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The Harvard University Management Magazine has been published for a century and gathers articles based on research and data. Its authors include the best international management and business experts in a variety of fields, including leadership, negotiation, strategy, marketing, finance and operations. Harvard Business Review articles are translated and published in Globes three times a week: on Mondays, Wednesdays and Thursdays (G Magazine).
About the authors
Hemant Tanja is the CEO of the venture capital fund General Catalyst.
Farid Zakaria hosts the GPS program on CNN and writes columns for the Washington Post.
American hegemony is coming to an end. It is being replaced by a world order defined by superpower competition and increased nationalism, a change that has enormous implications for the world economy. The technologies and companies that will thrive in this new era will need more capital, more patience and higher levels of corporate governance than before.
The fall of the Berlin Wall in 1989 was seen as marking what Francis Fukuyama defined as “the end of history”, the end of centuries of competition over the question of what is the best political and economic model for nations. Shortly after, the collapse of the Soviet Union reaffirmed the role of the USA as the sole power, without question. This has led to the adoption of American policies in many parts of the world – free market economics and free trade, democratic politics and open technology platforms.
The return of politics
This period of free market reforms, globalization and technological transformation also had the effect of lowering prices and softening inflation. These forces, as well as generally enabling monetary policies around the world, created a very unusual macroeconomic environment – one that suited new financial products that encouraged innovation and growth. In industries like private equity and even venture capital, the ability to buy, refinance, and sell assets has become a powerful profit multiplier that has allowed even marginal investments to generate strong positive returns. In an otherwise low-return environment, these returns have attracted new levels of investment and capital abundance, fueling a new generation of companies and technologies.
But the “vacation from history” is over. American dominance began to fade and a new competition between superpowers took its place. At the same time, the effects and increasing frequency of global crises revealed the decisive weaknesses of a system characterized by great connectivity that prioritized openness and speed over safety and stability – in a dynamic and global world, local events quickly turn into crises with enormous consequences. Countries began to look beyond economics and global efficiency and re-prioritize domestic politics and global resilience.
It is too late and it is also not desirable to completely reverse globalization, but a renewed focus on national politics will cause it to take a different form: re-globalization. Countries will seek to balance its advantages with the desire to build greater independence and resilience in their most complex and important industries: health, defense, energy, manufacturing and financial services. This will require enormous amounts of capital and patience as countries and companies seek to strengthen and rebuild local R&D and production and distribution networks. The profound nature of these challenges will require an entirely new approach to company building and innovation and will change the model and very nature of venture capital.
In a time of economics over politics, we seemed to be moving towards a borderless world where the digital trumps the physical, and where technologies spread rapidly across the globe through unhindered markets. It was during this period that modern venture capital, as we know this industry today, was born. Companies could obtain capital relatively inexpensively to finance unproven and unprofitable business models at a time when technology aspired to digitize a world that would be entirely connected.
beyond venture capital
In this new era of re-globalization, however, the role of technology will be to solve far more complex and important structural challenges without the benefits of unfettered markets, low interest rates, and “easy money.” This will require a new venture capital model, one that encourages larger capital commitments, longer investment horizons, higher levels of collaboration and a greater degree of depth of corporate governance.
The new companies that will face such challenges will be born with completely different levels of ambition, business models and distribution networks than we have seen so far. Progress towards achieving such goals will not be measured in years, or perhaps even decades. In addition, technology will have to provide the leverage that financial engineering and government funding can no longer commit to.
The most significant impact will be on the level of responsibility and the depth of governance that venture capital investors will undertake. In the past, tighter capital requirements and shorter investment horizons have unfortunately allowed investors to shift concerns about corporate governance and plans for responsible innovation to management teams or roll such concerns further down the road. In the future, the challenges of this new environment will require much longer investment horizons and higher levels of financial and intellectual involvement.
In the last 30 years, venture capital has both profited and contributed to the rapid pace of innovation that characterized the era. Across the industry they learned to expect a positive risk/reward trade-off that was characterized by high returns on relatively short-term investments that required limited governance. But in a time of re-globalization, these models will no longer be sufficient. The complexity of today’s challenges and the gravity of the consequences of innovation will require a new paradigm for investments – one that prioritizes greater collaboration and longer-term thinking in order to build companies that will last for many years.
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