIC program lifted up a first generation of managers, such as William Henry Draper III and “Pitch” Johnson. Then it grew tremendously in the 1970s not only thanks to the first wave of tech IPOs, but also because of two critical regulatory changes: a lower taxation rate on capital gains, and the redefinition of the “prudent man rule”, which made it possible for pension funds to allocate a fraction of their assets to VC funds.
Because this happened exactly at the same time as the boom of personal computing, everything together generated a positive feedback loop. A higher demand for capital could finally be met by a dramatically increased supply, all triggered and amplified by clever policy decisions.
2/ Now what Robyn is demonstrating in her book is that any country (in this case Taiwan, Hong Kong, and Singapore) can reverse engineer the whole sequence that led to the thriving of venture capital in the US. This is a major contribution because I don’t know many works that have documented that kind of effort. In fact, when my cofounder Alice Zagury, CEO of The Family, was asked a while ago to work for the French government and make , we had a very hard time backing up what we were explaining about the US with robust documentation. Had Robyn’s book already been published, we would have been able to use it to make a more convincing case: If Taiwan and Hong Kong have been able to reverse engineer the US “Venture Capital State”, why not France?
3/ However there’s a catch: reverse engineering is not the same as replicating. And indeed that’s not what happened in the Asian countries covered in Robyn’s book. Instead of doing exactly the same as the Americans, those in charge in Taiwan, Hong Kong, and Singapore made the effort to adapt what they had devised to the local context. Having understood what made US venture capital thrive, they could abstract a framework and then apply it to the very different context of their own country.
It’s a difficult art, transposing a nexus of policies to a radically different context. I’m not sure European policymakers have what it takes to practice that art. But it should rank very high in our list of European priorities: More and more tech companies are ready to raise more capital, and this demand is not being met by our local venture capital industry. European VCs, with a few exceptions such as our friends at Index Ventures, are still lagging way behind, in no small part because of an adverse policy context.
4/ It always surprises people how useful history is when it comes to succeeding at innovation (a lesson well taught by historian Margaret O’Mara!). Everyone knows about Silicon Valley and more or less understands why it works so well. Very few people, on the other hand, have a clear idea of what it took to bring Silicon Valley to where it is today. Only a few determined policymakers, such as those that Robyn interviewed in Asia, have the desire to learn that history and to draw appropriate lessons.
More people should do that, especially in Europe: not entrepreneurs, who should be focused on more urgent matters such a building great products and addressing large markets, but investors like us, who would like to do their job better, and policymakers who would like to support all of these with a better environment. And so I’m very grateful to Robyn Klingler-Vidra for doing the hard work, and I look forward to learning more when I am in Singapore in two weeks!
Book reviews and others
✍️ From April 2018 to last month, I was an op-ed columnist for the French newspaper Le Monde. When they approached me, their request was that I write on the digital transition in general. I chose to focus on authors who are relevant and influential in the English-speaking world but sadly overlooked on the French market—in most cases for lack of a French translation. I wrote 10 columns in total, but that’s now over as Le Monde has decided to cut down on guest columnists. And so I’ve decided to share English translations, posting one per day on The Family’s blog. Here are the first 5:
On The Entrepreneurial State by Mariana Mazzucato: Innovation Doesn’t Run on Calls for Project
On Doing Capitalism in the Innovation Economy by Bill Janeway: The ‘Pas de Deux’ of the State and Venture Capital and the State
On Makers and Takers by Rana Foroohar: After Financialization
On Learning by Doing by James Bessen: From Innovation to Job Creation
On The View From Flyover Country by Sarah Kendzior: The Illusions of Prosperity
🎙️ Also, my colleague Mathias Pastor started a podcast called Sigma, showcasing young people taking on particularly hard problems. He’s seeking to bring people from different walks of life (authors, entrepreneurs, politicians, researchers...) who share a real intensity in their endeavors, to hopefully raise the aspirations of others. He released his first episode this week; here are the podcast & video links. If you know anyone that Mathias should interview, please let us know!
Further readings on building up venture capital
The Warburg Pincus Story (Lionel Pincus, in Udayan Gupta’s Done Deals: Venture Capitalists Tell Their Stories, July 2000)
The Secret History of Silicon Valley (Steve Blank, March 2009)
The Political and Financial Economics of Innovation (William H. Janeway, Institute for New Economic Thinking, April 2012)
Why The SBIC Doesn’t Work For Venture Capital Anymore (Brad Feld, FeldThoughts, July 2014)
A Venture Capital History Perspective From Jack Tankersley (Brad Feld, FeldThoughts, August 2015)
Low Risk, High Reward: Why Venture Capital Thrives in the Digital World (me, The Family Papers, November 2015)
A Brief History of the World (of Venture Capital) (me, The Family Papers, May 2016)
The Unicorn Hunters (Kim-Mai Cutler, Logic, April 2018)
Building the Venture Capital State (Robyn Klingler-Vidra, American Affairs, September 2018)
Thoughts on the New Jersey Innovation Evergreen Fund (Ian Hathaway and Brad Feld, Startup Revolution, October 2018)
Warm regards (from London, UK),
Nicolas