Capitalism without Capital and after COVID (#37)

Structural Shifts with Stian WESTLAKE, co-author of ‘Capitalism without Capital’ book.

Our guest is Stian Westlake, co-author of ‘Capitalism without Capital: The Rise of the Intangible Economy‘ and we discuss the implications of an economy built increasingly on intangible assets, even more so in the post-pandemic world. In this podcast, we discuss the four S’s that explain how intangible assets behave differently than tangible ones, why we’re not seeing more economic growth or higher productivity right now, even though intangible assets are more scalable, what governments need to do to mitigate the increased income inequality that’s occurring in part due to the rise of intangible investments, and more. Stian serves as the Chief Executive of the Royal Statistical Society. Previously, he served as an advisor to three British ministers for science, innovation, research, and higher education. He also led the policy and research team at Nesta - UK’s National Foundation for Innovation.

Full transcript
Structural Shifts with Stian WESTLAKE

Sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things

[00:01:30.26] Ben: Stian, thank you so much for coming on the Structural Shifts podcast. We’re really delighted to have you on. I think there are a few structural shifts as profound as the one you’ve been investigating, most notably through your 2018 book, “Capitalism Without Capital”, which is the shift from a tangible to an intangible economy. This is a phenomenon which has been playing out over the last 40 years in developed economies, and which, as we’ll discuss, has likely been accelerated by the pandemic. It’s also a phenomenon, which, although it might seem slightly esoteric, is at the roots of or contributing to some of the biggest changes we’ve seen in society, such as inequality, as well as in business, such as the rise of big tech platforms. So if it’s okay with you, let’s start by just defining what we mean by an intangible economy. So, do you mind just kind of setting the scene and telling us the extent to which investment has shifted from tangible to intangible assets?

Stian: Yeah, of course. If you think about what the economy used to be like 40, 50, 100 years ago, the majority of the stuff that businesses, that governments invested in were stuff you could see and touch — what economists would call tangible capital. So, it was machines, it was factories, it was vehicles, it was buildings — all these kinds of things. One of the things that we’ve been noticing is there has been a really slow but pronounced change over time, such that now the majority of investments that businesses make — buying an investment, I mean, something that you incur a cost upfront, and it delivers you a benefit over time — most of the stuff is stuff that you can’t see or touch, things that you can’t stub your toe on, as it were. It’s things like investing in r&d to create new ideas, new patents, things like investing in marketing, advertising, customer understanding to build brands, it’s things like employer training. And it’s stuff that has this kind of fuzzy idea of things like organizational development. So if you think of a company like Apple, one of Apple’s competitive advantages is its remarkable supply chain. Now, the supply chain includes some things that you can touch — it includes factories — but Apple doesn’t own them. So those are to some extent tangible. The stuff that really creates value for Apple is these privileged relationships, the expectation of doing business, and their access to these suppliers, which allows them for example, to get products to market at volume, fast. These things are investments, they’re costly to acquire, they deliver benefits over time, but they’re very different from the world where your investments were the machines and the factories or the land that you grazed your cattle on.

For most of history, tangible assets represented a much bigger slug of the economy, than the investment in intangible assets. And about 10 to 20 years ago, depending on the country, those two lines crossed.

[00:03:59.18] Ben: The book is full of brilliant graphics but one of the ones that really stands out is the one that shows the acceleration in investment in intangibles and the point at which it crosses over. So intangibles now represent or comprise a larger proportion of overall business assets than tangible assets.

Stian: Yeah, that’s right. So if you think of these as a percent to GDP, so in relation to the size of the economy, for most of history, tangible assets represented a much bigger slug of the economy, than the investment in intangible assets. And about 10 to 20 years ago, depending on the country, those two lines crossed. The intangible line has been moving up and up and up, slowly but steadily for decades. They crossed. If you look in rich countries now, the intangible investment represents roughly 15% of GDP of national annual output, and tangible assets more like 10–11%. One of the nice things about these slow but steady changes is you can be pretty confident that these things are reliable. We have so much data on this. This is a change that’s been going on for a very long time.

[00:05:06.17] Ben: You say we can be confident in the reliability of the data. But, I mean, you used the term ‘fuzzy’ for some of these intangible assets earlier on. And that sort of suggests that there might be things that are quite difficult to define, and therefore quite difficult to value and capture on a balance sheet or in economic statistics, GDP statistics.

Sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things in that national accounts do a kind of okay job of representing this.

Stian: So it’s a really good question. And it’s one of these things that have traditionally not been very well captured in either economic statistics — the kind that governments put together — or in business statistics, the kind of thing that your accountants would put together. And one of the interesting parts of this work, my co-author, Jonathan Haskell, along with many other economists, have really spent a lot of the last 20 years trying to work out ways of measuring this intangible investment at the level of the economy. And they used surveys, they’ve used fascinating historical data sets; it took quite a while to get a handle on this stuff but the results are pretty conclusive that this intangible investment is growing. Where things get tricky — you mentioned company accounts — sometimes there are things that are very easy to measure at the big picture, but they get harder to measure the more granular you get — and intangible investment is definitely one of those things in that national accounts do a kind of okay job of representing this. Nowadays, most countries will record their r&d investment and record some of their human capital investments. But corporate accounting standards don’t recognize this stuff. So, you will find very few intangible assets on a balance sheet. And I guess one of the interesting aspects of this is if you look at the job of people who try and value businesses with a lot of intangible assets — such as sell-side investment analysts, people who work for hedge funds or other investment funds; it’s really interesting, there was a whole bunch of research done on what these guys spend their time doing when they’re on CEO calls, CFO calls, and someone managed to code all these conversations. It turns out that most of these things are actually asking about intangible assets, to try and understand the value of whether it’s supply chains, whether it’s the r&d going into the new product line. And there’s a kind of an interesting opportunity here if you’re involved in investment because this stuff is harder to value — and if stuff is harder to value that’s good for the people whose expertise lies in valuation.

The reason why we should care about the change to intangible capital is that from an economic point of view, intangible capital behaves differently. And the four S’s are the four ways in which it acts differently: scalability, sunkenness, spillovers, and synergy.

[00:07:19.18] Ben: It’s true, I never… I suppose I had thought about it, but not like that exactly, which is it’s kind of an arbitrage opportunity there because I suppose superficially, things like return on capital might be understated, or profits might be understated because so much of this stuff should be on the balance sheet, but it is an expense to the p&l. And then, you know, just having a better understanding of the things that are not recorded in annual accounts or in the annual report potentially gives you an edge.

Stian: Yeah. And I guess, you know, if you think about the way things have always worked in, say, on the sell side, when you look at sectors like pharma. So pharma is a sector that has always been heavily based on intangible assets. The value of GSK is kind of the value of its pipeline of drug ideas. And I guess, if you’re an analyst in that sector, what you’ve always done is basically, you’ve done a bunch of valuations of what you know to be the product pipeline with some kind of option value based on what you think the individual capability of the firm is. And I guess in an economy where intangible capital gets more and more important, more of the task of investment analysis is going to look more like the pharma investment analyst or even a kind of an analyst of the VC house.

Intangible assets have a lot of spillovers, and that means that a company that makes them can’t always be sure that it will get most or even any of the benefits of an investment that it makes. […] It’s much harder to control those spillovers than it is with tangible assets, […]. And so, managing those spillovers becomes a really important part of what successfully managing business looks like in an intangible economy.

[00:08:30.22] Ben: Definitely. You talk about the four S’s of intangible assets. Do you mind just running us through it? Because I think it’s really critical that we understand the properties of intangible assets. And since they behave differently, that then, in turn, means that economies behave differently, and so on. Do you mind just telling us about the four S’s?

Stian: Yeah, totally. If you take away only one thing from the book, this is the thing to take away from it. So the reason why we should care about the change to intangible capital is that from an economic point of view, intangible capital behaves differently. And the four S’s are the kind of four ways in which it acts differently. The four S’s are scalability, sunkenness, spillovers, and synergy. So I’ll just quickly give an example of what I mean by each of those. So scalability: if you compare an intangible asset to a tangible asset, a tangible asset, you can only get a certain amount of use before you need to kind of invest in more of those tangible assets. If you own a fleet of taxis, if you want to carry more of a certain number of customers, you need to buy or lease more taxis. If what you own is an algorithm for dispatching private hire cars like Uber, you can scale that if not infinitely, then arbitrary. You can scale that across a very large number of taxis and a very large number of cities. So valuable intangibles go a really long way. And one of the implications that means that we can go on to talk about is that if you’re a big company with some valuable intangibles, you can get very big, you can create a lot of value.

Stian: The second S we talked about — sunkenness. So sunkenness refers to the economists’ idea of sunk costs — the fact that sometimes once you invest in something, you can’t recover the value of it. And that’s very much more true for intangible assets than tangible assets. So if you own, for example, an office building — a tangible asset — and you go out of business, you can very often sell that office building, you can recover quite a lot of the value from it, even if you’re in a distress sale. If you own a patent, you can sell patents but patents are very often worth almost nothing to anyone apart from a small number of providers. A brand of a company that’s gone bust is not worth a lot. As we can maybe come to talk on later, that’s got some really important implications to how you finance businesses that have a lot of intangible assets because debt investors do not like sunk costs.

Stian: The third S is spillovers. The idea of spillover is, intangible assets have a lot of spillovers, and that means that a company that makes them can’t always be sure that it will get most or even any of the benefits of an investment that it makes. So, there are classic examples all through the history of tech, but Xerox PARC — kind of one of the foundational stories of Silicon Valley — they invented almost every foundational computing technology, every desktop computing technology you can think of. They make no money from it. Most of the value was captured either by Apple, by Microsoft, or by a host of other companies. It’s much harder to control those spillovers than it is with tangible assets, where we’ve got a set of very clear rules around them, they’re kind of physical, they’re kind of easier to keep tabs on. And so, managing those spillovers becomes a really important part of what successfully managing business looks like in an intangible economy.

There is a lot of productivity growth, at the moment, it’s just not evenly distributed. So, if you run one of these companies that can benefit from the synergies and the scale of intangibles — i.e. own a bunch of valuable intangibles, you can scale them across a really big business, and you can combine them in ways that make it very difficult to compete with you. 

Stian: And then the fourth S — synergies — is this idea that intangible assets seem to be especially valuable when you combine them in the right way with other intangible assets. So, a classic example we talk about in the book is the EpiPen — the epinephrine injector for stopping allergic reactions and anaphylactic shock. And what we talk about in the book is how that isn’t really a typical pharmaceutical invention. In fact, it’s based on a drug with a patent that expired over 100 years ago. But one of the things that EpiPen’s owners have very effectively done is they’ve combined a whole bunch of intangible assets from the design of the injector, to their very privileged supply chains, to the various legal moats that they put around things to even the brand name — the recognizable brand name — of the product that you kind of want to be able to recognize when describing in an emergency. And together, all of those things, all of which are kind of intangible assets, combine to create a big competitive moat around the product, but ultimately kind of very profitable, very value-created product for them. And these synergies exist, you know, between talent and intangibles, between different intangibles. And again, it means that if you’re a company that has a bunch of these valuable intangibles, you can create a lot of value for shareholders.

[00:12:59.01] Ben: Fantastic. So I think the four S’s give us a really nice framework to dig into some of these other topics, right? So I wanted to move next to growth. You talk about the scalability of intangible assets, right? So if the economy is made up of more intangible assets, and those intangible assets are more scalable, why don’t we see more economic growth or, you know, or higher productivity growth than we do at present?

Stian: So that’s a really good question. It’s something that really ever since we started working at this, we’ve been wrestling with, and it’s a big subject of our follow-up book, which is coming out later this year. But I guess one of the things here is that there is a lot of productivity growth, at the moment, it’s just not evenly distributed. So, if you run one of these companies that can benefit from the synergies and the scale of intangibles — i.e. own a bunch of valuable intangibles, you can scale them across a really big business, and you can combine them in ways that kind of make it very difficult to compete with you. Those businesses, as far as we can see, are very profitable, their profitability is growing, they make a lot of money for their shareholders and their employees, and they’re kind of seen as iconic businesses. So, you know, your classic dominant internet platforms, Google and Facebook, and whoever would be examples of that. But, you know, we see this in other areas as well. So, you know, Domino’s Pizza — a classic example of a business that looks very old fashioned, but has totally killed it in terms of developing a very powerful internet platform. So you have a world where some businesses, because of the intangibles are doing really well. And one thing that we’ve been looking at is the fact that in an economy like that, because of these spillovers, you create kind of perverse incentive for the rest of businesses. If intangibles have quite a high spillover and if some firms are really good at getting the benefit of those spillovers, the rationale for investing, for your kind of laggard businesses, your runners up in industries is plausibly much less.

there’s been a ton of research over the last kind of 20 years now, looking at that gap between your so-called leader firms and laggard firms. And basically, in every country, in every industry, that gap is growing. And really, interestingly, it’s growing the most in the industries that have the greatest number and that have the greatest proportion of intangible assets.

Stian: You know, if you’re in a traditional — if you imagine a very tangible-based economy like an industry like, I don’t know, running a laundromat, let’s suppose the best laundromat has the best washing machines and the best building; if you run the second best and the third-best laundromat, you can catch up in due course. You can borrow money from the bank, you can buy better machines, it’s kind of pretty obvious what you need to do to catch up because you can visit the other businesses and look at what they’re doing. There you would expect to see over time the gap between the most productive, most profitable businesses, and the least, would shrink because you can just copy. Now, if you’re in an intangible economy, those dynamics change. Imagine you want to compete with Uber. Okay, you can try and develop your own dispatching app but the scale effects are such that you’re going to be up against vast fixed costs, it’s very unlikely you’re going to be able to compete with the huge amount of money that Uber can pour into their development. And because of scale, you won’t be able to kind of amortize that across a large business. Okay, so you say, “Okay, well, I’ll come up with some new product feature that Uber hasn’t come up with.” Let’s suppose you’re an absolute product development genius, and you come up with something. In this economy, because of the synergies and because of the spillovers that we talked about, you might not be very well advised to do that, because Uber could quite simply copy it, or, you know, they might buy you, which would be kind of a good story for you but in terms of the dynamic, your business goes away, and therefore the leader business grows more powerful. So, rather than the world of laundromats, where catching up with the leader is about copying, it’s about acquiring probably mass-produced tangible capital, where you can probably get a bank loan for it, in the intangible economy, it’s much harder to catch up like that.

Stian: And I guess this comes back to your original question about what might be going wrong with productivity. If you can imagine an economy where the best businesses are doing really well, they’re generating a lot of money for their shareholders, they’re being really productive but there’s huge disincentive for a large chunk of the economy to invest and to catch up. In aggregate, that could come to an economy where productivity growth is actually pretty slow. And in terms of the evidence for this, there’s been a ton of research over the last kind of 20 years now, looking at that gap between your so-called leader firms and laggard firms. And basically, in every country, in every industry, that gap is growing. And really, interestingly, it’s growing the most in the industries that have the greatest number and that have the greatest proportion of intangible assets.

One of the issues of spillovers is businesses will invest less than is socially optimal in R&D. If you’re in a world where you want more R&D investment, but businesses won’t do it, that probably means you need governments or research institutes to do it. Again, that’s quite a judgment-based process, so you’re sort of saying you’ve got to trust people in positions of authority to do this kind of thing, which is particularly challenging in today’s political circumstance. So that’s a real dilemma.

[00:17:23.07] Ben: Do you think there’s another thing at play as well, which is, in the world of tangible assets, economies of scale were eventually subject to diminishing returns, right? Whereas in the world of intangible assets, you know, where we have network effects, you could argue that a lot of times, you get just increasing returns to scale. You talked about Uber — I guess the more customers you have, the more drivers you can attract, the more drivers the more customers, and you get these virtuous self-fulfilling feedback loops, meaning that you get increasing returns to scale, whereas in the past that almost wasn’t possible in economic terms.

Stian: Yeah, that’s definitely true. And I think those network effects you talk about are a really important part of this kind of scalability of intangible assets.

[00:18:07.18] Ben: Do you think we should be using more antitrusts? So you talked about Facebook and when I think about Facebook, I think, you know, the initial platform was super successful, had very strong network effects, it delivered a lot of utility to its customers. But since then, you know, it’s copied features from other people like Snapchat, it bought Instagram. And I just wonder, you know, should we be using antitrust to stop the big platforms from getting even bigger through copying and m&a, for example?

Stian: Antitrust and competition policy clearly become very important in an era of intangible assets because of this kind of tendency of the best companies to do really well. The flip side is, I think a lot of the old rules become a lot harder to apply. So, traditionally, we’d look at an economy, and also we’d look at an industry and we’d say, if the kind of concentration ratios are above a certain level, then that’s a problem and we need to break up the leader firm or we need to block acquisitions. That becomes a lot harder in this kind of economy, I think, for two reasons. Firstly, because these synergies because there are so many crossovers between different types of assets, it becomes a lot harder to define an industry. So, for example, you know, are Facebook and Google in the same industry? I mean, on one level, they’re clearly not — one is a search engine, one is a social media site. But, you know, if you’re an advertiser, they might look a lot like they’re in the same industry. So it becomes a lot harder to make those distinctions. I think the other thing is that, you know, the kind of silver lining of scalability and spillovers, is that although businesses can thrive and grow and their dominance can get entrenched, the flip side is, when things go wrong, they collapse very quickly and your rivals can grow up very fast. So the kind of optimistic vision of competition in a world of intangibles doesn’t look like a market where there’s kind of, you know, seven or 17 or 70 competitors all in the same market. It might be a market where you have people who temporarily look a lot like very dominant, almost monopolistic players, but where there’s a lot of competition almost across industries, and where you have enough dynamism, enough opportunities for startups, that people like Facebook and Google occasionally get dethroned.

[00:20:29.04] Ben: I agree with that. I think there’s not enough documentation of negative network effects. Because, you know, on the way up, it’s exponential; potentially, on the way down, it can be exponential too. Are you saying that competitive or antitrust policy is difficult to execute, therefore, we shouldn’t try? Or are you just saying that we need to find new sort of yardsticks for anti-competitive behavior? Because similarly, you know, it’s difficult to look at concentration; it’s also difficult to look at price because so often these platforms lead to lower prices because they’re monitored indirectly.

Stian: I think the short answer is, it’s probably the latter of your two things. It’s more that we need to kind of come up with new ways of analyzing this new way of looking at it. And that’s really tricky because one of the nice things about the world of 20 years ago, if you were a competition regulator, your job — I don’t want to say it’s easy; it was a difficult job — was quite rules-based. There were ratios and there was a whole academic infrastructure of how you would think about the concentration ratio in a particular sector, although a lot of judgment needed to be applied to that. That was kind of some yardsticks. I think if you’re looking at this kind of thing now, it becomes much harder. And in the same way earlier that we were saying that to be a sell-side investment analyst, scale becomes more important and the job becomes harder. I think that’s also true if you’re a competition regulator, which I guess where that takes you, if you’re to say, “What does this mean for politics or for public policy?” is a really unfashionable position. Basically, it means you need to spend more money on people who’ve been derided as bureaucrats and pencil pushers, more money on their analytic ability, and be more willing to at least consider innovative approaches to how you do those kinds of things.

We shouldn’t use the intangible economy as an excuse to give up on doing just the basic stuff to make society fair.

[00:22:14.20] Ben: But it all becomes a bit less objective, doesn’t it? Because in the same way that… You know, a sell-side analyst you could sort of test in advance their ability to understand the company accounts, or you could test civil servants’ ability to understand a legal framework, or similarly, you know, financial information. It’s very difficult ex-ante to understand or to kind of determine how good people are going to be at those jobs, right? How much to pay them and so on, right?

Stian: Well, it becomes much more judgment-based. And one of the things that we know from, there’s, I think, a whole branch of Management Science, looking at this kind of thing, that if it’s harder to measure performance in these jobs and more discretionary and more judgment-based, that typically leads to higher salaries, and it’s a more costly process to run.

[00:23:03.07] Ben: But I think in the world of antitrust if decisions are taken more based on judgment, then I suppose they’re more open to legal challenges and so on.

Stian: Yeah, you’re absolutely right. I mean, it’s really interesting. We see that across the piece as a result of intangible, so it’s not just… I mean, we can come on to talking about this a little bit later, but this is also an implication of spillovers, for example. We are probably in a world where one of the issues of spillovers is businesses will invest less than is kind of socially optimal in stuff like r&d. If you’re in a world where you want more r&d investment, but businesses won’t do it, that probably means you need governments or research institutes to do it. Again, that’s quite a judgment-based process, so you’re sort of saying you’ve got to trust people in positions of authority to do this kind of thing, which is particularly challenging in today’s political circumstance. So that’s a real dilemma.

[00:24:00.21] Ben: Do we need stronger IPE protection? Because I guess that’s, again, a double-edged sword, which is, what’s the right balance to anything?

Stian: So I guess the things we’re trying to balance, the spillovers of intangibles would suggest that you want kind of tough clear IPE rules because you want to make sure that the stronger your IPE rules, the more the incentive to own IPE and to invest in it are. Now, the problem, the thing that complicates that is the synergy between intangibles. So, if you take a product like Spotify — it’s a great example of something born from the synergies of intangibles, because you’ve got music rights, which are kind of one intangible asset, you’ve got the software, and the network, and the customer insight that Spotify has. By combining those, they’ve created a really valuable product that many of us are very happy to use. Now, suddenly, what people at Spotify have always told me is that if the music rights industry had their way, if they had tougher IPE rules and kind of more political influence that Spotify would never have been allowed to get off the ground. They would have been sued and out of existence in their first year or two. Now, I guess that’s the kind of great example of if your IPE rules are too strong, you don’t have a problem with spillovers so people will very happily make lots of music because they’ll make lots of money from it. But you’ll never get an innovation like Spotify, because it will always get crushed. So, I guess this comes back to what you’re saying. You need to strike the right balance between the two.

One of the ways to tackling inequality in an intangible economy, surprisingly, is through a very tangible asset — it’s through housing. It basically means that making it easier to build housing, making it cheaper for people to move to places they want to move in, becomes even more important.

Stian: I guess one interesting — if we sort of say, well, what’s the current failure mode of IPE rules? I suspect there’s probably quite a range of IPE rules that would work okay. What doesn’t work okay is a set of rules where there’s a huge amount of opportunities for special-interest lobbying where things get very distorted. So I guess the US patent system is kind of notorious for this, where you’ve got specific jurisdictions where a lot of patent lawsuits take place because they’re particularly pro-rights holders. I think the East Texas courts for patents seem to be like that. Similarly, in the US, you’ve got quite a lot of uncertainty. So you might have come across the copyright lawsuit over Pharrell Williams and Robin Thicke’s song “Blurred Lines”. So there was a huge lawsuit where the estate of Marvin Gaye sued Pharrell Williams and Robin Thicke for basically creating a song that seemed very much like a song that Marvin Gaye had written. And what was really interesting about this case, is that Pharrell Williams says he actually set out to create a song that was inspired by the Marvin Gaye song, but didn’t breach copyright. And it turns out, you know, there is a whole industry of forensic musicologists who would advise you on whether your song breaches copyright or not. And what was interesting is, in this case, the case went to court and I think it was a jury trial, weirdly; the jury just came up with a totally unexpected ruling in favor of the Marvin Gaye estate, even though everyone thought what was going on was kind of probably okay, with the result that the music industry is still talking about this. They’re saying, “Oh, well, you know, in light of this trial, what are we allowed to sample? What are we allowed to be inspired by? So that’s a kind of example of where an unexpected, quixotic interpretation rule is especially damaging. In the same way that, you know, if your business owns a factory, and it is possible to repossess that factory, sort of, you know, 5% of the time based on the phase of the moon or something like that, it would create a lot less incentive to invest in fixed assets.

Stian: So I guess what that means, probably matters less about precisely how strict the rules are, as much as making sure they’re clear. It also means that if you’re a government, you need to spend quite a lot of effort resisting the efforts of either rights holders or lobbyists to make little exemptions and carve-outs in the rules in their favor. Having been on the other side of the table working for the government on IPE policy, it’s really difficult to do that. IPE lobbyists are really smooth, they’re very kind of effective, they’re very highly paid. So that’s a challenge.

[00:28:17.19] Ben: Okay, I want to move on next to inequality. Let’s start with the inequality between people, right? So you’ve already alluded to this that where you have the right skills, the payback is going up, remuneration is going up. What are the kinds of skills that are most in-demand in an intangible economy? The most valuable.

Stian: Some of them will be the skills that are probably obvious — the tech skills; if software and algorithms are really valuable, the ability to code, the ability to manage teams of coders, or the ability to kind of manage big scientific projects and research projects. Those are clearly going to be more important. But that’s probably obvious, everyone knows that. The things that may be a little bit less obvious, is that in a world where the spillovers really matter, where it’s really important to combine synergies, the ability to bring those things together, also matters a lot. And those are often kind of soft skills. They’re often skills of hustle and entrepreneurship or social skills, things like the famous reality distortion field that Steve Jobs was famous for creating. Those things potentially become even more important in an economy like this. The other thing that I guess is potentially troubling about this is a world where who owns these assets and who has the right to use them is less clear. You could be in a world where political influence or even soft social influence becomes more important — whether that is retired politicians taking on high-profile jobs, whether it’s Instagram influencers, those general soft skills probably become more financially valuable than they were worth 40 or 50 years ago.

[00:30:02.09] Ben: Who loses out? What skills are less valuable, less solicited in this new world?

Stian: Well, one direct effect is that in some cases, these intangible assets directly relate to making some more routine jobs even more routine than they already were. Kind of the proverbial example here is, say, working in an Amazon warehouse, where, compared to a traditional warehouse job, intangible assets allow you to be more monitored, they generate a quicker work pace, which I think most people say this makes these jobs less enjoyable and less well-paid than they would otherwise be. So there’s a kind of direct effect there. But I guess there’s also an effect where if what you’re seeing is social status, social privilege, educational opportunities become more important, the flip side is that the pain of not having those things gets higher. So, you know, if you are more socially excluded, if you’re in a place that doesn’t have these job opportunities, it’s kind of not surprising that you will feel more left behind and that your sense of social exclusion — which, you know, there has always been kind of a divide between the big city and the kind of small town or the countryside; that’s always been there culturally. But the fact that cultural divide gets kind of underpinned now by an even bigger economic divide, is kind of… You can see that playing out in our politics and our current society at the moment.

[00:31:24.22] Ben: We definitely see that bifurcation of society in things like the Brexit vote. 14–52. Are we seeing, do you think, in a way, more losers than winners? I mean, relatively speaking, right? Because, you know, we don’t see massive rise in unemployment but what we do see is potentially a big bifurcation in the quality of the employment and the remuneration of employment. And I’m just wondering, you know, since we can see inequalities rising, is that because, you know, there are increasingly a small number of winners, if you like, or big winners, and then the overall population is tending downwards, in a way, in terms of, you know, real income?

Stian: Yeah. I mean, I think it’s always hard to say what’s ultimately driving inequality, because you can always, even if you have an employment system that’s creating a lot of inequality, you can always tax, you can always redistribute to generate more equality afterwards. I guess the kind of an optimistic way of looking at this is that this intangible economy, as well, is generating some of these superstar jobs that are really prestigious and really highly paid. It also generates a lot of jobs that are potentially more satisfying, more fulfilling for people to do than your kind of traditional job 50 years ago — even if they’re not as highly paid. So, you know, there’s a lot of jobs in the creative industries that are not particularly highly paid but all the research that has been done on well-being suggests that people actually like doing these jobs much more than potentially some jobs in traditional manufacturing. So I wouldn’t be totally pessimistic, but it’s definitely something that we need to be aware of this bifurcation between these elite jobs, and the kind of more socially-excluded mass.

[00:33:09.24] Ben: What do we do about inequality in this way? Because we have, I suppose, a small number of superstar firms, a small number of superstar individuals earning, sort of excess rent, if you like, or whatever. Excess returns on their skills? Is the answer to tax that and redistribute it? Or is that an industrial age policy idea that doesn’t hold someone in the digital age?

Stian: I don’t think we should give up on tax redistribution yet. I think that is pretty important and is still worth doing. And, you know, for all the people who talk about international tax-avoiding companies, I think there’s still quite a lot of low-hanging fruit there. In a country like the UK, you can just employ more tax inspectors. And, you know, we kind of under-invest in that. There is probably a low-hanging fruit in just basic compliance. So we shouldn’t use the intangible economy as an excuse to give up on doing just the basic stuff to make society fair.

Stian: I guess what you then get is, I think there have been some interesting angles where aspects of the intangible economy maybe exacerbate unexpected problems of inequality. So, one thing that there’s been a ton of research on looks at the cities that do really well out of the intangible economy — researchers were both in the US and in the UK. One thing that’s really interesting, if you take the Bay Area, Northern California, a great example of a place that’s been very successful because of intangible assets; not just computers, even before that. And what research shows is that once upon a time, housing in and around the Bay Area was pretty cheap. It was easy to build more housing when you needed to, and therefore the cost of renting or buying a house nearby was kind of somewhat affordable. And what that meant is if you had people making a lot of money in, say, San Francisco, that money somehow got spread around, because it was easy to move from a poorer part of the US to San Francisco, even if you didn’t have high skills, and you could take a low-skilled job but because you’re in a place where there were lots of people making a lot of money, you would get a pretty high wage relative to what you would have got had you stayed where you were.

Stian: And what people like Enrico Moretti, an economist who looks at these things and documents it, is that that’s kind of changed because it’s become much, much harder to build new houses in places like San Francisco; it’s definitely true in the South-East of England as well. And what that basically creates is that creates a really hidden unfairness because if you grow up in a place where there aren’t a lot of great jobs, and for whatever reason, you’re lucky enough to have a good education, to have the skills where you can take advantage of the intangible economy, you probably have a high enough salary to make it worthwhile moving to London or San Francisco. You can afford the crazy rents, your landlord will suck up a lot of money. But it just makes sense and you can grow there. But if you aren’t in that position, you’re stuck where you are. So, the old world where — and it’s very unfashionable to talk about money trickling down or trickling out — in the old economy, it did that much more than it did now. And the real barrier, one of the real barriers was rent. So I guess what this means is, one of the ways to tackling inequality in an intangible economy, surprisingly, is through a very tangible asset — it’s through housing. It basically means that making it easier to build housing, making it cheaper for people to move to places they want to move in, becomes even more important.

[00:36:38.08] Ben: Yeah. So, I guess you can’t have social mobility without geographical mobility, or it’s much harder.

Stian: Well, it’s interesting. I mean, there was a very widely talked-about book a few years ago by David Goodhart, who talked about the idea that the world was divided into somewheres and anywheres and the anywheres were the kind of Metro elite who kind of went from New York to London and just kind of didn’t care and somewheres were kind of rooted in Pittsburgh or Grimsby or wherever, and kind of loved their city. But I think there’s another way of looking at that, which basically says, it’s not that people who David calls somewheres are unusually in love with one place and hate moving; it’s that we’ve made it so that even if they want to move, they can’t afford to, so mobility has become something that only the very privileged who are going into these high-paying jobs can ever hope to do. And in a world where a lot of this intangible economy is happening in particular places, that’s a very damaging burden to inflict on a country.

[00:37:41.21] Ben: Yeah, and I think you probably have great statistics on this but it seems to be also that the intangible economy maybe doesn’t throw up as many jobs as the tangible economy. And a lot of the job growth is in what we might call proximity jobs. And therefore, we’re sort of holding back the growth of those types of jobs by, again, not allowing geographical mobility,

Stian: Yeah, you’re totally right.

[00:38:05.08] Ben: It’s becoming more and more difficult for traditional lenders — you know, universal banks, corporate banks — to lend to corporates because it’s really difficult for them to get enough comfort over that kind of loan, where it’s made in the absence of collateral — you know, physical assets that a company can pledge to the bank in order to secure that loan. And I think, again, there’s another brilliant graphic in the book, where you show that, you know, despite everything we talked about the growth of intangible assets versus tangible assets, actually, the lending is going up against tangible assets versus intangible assets, which just seems perverse. Right? So is that the root of it? This absence of collateral?

Stian: Yeah, that’s right. So, I mean it’s been called ‘the curse of collateral’, the fact that banks, ideally, want assets that they can take a charge of if a business fails. That is the way debt finance works and most businesses in the economy rely on debt finance, most financial institutions provide debt finance. You know, if we talk about stock market or venture capital, those are modes of finance that apply to a very, very small minority of businesses. So, there’s a kind of real challenge here. On the one hand, how do you develop institutions to provide more equity-based finance to a greater range of businesses? But also, how do you make a rule system that doesn’t discriminate against that because obviously, the first rule of financial structuring for a business is that debt interest is tax deductible, but payments to shareholders are not. So, you know, you’d want to finance a business with that.

[00:39:45.17] Ben: So okay, there’s a lot to unpack. So the first question is, you know, should we change that? Should debt not be tax deductible?

Stian: The kind of wonkish answer, the ideal world answer is, yeah, you want to change that. You want a world where debt finance and equity finance are placed on the same footing. And, as I said, this is quite wonkish. This is something where economists and tax policy wonks have come up with 1,000,001 proposals for exactly how you do this and all the things like equity tax credits. The problem is this, politically, would be a really hard thing to do. I mean, if you were to try and change the economy like this, you’d immediately have the private equity industry up in arms, you would create a lot of challenges for the banking system, it would be a big change. So, you’ve got to think not just about what’s the ideal end-state, but also what’s the institutional basis for it and how do you get there without totally causing lots of unintended harm to the economy.

[00:40:45.20] Ben: Exactly. Because you then form policy in a vacuum away from all the subpart dependencies. But maybe a better question might be, then, how do we get more VC-type capital flowing to the economy?

Stian: So I think that’s a really good question. Germany is an interesting example here because if you look at the way German banks do business lending, they very often will take equity warrants in small businesses, which is effectively like a way of making your debt finance more equity-like. And one of the effects of that is, if you look at, say, a British small business lender — you know, British High Street bank making loans to small business — almost invariably, they will look to take charge on the owner’s or director’s house. And that caters to the idea that the owners own their own house, which is obviously quite an assumption anyway. So it kind of skews you towards lending to a certain type of person. Now, that’s basically a way of getting tangible collateral, in a business that’s mostly intangible because a house is kind of pretty tangible. Now, in Germany, probably partly because homeownership rates have always historically been much lower, and more people rent in Germany, banks are gonna have to find a way around that. So these equity warrants is something that they’ve always done. Now, it means the banks end up doing more due diligence into the businesses because you need to understand more about how the businesses work. But I guess, they figured that’s a worthwhile cost, because the upside of these equity warrants is quite high. So, I guess that’s one example of it being done well. I mean, if you look on the fringes of the venture capital sector, it’s really interesting to see different types of more kind of growth-oriented venture capital branching into more markets and I think it’s really interesting from that point of view. So, I think we’ll see a gradual growth there. But this is really hard. This is a 10-year project, and will probably require governments to get behind it, too.

[00:42:40.18] Ben: Now, a lot of these intangible businesses have become a bit better understood. And, you know, so you see people lending, for example, or putting debt into businesses that have SaaS revenues, or you see people putting debt into businesses where they understand the mechanics of a game, for example — you know, they know the points of which a game is going to get large pickup, and they’re happy to invest to allow the games provided to invest in paid advertising on Facebook or whatever. So I think maybe the idea that debt no longer works is perhaps too simplistic and maybe just debt needs an upgrade.

Stian: That’s definitely true. And I guess, obviously, you know, as anyone involved in that markets will know, some lending is against collateral, but actually, you know, a ton of debt is lent against cash flows and expectations of cash flow. But I guess, to your point, what that does, it requires a greater understanding of what those cash flows look like. And, again, this is another one of these things, where it advantages the smart money. If you can understand these streams of cash flows and get enough certainty to be able to lend against them, then knowledge is unusually valuable.

[00:43:49.14] Ben: Something that’s only really occurred to me lately, since I started a business, which is, if I invest capital on the stock market — this may vary jurisdiction to jurisdiction — I face a capital gains tax of x, right? And that capital gains tax is the same as if I take a much more risky stance of investing in a business that creates employment, generates intangible assets with spillovers. So do you think we need a separate treatment of people, depending on where the gains from capital come from?

Stian: That’s really interesting. We’ve got some kind of limited examples of that already. You know, there are some tax breaks for providing risk capital either in the UK — things like the seed enterprise investment scheme, venture capital trusts, and so forth. So, that principle is there already, but it’s a really interesting question. I think, broadly speaking, you know, if the spillovers are good, then ways of subsidizing those — whether that’s through direct funding or tax breaks — it seems like there’s a strong economic case of that.

[00:44:54.06] Ben: And then the last question I wanted to ask you in this section was really around the role of government here because you’ve probably seen it — you know, there’s Mariana Mazzucato. In her diagram where she said the constituents of the iPhone and how many of them were spillovers from government fundamental research. And I’m just wondering, you know, there’s been, I would say, a reduction in government fundamental research in lots of countries, right? Because, you know, there was this sort of ideology of that crowding out public, private sector investment, and so on. But do you think we should maybe shift the balance there and the debate and push more money towards fundamental research?

Stian: I think there’s definitely a really strong argument saying the government should be funding more things like r&d, because they have these spillovers. If you just leave it up to business, you will get less of that than you would otherwise get because businesses can’t be sure they will internalize the benefits. And I think one of the really important things that kind of Mariana’s book really made the case for that in a kind of very powerful way, which is really important. I think there’s a lot of questions on how you do that, what the best way of doing that is, and particularly doing it in a way so that businesses also invest alongside because obviously, what wasn’t told in that story of the iPhone, is that alongside lots of fundamental research, there was also a ton of often quite unrewarding r&d done by businesses, whether it’s gonna join Magnetoresistance, which is how you got the kind of hard disks that these devices rely on, to the actual turning these things into useful consumer-friendly products. All of that requires a lot of investment as well, which often has quite high spillovers. So, public investment, yes, we absolutely need more of it. And it’s quite well that a lot of governments, I think, are moving in that direction. It also becomes even more important to work out how it may not mesh well with what businesses want to do.

[00:46:44.17] Ben: So many people talk about this sort of K-shaped economy, where everything that was analog is really suffering and everything that was digital or intangible is kind of accelerating. And I’m just wondering, is that a too simplistic read of the situation? I wanted to start with how intangible assets fare during the lockdown, for example, because I’ve read a piece that you wrote on Medium where you made this somewhat counterintuitive argument that actually intangible assets might not be faring as well as you might think, during a lockdown.

Stian: Yeah, absolutely. I mean, I think the pandemic was very interesting from the point of view of what you said for the intangible and the tangible economy, because when it started out, I think there was a huge focus on whether we’ve got our tangible asset response right, the way I would describe it. So people sort of say, you know, “Can we build enough hospitals? Do we have enough ventilators? Do we have enough factories making personal protective equipment?” And you know, everyone was very impressed when in Wuhan they built this huge new hospital, and we would say, you know, “Will the UK be able to cope? Will the US be able to cope?” And then we built the Nightingale hospitals, this is great. Wow. So this was all about tangible assets, you know, physical things. But I think what people kind of rapidly realized is that, actually, that wasn’t the real challenge and it wasn’t the thing that people struggled with, because actually, what people came to realize was really important was what you could call intangible assets. So, first and foremost, it was, “Can we develop vaccines that are effective? And can we put in place the supply chains to get them out there?” Both classic intangible asset problems. “Can we put in place tests and trace systems?” Test and trace systems are made up of software, they’re made up of processes, they’re made up of data? You know, those were classic examples of intangible assets. And some countries did them really well and some countries did them maybe not so well. And I think if you look at the differential mortality rates in different countries, it was, in some ways, the intangible response that really, really explained the bigger gaps much more than the tangible assets. So, I think that was kind of one interesting aspect of how the focus changed. I guess another really interesting question here is the move on what many people’s part remote working has done. So, certainly, in the UK, the latest statistics, 35% of people are now working entirely remotely. The historical figures for that before the pandemic struck have been less than 5%. So, that’s a really big change. And of the 65% who are not wholly working remotely, a fair chunk of those people are doing some remote work. So although this isn’t the majority of the population, it’s a really big chunk of people, it’s a really big change.

[00:49:38.17] Ben: And what happens to spillovers in the world of remote work? Because, you know, I think, again, it was in the same article, which I very much recommend to people — it’s on Medium — which is you talk about how during Prohibition you could trace a reduction in the number of patents because people needed to meet in bars to come up with some really brilliant creative ideas. And I think there’s some element of that, which is, you know, even though, ostensibly, we’re still interacting with our colleagues in a very collaborative manner, it’s different, right? It’s different if you’re remote, and you can’t go for a beer or coffee, whatever, and have those brainstorming moments, those moments of serendipity. Is it your hunch that this is going to lead to fewer spillovers.

Stian: So I think this is the $64,000 question. So, no one really knows and I think, to some extent, it’s probably up for grabs. It’s almost certainly true that it’s going to have some effect on spillovers, because you’re not getting these, as you say, these casual interactions that maybe some ideas depended on. The question is, you know, to what extent can we replicate them? To what extent, maybe, can a lot of remote working work well? And to what extent can we come up with ways of doing more remote working that gives you just enough of what you need? I mean, there was that famous saying, where, I don’t know who said it, but it was, “50% of my advertising works, I just don’t know which 50%.”

Ben: Oh, yeah.

Stian: It’s probably the same. You kind of think, well, you know, there’s probably some really important part of the time you spend in and around the office with people but it might actually only be 10% of that time. And the question is, can you work out what that is, and focus on that more effectively? So I think if we can do that, there’s a huge benefit, because remote working is incredibly good for productivity. But you know, it’s a big forced experiment.

[00:51:34.29] Ben: Well, I think the thing is the experiment is going on for a very long time now. So I’m sure people are starting to codify some of those things that there’s moments of serendipity and putting them into the way that we do remote working. Because in the beginning of the pandemic, it was very much kind of everything just moved to Zoom. And now I think people are realizing, for example, that, you know, just doing things synchronously through Zoom is not great, and Slack sometimes can be a better medium, for example. I think people are sort of now adapting the way they do remote working.

Stian: I think that’s totally true. And it’s interesting, you know, there are some industries that have been doing this for longer. So, you know, huge parts of the tech industry have been very comfortable with aspects of remote working and having remote development teams, as you say, using asynchronous communication and text communication much more than video conferencing. And I guess the real question is, can we work out the lessons for that? And can we scale them up quickly? Because that could be really valuable.

[00:52:28.15] Ben: You started to talk about San Francisco earlier on, and I had to hold myself back from delving into that. But on a few podcasts ago, we had Ian Hathaway on, and he was talking about his idea that, you know, smaller and smaller cities, if you like, can learn from San Francisco to some extent — you know, replicate the playbook. And I’m just wondering, does that diffusion of the magic of Silicon Valley happened faster now? Because maybe that was less important than it was to be in physical proximity?

Stian: Yeah, I think this is a real opportunity for anyone that wants to compete with Silicon Valley to make the most of it, partly because it’s about getting new norms in place that will help these areas. So, if we can get more comfortable with remote hiring, if we can get more comfortable with remote VC funding — something that’s often driven proximity — then this is a sort of an opportunity, as you say. There’s a kind of two-year window where some of these new practices could get trenched and people could realize their worth. That’s a huge opportunity to make a step-change. I mean, I guess the other dimension talking about San Francisco — San Francisco has kind of an interesting story. So, you know, I worked in Silicon Valley at the beginning of the 2000s. And San Francisco wasn’t really a part of the Silicon Valley ecosystem back then. The idea that this one big city is kind of the epicenter of tech is, as far as I can see, kind of something that it’s the kind of last-decade phenomenon. Silicon Valley for a very long time was just kind of the suburbs of Palo Alto and Mountain View, and places like that. And so, there’s kind of an interesting question. Well, you know, maybe the move to really core cities — maybe we might take a step back from that. So I definitely think it’s a lot to play for. You know, if you’re a city leader, or you’re someone who wants to kind of build a cluster somewhere other than San Francisco or New York, or London, then this might be a big opportunity for you.

[00:54:35.14] Ben: One of the things I thought was interesting in that article you wrote is you said that a tangible asset during lockdown doesn’t get used, right? And therefore, the productive capacity of that asset is kind of frozen. And then once things get back to normal — whatever that normal looks like — it then becomes productive again. What you said about some of the intangible assets is they degrade much faster in the absence of being used, right? And again, it was something that I thought was quite interesting because I think there’s been this assumption that everything intangible is benefiting and everything tangible… You know, you wouldn’t want to be an airline. And it was just a more nuanced kind of view of tangible versus intangible assets.

Stian: Yeah, you’re right. I mean, there’s this kind of question we were thinking about what’s the economic cost of leaving an asset, a business unused for a while, and we were speculating that maybe for a very physically-intensive business, that cost was lower. So it was easier to kind of mothball a factory and turn it back on, again, than it is to mothball an advertising agency and turn it back on again. But that’s very speculative and I think that’s something that I don’t think anyone knows the answer to that. So, there’s lots of real-time economic puzzles kind of going on right now.

[00:55:51.10] Ben: Okay, and this is the only political question I will ask you, which is, do you think that the pandemic is kind of giving a backdrop, or a unique set of circumstances in which somebody like Joe Biden could introduce a massive set of policy initiatives — a new deal, if you like? Because one of the things that we’ve talked about, every sort of policy initiative we’ve talked about: we’ve talked about some really difficult politics around it. For example, you know, opening up planning restrictions, I’d imagine is a very difficult political thing, changing the tax relief on debt would be a very difficult thing politically to introduce. So, does it give the pretext for more ambitious political maneuvers?

Stian: I think there is definitely the need. You know, there is a platform of policies that would be really great to put in place, whether that’s more investment in r&d, planning reform, making sure that we create opportunities for people to take on these new jobs, investment in education. There’s definitely a need for that. I think the really difficult thing is that in an age of populism, all these things get harder to do. So I talked to you earlier about when we were talking about the competition policy, that really actually what you need is, you know, more bureaucrats, more pen pushers, and to give them more power. Now, that is a pretty hard sell in the age of queueing on and, you know, ramp and populism in most countries. So you have this kind of weird situation, the need for this kind of institutional reform is greatest at a time when the political dynamics push you in the opposite direction. You know, if you want to sort of say, “Let’s spend more money on r&d, because that will lead to good business opportunities and create economic growth and more jobs.” What does it mean, when you say, “Invest more in r&d”? It means you’re going to tax people more, and you’re going to pay that money to kind of liberal elite scientists. That’s the kind of paradox and I think it’s really interesting to see different people trying to negotiate that in different ways.

[00:57:53.25] Ben: And you don’t think that the pandemic gives kind of enough political capital to unlock the paradox? So you think it’s not as simple as that?

Stian: It might be, you’re right. You’re totally right. Maybe the pandemic will give the opportunity to do this. And maybe it’s the kind of thing where even if you can’t do the big push, you can get some of the way there and that will still make a difference. It’s definitely tricky, because the politics and the policy push in opposite directions.

[00:58:23.04] Ben: Would you mind sharing with us one of your favorite books?

Stian: A really interesting book I read recently, is a book called “The Hungry Empire” by Lizzie Collingham. And what’s fascinating about it is it’s basically a book about the history of the British Empire seen through the history of food. And what’s so interesting about this, it obviously speaks to a lot of issues around global history, around race, around the relationship between Britain and the rest of the world, all of which is super topical at the moment. But it does it through a prism that I think will be really interesting to anyone who’s interested in technology, in kind of economics, in kind of the business of how the world works. It’s a long way from technology, but in some ways, it’s a book that’s very much about technology and a lot of issues in the world today. So, it gets a strong recommendation from me.

[00:59:12.19] Ben: Okay, I’m gonna read that, and, for the listeners, we’ll share the links to all of these on our website. So the next one, a favorite recent article.

Stian: For me, I think something I would absolutely recommend here is the work of Enrico Moretti on cities. We talked a bit about it earlier, but he wrote a great book called “The New Geography of Jobs” and a few articles based on that where what he looked at was the way that we live in a world where great cities, dynamic cities are increasingly economically important. But one of the problems that we have is that the ability to live there, to afford to pay the rent there or move there is unequally distributed because we make it harder and harder to build in these cities. And he effectively made the case that it is totally kind of countercultural range where we like to talk about somewheres and anywheres but he talked about the fact that actually what lies at the heart of our problem is the fact we’ve made it harder to move. And this is not something that people actually want. There’s not something that makes people happy. So to me, it’s a very important and topical article right now.

[01:00:15.02] Ben: And then, the next one is a favorite thinker, somebody whose essays and articles you regularly turn to.

Stian: This may be — I don’t know if all of the people you have on say this, but I’m addicted to the blogger Scott Alexander, who used to write Slate Star Codex. He’s now gone on to Substack and the new version is called Astral Codex Ten. You may know, he’s a US-based psychiatrist, he’s kind of very involved in the rationalist community. He writes about technology, economics, psychology, about kind of almost anything. He has an absolutely incredible writing style. Everything he writes is an absolute breeze. But he does it with a kind of an incredibly good nature. So a strong recommendation from me.

[01:01:04.17] Ben: This is exactly why we ask these questions because I confess to not knowing Scott Alexander.

Stian: It’s amazing.

[01:01:11.03] Ben: Okay, the next one: a productivity hack, something that enables you to operate at scale in the intangible economy.

Stian: This is a very weak productivity hack because I’m very bad at it, but I do try and do 10 minutes of mindfulness meditation at the beginning of every day, and I’m probably the worst meditator in the world but either because of some kind of placebo effect or because it’s useful, it does make me feel a little bit more on top of things.

[01:01:39.28] Ben: Okay, and then the last question is a favorite brand.

Stian: My surprise favorite brand I think it would have to be Bovril. I rely on Bovril for my protein needs. It keeps me going in home working, kind of always have a mark of it on the go. It’s a remarkably nutritious food. And it’s got a retro appeal in the sense of it’s something that was very big 100 years ago, but has kind of come back into popularity in an age of high protein, low carb eating.

[01:02:09.29] Ben: Yeah. And I think it’s something that’s quite polarizing. So it’s good that you’ve taken a slightly controversial position there. That’s good.

Stian: I’d like to think so.

Ben: I guess many people that listen to this will not know what Bovril is. So that’s gonna be interesting to see and googling.

Stian: Yeah. A very affordable, a very accessible product as well.

Ben: Great. Stian, this has been an absolute pleasure. Thank you so much for coming on the podcast and sharing your insights around this structural shift from the tangible to the intangible economy.

Stian: Thanks so much, Ben. It’s been a real pleasure talking to you about it.

Evolving an Entrepreneurial Ecosystem (#31)

Structural Shifts with Ian HATHAWAY, Senior Fellow at The Brookings Institution

We discuss with Ian Hathaway — Senior Executive Director at Techstars, Senior Fellow at The Brookings Institution, and a Co-founder and Board Member of the Center for American Entrepreneurship and book author (latest book co-authored is called ‘The Startup Community Way’ ). In this episode, Ben and Ian discuss entrepreneurial ecosystems, what governments are getting wrong when they try to foster entrepreneurship and how they can create better outcomes; why entrepreneurship can lead to bigger and better outcomes than direct engagement in politics; why entrepreneurs are going to have more opportunities than ever during the pandemic and after it — and more.

Ian recommends:


  1. One book: “What You Do is Who You Are” by Ben Horowitz
  2. One influencer: Naval Ravikant
  3. Best recent article: What is a tech company, by Ben Thompson
  4. Favourite brand: Apple
  5. Productivity hack: Say ‘No’

The difference between a small business owner and an entrepreneur is the ambition to grow.

[00:01:22.21] Ben: So, Ian, thanks very much for coming on the Structural Shifts podcast. We’re going to cover in quite a lot of detail your new book. But before we get started, I just wanted to ask you a broader question, which is, in what sorts of health do you think American entrepreneurship is today? Because we sort of get the impression, because there’s been so many world-beating tech companies that have come out of Silicon Valley that everything is rosy. Would you agree with that statement?

Ian: So I view entrepreneurship much more broadly than Silicon Valley, for sure. In my framework, I think the difference between a small business owner and an entrepreneur is the ambition to grow. That’s much broader than most people think about in tech, but to stick to the tech and venture-backed world, the US market has a long tail, right? A substantial portion of startup activity, venture-back startup activity happens, of course, in the Bay Area, but an even larger portion happens outside of it. And in those markets, the capital efficiency maybe is what we’re talking about here, is much better. So Silicon Valley is just a completely different place, even within the context of the United States.

[00:02:43.04] Ben: But I was reading some statistics. Actually, the number of new companies that’s getting started each year, has actually been going down. So I’m just wondering, you know, do we have the impression that maybe entrepreneurship in America is kind of doing better than it actually is?

Ian: Well, so, the Business Formation Statistics, which you’re talking about is covering business owners of all growth, ambitions, all sectors, right? That’s been on a steady decline since the late 1970s. And in fact, that’s a trend that has been carried across all of the OECD. I believe that’s more demographically driven than anything — as population growth declines and as society ages, business formation rates, overall, are reduced. Now, businesses are also getting much bigger. There’s no rule that says, if the business formation rate is subdued, that businesses must get bigger. And overall, the average business is getting much bigger. There’s a huge debate happening on what the implications of that are. I think it varies substantially across sectors. But one of the things that I and some other researchers documented back in 2014, is that the business formation rate, even in the high-tech sectors is declining as well, which will startle a lot of people. But it’s just because that denominator is so resilient, and the companies are getting so big.

[00:04:14.19] Ben: What was the rationale for writing this book?

Ian: Yeah, I guess I should go all the way back to 2012. My co-author, Brad Feld, wrote a book called, ‘Startup Communities’, documenting his experience as an entrepreneur turned venture capitalist and community builder while in Boulder. He moved to Boulder in 1995, didn’t really know anybody, had a successful career in Boston as an entrepreneur, started investing in the Valley, New York, East Coast — and wanted to just get involved in Boulder. There was a lot happening, but it wasn’t really concentrated. And so, he spent, you know, the next couple of decades doing that work. He felt that Boulder was unique in terms of the entrepreneurial output that it has achieved and that that collaborative spirit, that community was a big part of that reason. So he wrote that book.

First of all, the entrepreneurs must lead the community. Secondly, the entrepreneurs must have a long-term commitment.

Ian: We started talking in 2016 about ways we might work together and one of the things we discussed was an evolution on his Startup Communities book and the frameworks that were included in that. Given that my background before working on a full-time basis with startups, as I do today, and big tech companies, as I did, you know, over the last decade, I was a full-time researcher. So, I have a research background and an economics background. And that was one of the appeals, I believe, for Brad was, “Hey, look, we’ve got knowledge and interest in startups and ecosystems, we have different frameworks in our heads. Let’s bring those together and see what comes out of it.” And so, that was kind of the script. And we began work in the spring of 2017. We had a bunch of fits and starts, a couple of hiatuses, nonlinear progressions, which we’ll talk about, I’m sure. And the book was finally published this last summer. So three years in total, from start to finish.

[00:06:13.25] Ben: Maybe let’s talk about what the first book is about, right? Which is principally about the Boulder thesis. So would you mind just introducing us to that, the four principles of the Boulder thesis in creating a community?

Ian: Yeah, so the Boulder thesis is simple, but not easy. First of all, the entrepreneurs must lead the community. Secondly, the entrepreneurs must have a long-term commitment. So originally, in the book that said a 20-year view; that’s evolved to a 20-year view from today, which means it’s always 20 years ahead of you. So, you’d be thinking in generations not in, you know, weeks or years. The third is that it must be inclusive of anyone who wants to participate. And the fourth is that it must engage the entire entrepreneurial stack, which I interpret as a derivation of inclusivity — so people from various domains, roles, experience levels, and so on. And that that engagement is constant.

if you think about a city as a series of systems, the startup community is the beating heart of entrepreneurship in a city

[00:07:12.29] Ben: You know, when you talk about a long-term commitment — so generational commitment — and you, yourself acknowledge that these things are hard, and the outcomes are uncertain. I mean, how difficult does that make it to recruit the key actors for a startup community?

Ian: It’s very difficult because most people don’t work on those time cycles. But there’s nothing that can be done about it because these long feedback cycles are inherent. That’s one of the reasons why we wrote this new book, which we can dig into that a little bit more, and why we wrote it in the way we did, which is explaining these systemic properties of startup communities and entrepreneurial ecosystems. But taking a quick step back, it’s also why Brad emphasized why entrepreneurs should lead the community. That’s not to say that non-entrepreneurs cannot be involved in building startup communities, helping founders, and in fact playing leadership roles, right? In many nascent communities, it’s these non-entrepreneurial community builders, whether as a side hustle or as their full-time job they are catalyzing efforts because entrepreneurs are heads-down, doing what entrepreneurs do, which is building their businesses. So, it’s not to say that, that non-entrepreneurs don’t have a role, but it’s that the entrepreneurs who are committed to being in a place for a long period of time, building their businesses there, knowing that it’s a — you know, even a successful outcome it’s 10 to 20 years before that liquidity event occurs, and those resources can get recycled back into whatever comes next. That’s just the reality of the situation. And so, that’s why the emphasis on entrepreneurs leading. Not only because the entrepreneurs are the ultimate end-users of the startup ecosystem — if they’re not benefiting from it, or participating or engaging, then it’s not valuable to them, which happens in many communities. But it really is an acknowledgment of the long-term commitment that’s required.

The mistake that’s often made is looking at the factors that currently exist in successful ecosystems and equating that with what it takes to get there.

Ian: Now, to build on that quickly, one of the things we talk about is the difference between the community and the ecosystem. Quickly, I’ll just say, if you think about a city as a series of systems, the startup community is the beating heart of entrepreneurship in a city. It’s really the founders, it’s the people who work with them on a consistent daily basis, whether as their full-time job or maybe something that they do outside of their job — maybe they’re mentors, maybe they’re angel investors or something like that. It’s having a firm understanding of what the entrepreneurs do and what they need, but it’s more than that. It’s also this kind of kinship connection, right? It’s a common identity, it’s kind of a love of place and that sort of thing. The ecosystem is a broader construct, which is, of course, all of these resources and actors who bring them that can either accelerate or impede the progress of entrepreneurship in a community. They have different organizational structures that align or are misaligned to varying degrees with entrepreneurship and entrepreneurial communities, they have different incentives — so, people want governments to engage a great deal in the building of ecosystems, which makes sense, because, you know, ecosystems in startup communities are sort of like a public good for the benefit of entrepreneurs. But governments have a much bigger mandate, right? So, their mandate is typically around creating jobs and having economic vitality and safe and enjoyable cities. And so, because of not just the hierarchical, top-down structure of governments not being aligned with the behavior of startups and startup communities, it’s also very different incentives.

Ian: And so, back to this long-term arc, this concept we discussed is community ecosystem fit, and why developing a strong startup community must precede the development of a robust ecosystem. Part of the motivation behind that was something we observed in many cities, which is you pull in these ecosystem actors — whether it’s potential angel investors, corporations, governments, and so on — their response was, “Well, you know, the entrepreneurs aren’t any good. You can tell me all day long I should be more collaborative and helpful and focused on the needs of the entrepreneurs, but all the entrepreneurs here suck. So why would I want to do that?” Now, we can push back on that and say, “Look, well, you know, what are you doing to help that situation? But fair point.” And so, once the startup community is producing a high rate of companies that are interesting, it then becomes a resource attractor that pulls those things in. And so, that’s a very long answer to your question about, you know, how do we get around that — this need for a long-term view — and my answer is that the entrepreneurs will be the ones who will create the interest by producing interesting companies.

[00:12:30.20] Ben: Is it not slightly a Catch-22 situation, where, when you’re trying to create a new startup community, we don’t have successful entrepreneurs? Because, you know, in a way, the community depends on being led by successful entrepreneurs and if they don’t exist, then it makes it harder to create that community, right? How do you overcome that challenge?

Ian: The mistake that’s often made is looking at the factors that currently exist in successful ecosystems and equating that with what it takes to get there. The resources, the actors, they co-evolve along with success. We’re going through the early days of a boom cycle, right? If you believe there has been this outward shift in technological opportunities, there has been a shift in certainly the supply of venture capital into these ecosystems. But these are emergent systems. And so, we can’t just force success. We can’t say, “Okay, these seem to be the ingredients of success. Let’s just place them here and then innovation will happen.” The reality is what’s valuable will emerge. There will be certain principles that apply across geographies, but it truly will be unique to each time and place. That’s an inherently uncertain process and when that gets choked off, progress is stifled. So, that’s the frustrating thing. The Catch-22 is really about that we want to manufacture success, but it’s the attempted manufacturing of success which is actually what can impede success from emerging from the bottom up, principally led by the entrepreneurs.

you can improve the odds that your company will succeed by being more collaborative and engaging in a community, regardless of where you live

[00:14:22.14] Ben: I want to talk a bit about what’s different, or what changed versus the 2012 book. So, you talked a bit about, you know, how you wanted to talk more about what you’d learned from Boulder. But I think also, this whole notion of an adaptive ecosystem is new in the second book. And then also, I think you took a much broader lens, right? So you wanted to look at the startup community and ecosystem through a broader lens, which included some of the geopolitical events that we’ve lived through in the interim. So, can you just talk about that — what evolved versus the original Startup Community book?

Ian: Yeah! So, our process is actually pleasantly recursive of a complex adaptive system. The process itself evolved. Our mission emerged from our process of discovery. So, the 2012 book was really about Boulder and Brad’s perspective of here’s what the situation was, here’s what we did, here’s what worked, here’s what didn’t, here was the outcome — of course, with it being about one place. You know, I thought that book was very principles-oriented. It was very actionable too. There were tangible ideas that people can go and try this thing or that thing. But because it’s about one place, it’s inherently limited. It was so early. I mean, Brad is really a pioneer in this thinking. And so, people in lots of places adopted the principles and the practices from that book. They found varying degrees of success with that because their city was so different from Boulder, and that’s the main criticism, that this is an idealized state of the world. If you’ve been to Boulder, it’s teeming with talent, large institutions, it has a huge entrepreneurial spirit, the community is so collaborative. I actually think the collaborative nature of the Boulder startup community is reflective of the entire Boulder community, rather than the other way around. And it’s just this fantastic place. So that was kind of the main criticism is like, “Look, try going to Paris where people undermine each other.” Nicolas Colin, our mutual friend, he wrote a book review of the Startup Community Way, saying, “There’s kind of this Kumbaya spirit emanating from Brad and then also Brad and Ian, which didn’t really apply in Paris.” And so, that’s fair.

Ian: But I still think, even if you view Boulder, which is not perfect as the idealized state of collaboration, there’s still a lot that can be learned from that. Why the evolution was, as startup communities, entrepreneurial ecosystems garnered more attention over the last decade, the scope and scale of ecosystem actors increased, right? Governments, corporations, universities, other actors, and so on, have been putting more resources, getting more involved in more places. And one of the things they were looking for were tangible frameworks, right? It’s very difficult to convince those actors without sufficient evidence, and theory and frameworks to guide, that this bottom-up approach of experimentation — learning — adaptation, which is so familiar to entrepreneurs and entrepreneurial community builders, that that’s actually the way to do this work, because it feels a little hand-wavy, right? It feels kind of like it’s bullshit.

Ian: And so, our mission was to say — and I think that’s part of the appeal of working with me, someone with an economics and research background to say — look, let’s dress this up with some data, let’s dress this up with some more theoretical frameworks. And that kind of was the initial mission, to do that. But through, I guess, maybe we were four or five months in, we have 30,000 words written and just think of it as, you know, Startup Communities 2012 book with more evidence, theory, frameworks, from economics, sociology, economic geography, that sort of thing. But it was still a linear progression from the first book. As I talked to more people, I realized that it was just this complete disconnect, almost of mental models about bottom-up versus top-down, you know, planning and execution versus experimentation and adaptation. And so, we realized that we were on a different mission. I don’t have a background in systems science. My background is in political economy and economics, but I discovered complex systems along the way. And as soon as I — you know, having talked to lots of people, reviewed lots of work — as soon as that framework came into my mind, I realized immediately that this is what needed to be the centerpiece of our book, to explain the inherent uncertainty, the nonlinear behavior, the uniqueness of each place, and why that presents these challenges. So, we threw the first 30,000 words or so that we wrote away and we began a new — and so, that sent us down this path of explaining the behavior of startup communities and entrepreneurial ecosystems through the lens of complex adaptive systems.

[00:19:48.24] Ben: So, I’m trying to draw a parallel: in nature, you can’t control ecosystems. You can merely sort of seek to guide them, to influence them. And this is very much the same philosophy you take with startup communities and the attendant ecosystems. But what are some of the equivalents? How do you give an ecosystem the energy, the nutrients, the oxygen to grow? What can be done that’s replicable across different places?

Ian: This is not to say that the inputs don’t matter, right? It’s an empirical reality that entrepreneurship, especially in the knowledge economy, and especially if we want to talk about tech and venture-backed entrepreneurship, is concentrated in certain types of places, right? The distribution is very spiky. That’s an empirical reality. It is beneficial to have a density of highly-educated, ambitious people, right? It’s advantageous to be around other high-tech institutions, whether they’re businesses or universities, and so on. Those things matter, but they’re not enough. What our point is, it’s about the integration of those elements, right? If I view the process of starting and scaling a high-potential company, as a search — not entirely, but to a large degree, it’s a search for the resources you need to succeed. Many of them exist outside the boundaries of the company, right? So, whether it’s a key senior hire, it’s early-stage mentoring — we talk about investment capital a lot, right? It’s a relationship with the customer. All these things are dependent on the exchange of intangibles, fundamentally underpinned by relationships, which require trust.

Ian: And so, what we’re really talking about when we talk about integration, is building better relationships. And so, one of the points that we make throughout is — and this is the part that’s empowering, especially for people in places that don’t have all these resources, where people do have ambitions, and they do want to be better, and they want to stay where they are — is by building a community of like-minded people who are committed to a cause — entrepreneurship, technology, they’re committed to that place — if they could be committed to each other, create a critical mass of knowledge sharing, support learning, sharing contacts, expanding networks, we believe that the odds of success for any one company will be greater. It doesn’t guarantee success, it also doesn’t guarantee success to be in Silicon Valley. It just improves the odds of success. I mean, maybe we could debate that today, if that’s turned negative. But that’s the fundamental point we’re making is, you can improve the odds that your company will succeed by being more collaborative and engaging in a community, regardless of where you live.

[00:23:10.09] Ben: And how do you get some of those stakeholders to be collaborative, and to not want to take control? Because, as you said, they’re not the principal actors; the principal actors or the leaders have to be the startups. But you still need the participation of governments, universities, organizations that are typically very top-down driven, very hierarchical. How do you get them to behave in the appropriate, collaborative manner to really help the ecosystem?

Ian: Well, it helps to have individual champions from those places. And this is a subtle nuance that’s missed. Sometimes it’s a key individual or individuals who drive the whole thing in a community. Fred Terman’s role, from Stanford and Silicon Valley, has been talked about a lot. Brad Feld, honestly, in Boulder is sort of a local hero. There are a number of stories throughout. There’s even one from the Viking Range Company — I don’t know if you’re familiar with that — but high-end ranges in the United States, a small town in Mississippi, there’s a famous story about how the founder of that company created an entire local services economy to support high-end families who would come to purchase these ranges. This role of a local champion can be really important, whether that’s in an official capacity or non-official capacity. Too often, though, however, these institutions are disconnected from the entrepreneurial community. University towns are a great one in particular. Even in Boulder, which is a city of 100,000 people, it’s fairly densely populated for having a small city vibe. The university is just adjacent to downtown, but in my experience, it’s very disconnected from the startup community. So in an ecosystem ranking or a research report, it might say, “Well, this is an example of a research institution that’s feeding entrepreneurship.” In my opinion, it doesn’t. So, it’s more about the talent that it’s producing, it’s drawing interesting people to the community, it’s driving economic growth. But I wouldn’t say that, that university and countless other places, are driving the entrepreneurial community. And in worst instances — I’ve seen in a bunch of especially smaller, less-developed ecosystems — there are what I’ll broadly call entrepreneurial supports; these are innovation centers, incubators, co-working spaces, and so on. They’re almost always funded by the government, and the people leading it have no entrepreneurial experience. What they have experience doing is extracting, or I should say, getting these initiatives funded by the government and maintaining those relationships. They at best, are irrelevant, and at worst, harmful. They suck the oxygen out of the community, and they can be actually predatory to entrepreneurs in too many places.

what each city is going to find is that about 10% of the companies will create 90% of the value

Ian: Going back to one of the first things we talked about, which is, if you live in an environment like that, the best thing you can do is to build a critical mass of people who don’t behave that way, to help each other. One of the things that I’ve found, even more transactional — I mean, I know it’s very easy, the American way is to say, “Hey, be informal, be collaborative, be helpful.” That can be seen as a naive view towards many cultures. But what I have seen is that when people do embody those values — being helpful to others, without expectation of something in return, being less transactional, at all times — that shifts the dynamic, and people start to think in positive-sum terms, right? Like, “Oh, well, if that person does well, that’s good for me, too. This is going to grow our ecosystem overall and that’s a good outcome for me as well.” And so, you know, my message would be entrepreneurs creating a critical mass, in spite of those obstacles. It’d be great to unlock the power or the resources that some of those larger institutions have, but you don’t need it. And one of the ways to get around that is by creating a critical mass, creating successes, and then those larger actors have to adapt or die because they’re no longer the most important force in that ecosystem.

[00:27:41.23] Ben: Do you think is as present now as it was historic? I mean, is it more difficult to find people that will act in that way, and with that level of generosity?

Ian: I believe the startup communities in which I operate — so this could be a biased view, just because of my network — but I find that the entrepreneurs are fairly collaborative. The Startup Community community is fairly collaborative, more so than obviously, many other sectors of the economy. I do think that mentorship is one of the ways that this has manifested, I think mentorship around entrepreneurship has been adopted pretty much worldwide at this point.

[00:28:27.09] Ben: You know, you’re giving advice to governments around ecosystem development. And what should they be doing? Because you’ve already said they should not be necessarily investing in or funding incubators, and accelerators. So what should a government do to foster a startup community and then an ecosystem?

Ian: Well, it’s not that they shouldn’t do those things. It’s the way in which they do those things. So, the first order of business is figuring out what is needed. I can’t tell you how many times, whether it’s from a mayor in the US to a minister of innovation in country XYZ, that says, “Oh, we’re doing this, this and this.” And the question I always ask is, “Well, you know, where did that idea come from? What do the entrepreneurs think of that?” And they never know. They’ve never taken the time to say, “Well, what actually is needed here? And what can we do to see that?” So that’s the first principle, which, again, it’s super simple, but it’s not easy because governments aren’t used to acting in that way. The second thing, it’s not that they shouldn’t fund accelerators, incubators, and so on. Actually, there’s a super important role for government to catalyze those things, especially early on, but don’t do it in perpetuity. Let the private sector fill in eventually. And make sure that entrepreneurs are involved. I’ve done some survey work on a bunch of different dimensions. And the number one thing — at least in the way that I’ve structured these surveys, where I’m kind of generalizing between positive and negative — on the negative side, the number one thing is not involving entrepreneurs with any of the decision-making process and how money is spent. That doesn’t mean you want to have an entrepreneur, necessarily, who’s the CEO of an innovation center, a co-working space, something like that. But you should have entrepreneurs involved with the design, and from the governance perspective, on the board. That way, we ensure that it’s relevant. Over time, the entrepreneurs, the successful entrepreneurs who are in that community should begin to fund those initiatives. Otherwise, again, they’re not valuable.

the most powerful political actors in the United States, where I’m from, are the people who’ve had the major entrepreneurial successes

Ian: So that, I think is more kind of the role of government, right? Be smart, be agile, fund many things, not just one thing — that tends to happen as well. You know, they’ll pick winners, and everything goes to this, they try to consolidate. But actually, I think a better thing to do is fund maybe a handful of things over a two or three-year period, and then let them be self-sustaining at that point, see what works, see what doesn’t. Also, think about stage. So, it feels to me like there’s been almost an oversaturation of very early-stage entrepreneurial support, in most places in the world. We saw the S curve adoption for accelerators. Now, there’s pre-accelerators, pre-pre-accelerators. And I think that’s fantastic! I think we have more experiments that are going on. But what each city is going to find is that about 10% of the companies will create 90% of the value. So it’s the ones who have achieved that product market fit who have the traction, and maybe are unclear about navigating international markets, or what it means to be a CEO in a company that goes from 10 to 50 people overnight, that sort of thing. There’s a huge under provision of that and I think that’s where the industry of entrepreneurship support needs to really fill in that gap. Because we haven’t seen that yet.

[00:32:17.03] Ben: In the book, you say, these are things that measure the things that are least important, right? But you’ve got a government that’s clearly very keen to demonstrate progress, very keen to demonstrate they’re getting return on investment. So, how do you get them to think about the right metrics for success, and to apply a long-term vantage point to this, when again, you know, they’re hungry for short-term success?

Ian: Well, the first thing that I do is explain to them that any metrics must be oriented around whatever the program’s goal is. So, if their ultimate goal is about job creation, wealth creation, okay, I understand that. But too many people will sell them a solution saying, “Oh, yeah, this thing we’re going to do, this program that is supporting entrepreneurship, will create x jobs.” Oftentimes, governments will fund initiatives and the key metric is how many jobs did this create at this point in time? Which is the wrong metric. What I might be more interested in is what kind of lift do they give to the marginal company who participated, right? How did, let’s say, a top of funnel community catalyst program, what kind of relationships spun out of that, if that’s kind of the goal? Or, what kind of people did it pull into entrepreneurship? So making sure that it’s structured around what the programs actually do, having a clear value chain that explains, okay, if job creation is actually what you want, how we get there is having companies with better outcomes. Let me tell you how you help companies have better outcomes, and we can create that value chain. But making sure what you’re measuring is actually built around the program.

Ian: The other thing, too, is that I believe that system structure explains so much of the performance of an ecosystem. So we’ve been doing a bunch of network mapping exercises in a few markets where we’re looking at who’s influential. There’s some academic research, and also some policy research that supports this, that when the influential actors in the ecosystem are entrepreneurial, have had entrepreneurial success, or they support organizations that are heavily influenced and/or funded by entrepreneurs, those tend to be more productive ecosystems than those with less. So, there’s empirical support behind these theories that we’re talking about. And so, that’s one of the things that we do, we map out the ecosystem. Who are the businesses that have reached to scale, have had some success, and how are they integrated in? What are they connecting up with? Often what we find is that the most successful entrepreneurs are isolated. They’re not linking up with any of these support programs. So, the metrics, in this case, are outputs. How many companies participated in this program? How many people attended this event? What I want to know is, have the most impactful companies touched any of these things we’re paying for? Or who is this angel investor over here who seems to be connected to every high-impact company that has come out of this community in the last 10 years? How can we engage her more in our efforts? What do they think we could be doing better? And just by mapping that out, and not only who the influential actors are, but how they’re all connected through meaningful relationships — whether they’re investment, mentorship, program participation — that explains a lot. And then you have a well-informed strategy about, again, taking the system’s view of how can we better integrate these things and make sure that the most productive programs have the resources they need, and maybe the ones that aren’t, that are just sort of creating a lot of noise, but not producing tangible outcomes, high-impact outcomes — maybe you start winding those down. And that’s okay. That’s normal and healthy.

[00:36:16.27] Ben: We talked about the introduction of the whole complex adaptive systems framework. We’ve talked about developing what was learned in the interim period. But the other thing that strikes as different with the second book, is this idea of it having a broader context. Now you’re looking at startup communities through a broader lens, including a geopolitical one. And you talk about your experience of living in London at the time of Brexit. I suppose the question I wanted to ask is, like, you know, you mentioned Nicolas Colin, but Nicolas has this view that, you know, almost through entrepreneurship, you can make a bigger change than you can through engaging directly in politics, for example. So would you say that, that was a big motivation for writing the book? And do you subscribe to that view that entrepreneurship can lead to bigger and better outcomes than a direct engagement in politics?

I’m incredibly optimistic about the future of entrepreneurship in America, in Europe, globally. I think entrepreneurs are going to have more opportunities than ever, coming out of this crisis, during this crisis. And we’re going to need that

Ian: Well, I’ll answer the second one first, which is, absolutely, yes. In fact, you might say that the most powerful political actors in the United States where I’m from are the people who’ve had the major entrepreneurial successes. So, kind of reverse engineering math. You know, I’ve always been fascinated by geography. I’m committed to entrepreneurship, working with entrepreneurs, writing about entrepreneurship, explaining the importance of it to economic vitality, and, you know, to vibrant cities. I’ve just always been interested in these things. But it’s also personal to me. Although I’ve spent most of my adult life in California — well, I went to school in Chicago, spent time there — California, Washington DC, London, I spent a little time in Geneva, we talked about that a few weeks back. I grew up in a small, agricultural and industrial town, in the Midwest, in Ohio. It was part of the Detroit supply chain. And we didn’t have a lot of opportunities. I was born in 1980. That’s when manufacturing employment peaked in that region. We had a self-sustaining community. But I was born in the beginning of the decline. My father is a brilliant innovator. He has no college, no university degree, but he has, I don’t know, something like 50 or 60 patents in transportation logistics. And it’s always been this weird thing. It’s kind of like, my dad had these jobs, but he had these crazy hobbies in redesigning transportation logistics infrastructure. But he was not successful economically in these endeavors. He was not a successful entrepreneur. And what I had thought about was, well, what if instead of being from where we were, where we lived, if we were instead from Palo Alto, California, if you just changed that one piece, would my dad have had a very different outcome? Therefore, would I have had a very different life trajectory and so on? And I think the answer is not 100%, but I would imagine the odds of success would have been much higher. And I would like to see that equalized more.

Ian: I think we’re living through an era where there has been a massive proliferation of entrepreneurial high-tech activity around the world. People forget — you know, I know that Silicon Valley gets a lot of the attention, but people forget how fast activity has diffused. I did a report in 2018 with an urban economist named Richard Florida, where we mapped just over a decade and a half period, about the spread of venture capital, which we used as a proxy for high-tech entrepreneurship. Not a perfect one by any means, but it is a reliable data source for what it measures. And, you know, I guess, in 1992, the US got something like 97% of all venture capital. It’s now less than half. It’s 40%. And I think half of that decline happened in the last seven years. So, people forget how quickly this is diffusing in geographies, not only outside of Silicon Valley, but outside of the United States. And so, I feel like my soul’s mission in this work is so that entrepreneurs, regardless of where they want to live, can improve the odds of succeeding. That doesn’t guarantee they will, but if we can move the needle, and so that people don’t feel like they have to ride the train an hour and a half into London every morning, just to have a job in the industry they want to work in or, you know, face exorbitant housing or wildfires in San Francisco, and congestion. Like, I hope we can move the needle on that. And so, that’s what’s motivating me.

[00:41:18.07] Ben: The neoliberal kind of supply-side economics view was that people have to move to where the jobs are, right? We need to get mobility of labor. But, one of the downsides is that it’s very detrimental to happiness, because people have to give up their community links and so on. And so, what you’re saying, your philosophy in life is to take the opportunities to the people rather than vice versa?

Ian: Yeah. And also, the reality is that high-profile, high-tech successes happen in way more places than people realize. A successful company can be formed anywhere. The question is, how repeatable is that process? What happens after that success? I’ll use the example of my adopted hometown where my family moved to, on the central coast of California, called San Luis Obispo. It’s a 45,000-person town, small university, huge agricultural element, beautiful place where retirees and people on long-weekend holidays like to go from San Francisco and Los Angeles. In 2015, there was a company called Mind Body, which it’s been a unicorn exit. They were the first company to really get venture funding. Like, nothing happened and then it went from basically zero to a unicorn exit. Now the question is, what happens next? So, I just spoke to an entrepreneur down in Orange County, California — for people who don’t know, that’s between LA and San Diego — and he was saying, “We’ve had loads of exits. But then, people don’t reengage. There’s no community.” And so, what we’re after is we’re not going to predict where the next unicorn or 100 million or 500 million exit occurs. It’s, can you increase the odds that they will occur in your place? And when they do occur, how do we build a community of support around that so that the people will want to reinvest and stay engaged, rather than leaving or, you know, going off to the proverbial beach and disengaging? And that varies across geographies, significantly. And that’s really what this is all about.

[00:43:29.03] Ben: And that diffusion of startup success that you talked about, do you think that’s going to accelerate now, post-pandemic? I mean, do you think being physically close to the other actors in the startup community and an ecosystem is still as important as it was?

Ian: I feel like distributed work, there’s been a permanent shift on that, at least in the United States. Our cities are unsustainable, to a degree. You know, cities in Europe are unsustainable, but they’re just completely configured in a different way. I mean, the San Francisco Bay Area, Los Angeles, they’re almost unlivable, they don’t have the right infrastructure. So, I feel like there’s at least a permanent shift in some of that activity. But we have to remember that even the people who are moving to smaller cities — second, third-tier cities — they still spent years building relationships in those larger cities, they’re going to have a meaningful relationship with those places. I mean, I don’t want to be remote 100% of the time, I don’t want to work out of my house. So, I actually like the model of, you know, whether my colleagues sit next to me on a daily basis is irrelevant to me so long as we have the foundation and we come together when it’s needed. I do believe that the human element is important. Having said that, if you’re an early-stage company on rapid product iteration cycles, that’s hard to be distributed. I mean, I think it’s okay to have a distributed company, as long as it’s by teams, especially having engineering teams where people are completely isolated, that’s really hard to do rapid iteration. So I don’t think that will be permanent.

Ian: Another thing is, you know, there’s been all these announcements from big tech companies in San Francisco, like Twitter and Facebook saying, “Okay, permanent remote work.” The key indicator for me will be what happens to the executives. If the executives don’t leave, then it won’t be lasting, because it’s a strong signal that if you want to be promoted in the company, you still need to be at headquarters. And that’s been going on for a long time anyway, right? All these satellite companies. I know people in Europe feel that strongly that a lot of these American tech companies like, you know, you’re always second-class citizen if you’re in one of the satellite offices. So, we’ll see if that evolves. So yeah, I think, more importantly, though, that we’ve just gone through a massive shift in society and the structure of our economy. Entrepreneurs are best positioned to respond to that. Some people are being forced into entrepreneurship, maybe for the first time. So, I actually see a huge explosion in entrepreneurship happening overall and I’m incredibly optimistic about that.

[00:46:30.09] Ben: You wrote quite a lot about having a creative class, a spirit of rebellion. And there’s that great case study of Jerusalem in the book — great work with it — where the guys visited by a public official, saying, “Oh, we’re going to seed 200 startups.” He said, “You’d be better off seeding 200 rock bands”. Do you need to create the draw to bring people in, that will then create the foundations for community?

Ian: I think it’s extremely important. You know, in general, people go to places for three reasons: they go to a place for work or opportunity. Second, they go to a place for family or personal connections. The third is they go to a place desirable. So, if you’re a place that’s lacking on opportunities — family is sort of, there’s nothing you can do about that, right? Family and personal connections. But the third thing, making it a desirable place. Absolutely! Especially now, if you’re trying to attract people from the entrepreneurial class, knowledge workers that we’ve proven can more or less be based anywhere, if you have an airport or rail links that can get you into those major markets in a reasonable way, and the communities are desirable, they have social, natural, cultural amenities — I think that’s what people want. So I think it’s hugely important. And also, you know, additionally, this is something that people in the traditional institutional actors, the governments, the other civically-minded corporations and universities and so on, can do something about. It’s a little more in their lane.

Ian: One of the things that I tell governments often is, you know, they so desperately want to do the exciting things, you know, “Let’s create a huge startup campus!” I think they like going to ribbon-cutting ceremonies — that is like a tangible thing that’s exciting and fun. But then it’s like, just stay in your lane. Like, is this a great city to live in? Paris, fix your traffic congestion problem! You know, like, why don’t you start there? Taxation, regulation, all that. But a big part of it is, you know, making your community a place where people with options want to be. A big part of that, for me, is a healthy and vibrant small business sector, right? Quality restaurants and bars and that sort of thing. And so, yeah, I think it’s hugely important. I can say it in eight different ways, but absolutely, yes.

[00:49:05.19] Ben: Yeah. And I think the proxy sometimes, for success, is to build infrastructure, right? But infrastructure won’t bring companies by itself.

Ian: No. Well, today’s infrastructure is what? High-speed internet and interesting places to work.

[00:49:22.20] Ben: Yeah, exactly. Because I think, yeah, the definition of infrastructure is often defined in the industrial age terms, which is, we need new roads, we need new railways. I think you’re right. I mean, the actual kind of conception of what infrastructure should be, probably hasn’t been updated in many politicians’ minds.

Ian: Yeah, absolutely.

[00:49:42.13] Ben: What happens for those cities and those countries that can’t create a vibrant startup community?

Ian: They’re probably falling behind if they haven’t already. Entrepreneurship, in general, is important for a more vibrant economy and community, creates jobs, provides better services, increases productivity. In normal times, you know, creative destruction, even in the small business sector is super important. Kind of old, tired businesses move out while young, exciting ones move in. Everything’s updated and reflects the current demands of consumers and businesses, right? So, we want a healthy amount of that in general. So, if we focus on just the innovation-driven businesses, they’re the ones… Innovation-driven startups are shepherding in new industries, new sources of growth. Oftentimes, economic development initiatives are focused on the industries of the past and present — cluster analyses, you probably heard that terminology. Those are the strengths yesterday and today, but what entrepreneurs do is they look for sources of new opportunity. So, again, can’t guarantee success, but a healthy amount of that going on is really good for the long-term prospects, not only for those companies that achieve success but for the entire community.

Ian: One of the best books on economics I’ve read in the last decade, is called ‘The New Geography of Jobs’ written by Enrico Moretti, who’s an Italian economist at UC Berkeley. And his overall thing is, look, let’s divide the world into two types. Let’s divide the economy into two types of businesses. There’s the non-tradable sector, which produces local goods and services; this can be high value, low value, you know, everything from taxis and barbers, all the way up to lawyers and doctors. The tradable sector produces goods and services that can be bought and sold all around the world. Everything from agriculture — food — to the high-tech, innovative sectors. Within the tradable sector is the innovative sector. And his whole thing is, you know, you don’t have to work at a high-tech company, or a knowledge-intensive company that’s tapping into huge global markets, in order to benefit from that. What you need to do, if you’re destined to be a barista or a school teacher, you want to live in a community that has some amount of that going on, because those are well-paying jobs, those businesses are bringing revenue, and so income and wealth into that region is then spent to support the local services economy. So you want a healthy amount of that in your community to propel long-term economic vitality and opportunities for people.

[00:52:55.17] Ben: What’s your view on Europe? Do you think Europe has enough vibrant startup communities? Do you think Europe is building enough digital-age businesses to be successful or to have the same level of success in the future that has had over the last few decades?

Ian: Yes, absolutely. You know, I’ve mostly spent time in London. London, to me, feels top of the stack in terms of not only entrepreneurial activity, but collaborative spirit. I feel like people are generally helpful, interesting, people are weird. There’s that spirit of rebellion going on. I can’t say too much about many of the other places. But what I will say is, you know, the US is at an inflection point, and we’re definitely, because of our political dysfunction, our inability to address major challenges, putting aside outright hostility to foreigners — including high-skilled foreigners — we’re losing our edge. We have a major election coming up and I think the outcome of that could have a huge impact on the future of innovation here, as a talent magnet. Another great book to read on that — Harvard Business School Professor Bill Kerr wrote a book called ‘The Gift of Global Talent’, and it’s documenting how the US has been by leaps and bounds, a major beneficiary of foreign talent. Foreign talent has driven our innovation economy to a very large degree. So, you know, if you’re a European founder, entrepreneur, investor in the US, you know, depending on your embeddedness in this country, and you’ve had enough of our response to COVID, maybe you spent the last four months back at home and you realized, “Hey, life is better here!” Because it is. I think the European lifestyle is much better overall. And so, you know, I think that’s one dynamic at play — the US losing its relative position.

Ian: And, as I said before, Europe is a great place to live — I feel like that makes it a talent magnet — and a lot of progress has been made in a short amount of time. I think that that’s one of the things people forget. There’s a book that I read, called ‘100 Years of History in Silicon Valley’ — something like that; I forget the exact title — and it talks about how it was 100 years unfolding. You know, this didn’t happen overnight. People really do forget that. I think the first proper venture firm was founded in 1959 and the evolution of Silicon Valley’s technological prowess goes back much further. I recently realized that that book was written in 1996. And now, we’re 125 years in the making. As I mentioned before, we more or less can’t document the presence of venture capital in Europe before the mid-’90s, really. Early ’90s. Now, there were some, but it was very disparate. So, you know, that’s kind of a lot of progress in a short amount of time. So, I just want to frame it in that so people are mindful of how much has moved forward at a very, very rapid pace.

[00:56:22.06] Ben: Just to revisit the US election for a second. I mean, you paint this as a really pivotal moment, which I think most people would agree with, right? Do you think that entrepreneurs in the US — particularly those that have been very, very successful, and have major influence — do you think they’ve been sufficiently political or vocal?

Ian: I don’t want to paint with too broad of a brush, because people are so different. But I think the general bent for American entrepreneurs is to be more conservative, politically. The definition of that has shifted dramatically. Hardcore libertarian streak. Of course, the irony of that emanating from Silicon Valley is, you know, how propped up Silicon Valley was, and has been? Well, certainly, in the beginning, stages, how propped up it had been by government spending? And some of these entrepreneurs — you know, Elon Musk, in particular, has been a huge direct beneficiary of that. So, you know, the question, ‘have they been outspoken enough?’ I don’t know. It’s kind of all over the map. You know, I do see the private sector actually advancing cultural and moral causes more so than our government right now. It’s something I’ve actually been sort of thinking about, lately, that it’s remarkable how outspoken companies like Nike have had to be around the racial inequity crisis happening. Well, I say ‘happening in America today’ — it’s actually been happening for the last 450 years. I was watching a major league baseball game this past weekend. And I know most people in Europe might not be familiar with baseball, but on the pitching mound, there was a logo, it was #BLM — Black Lives Matter. And the fact that sports, major businesses, so many segments of our society are coming forward in support of that, and yet, our own government is actually hostile to that — you know, a portion of our government is hostile to that. I think that’s pretty remarkable. Really. A lot of businesses feel the need to fill that void.

Ian: So yeah, I don’t know, that’s kind of a meandering answer, but it’s a little bit all over the map. But I think in general, you know, people are stepping up. So, I’m incredibly optimistic about the future of entrepreneurship in America, in Europe, globally. I think entrepreneurs are going to have more opportunities than ever, coming out of this crisis, during this crisis. And we’re going to need that. I would encourage the entrepreneurs themselves, people working directly with them, whether you’re in consulting, podcasting, writing, mentoring, investing, wherever you are in that entrepreneurial stack, to be more collaborative and helpful. I think we’ve learned the importance of community by having it taken away from us. In some ways, my community is stronger, I will feel so much more gratitude to be in the physical presence of others in the future. But it’s really this positive-sum mindset. You know, we talk about ‘give first’, help people without the expectation of receiving something in return immediately. It’s not naive altruism. You expect to get something, but you don’t know when or from whom and in what form. You know, I believe if the global startup community is stronger, and I believe if entrepreneurs are doing better, that I will benefit from that too, because I’m a part of this system. This is like a time to just be grateful for each other, have humility, and build community, and you’ll be much better off if you do that.

[01:00:25.05] Ben: Amen to that! Ian, thank you very much for your time! That was a great discussion!

Ian: Thanks, Ben! It was a pleasure to be here!

Europe is a Developing Economy. But so is the U.S. (#13)

Structural Shifts with Nicolas COLIN, co-founder of The Family

For this episode, Ben Robinson is joined into the conversation by Nicolas Colin — Co-founder of The Family — and we argue that developed economies are defined by two major characteristics: they are able to create and accumulate wealth via large, global tech companies and they are able to re-distribute that wealth to benefit their entire society. Through this lens, neither Europe, nor the U.S. are developed economies in the current techno-economic paradigm — and we assess whether the current politicians campaigning for or holding power are in the right flow to inspire the radical imagination that is required.


Ben Robinson (Ben): Welcome to the Aperture Podcast. For this episode we are very lucky to be with Nicolas Colin, who is co-founder and director of The Family, which is a platform for European entrepreneurs. Nicolas is also an author, he’s written multiple books including Hedge: A Greater Safety Net for the Entrepreneurial Age, a review of which you can find on the Aperture website. He also contributes articles to Sifted, and he writes a weekly newsletter called European Straits. Nicolas, welcome!

Nicolas Colin (Nicolas): Thank you.

Ben: You said that Europe is a developing economy, which I guess is a slightly controversial statement. What did you mean by that? And what do you mean when you talk about Europe having to navigate the narrow strait between the Americas and China?

the fact that Britain used to dominate and ceased to dominate because they missed the opportunity of one particular transition from the economy of railways to the economy of steel reveals that every region that dominates at a given time is in danger of losing it if they don’t do what it takes to embrace the new paradigm.

Nicolas: It’s a long story, but to make it as short as possible, what I believe in is the idea that we’re currently going through a transition from one world to the other, or what economists would call one ‘techno-economic’ paradigm to another techno-economic paradigm. So the world we’re leaving behind is that of the Fordist economy of the 20th century that was dominated by mass production, mass consumption, and the core of this economy was the car industry, the matrix after which every industry was modeled in the 20th century with the core principle of mass production governing everything. The new world we’re entering is that of the entrepreneurial age, as I call it, which is a world dominated by tech companies as opposed to car companies. And tech companies have a distinctive feature that is increasing returns to scale, which leads to companies overall being more fragile, and markets being more concentrated, dominated by one company at the expense of the others. And so that brings many consequences, but as in any transition of the sort, it redistributes the opportunities between the different regions of the world.

We used to race ahead in the Fordist age, but as for the Entrepreneurial Age, if you look around in Europe, we don’t have the large tech companies that determine if you’re racing ahead or lagging behind. We might have that legacy wealth and prosperity that we inherited from the past, but it will be exhausted at some point if we don’t build the growth drivers that we need to rebound and to succeed in the new paradigm, and that’s about building successful tech companies that dominate the global scale.

The first modern technological revolution was the Industrial Revolution, which triggered the rise of Britain as the dominant power at the time, and then, one century later, the rise of the Steel Industry shifted power from Britain to Germany and then to the US, and the US became the most potent economic power in the world at the time, and they still are in many respects. But the fact that Britain used to dominate and ceased to dominate because they missed the opportunity of one particular transition from the economy of railways to the economy of steel reveals that every region that dominates at a given time is in danger of losing it if they don’t do what it takes to embrace the new paradigm.

And I think that’s exactly what’s happening in Europe. We got used to dominating in the 20th century, not because we were the most developed economy in the world, but we were close to catching up on the US, emulating them in many respects, forging this very strong transatlantic alliance that came with sharing the wealth, sharing the techniques to grow successful companies, but also sharing parts of the social contract, so institutions that existed on both sides of the Atlantic. I think we got used to racing ahead, and we need to realize today that we used to race ahead in the Fordist age, but as for the Entrepreneurial Age, if you look around in Europe, we don’t have the large tech companies that determine if you’re racing ahead or lagging behind, and if we don’t have them, that means we’re lagging behind and we might have that legacy wealth and prosperity that we inherited from the past, but it will be exhausted at some point if we don’t build the growth drivers that we need to rebound and to succeed in the new paradigm, and that’s about building successful tech companies that dominate the global scale.

If you want a tech company to succeed — to overcome the many obstacles that exists at the seed stage and then to scale-up and reach a scale that makes it possible to dominate at the global level — you need that company to aggregate resources on different fronts. One front is that of employees — you need to hire a lot of talent. Another front is that of capital — you need to raise a lot of funds. And then a third front is access to the markets, — you need to sell your product to as many customers as possible. If on each of these fronts, you need to overcome obstacles that come with the fragmentation, then you are slowed down when your potential competitors in the US and China are accelerating.

Ben: And you’ve talked a lot about the reasons that Europe is lagging behind United States, and we can point to many factors, less VC money, for example, but one of the key ones is that… you talk a lot about fragmentation.

Nicolas: Yes.

Ben: And in that regard, Brexit cannot be a good thing for the European project, right?

Nicolas: No, it’s true. So the fragmentation is critical because if you want a tech company to succeed, that is to overcome the many obstacles that exists at the seed stage and then to scale up and reach a scale that makes it possible to dominate at the global level, you need that company to aggregate resources on different fronts. So one front is that of employees. You need to hire a lot of talent. Another front is that of capital, you need to raise a lot of funds. And then a third front is access to the markets, that is you need to sell your product to as many customers as possible. If on each of these fronts, you need to overcome obstacles that come with the fragmentation, be it about languages or culture or regulations, then you are slowed down by the fragmentation when your potential competitors in the US and China are accelerating at the same time, because then they don’t encounter the same obstacles as you. So an example is… you are in Paris, you’re struggling to raise money because VCs are not ready to support an ambitious venture like yours. You can still cross the channel and go to London and pitch London-based VCs that will realize that your venture has the potential to grow big, and they will invest.

Crossing the channel sounds easy, but you need to realize that if you’re an early stage startup, it costs a lot of money to buy a Eurostar ticket, then you need to spend several nights in London and hotels are extremely expensive. And then you need to pitch a VC in English, which is not your native tongue. And then even though you master some English and you can pitch your company, the fact that that you didn’t grow up in the same culture, maybe the VC in front of you is English or they are Indian or they are American but you’re French, and so the informal communication is not the same, the context, the interpretation of the context is not the same, and so there will be a high probability of a miss, not because your venture is bad or that VC is feeble, but because there’s been some misunderstanding between you due to the language and the culture, and that’s fragmentation.

if you immerse yourself in the world of startups, you realize that hard borders are not that much of a problem. It’s more soft obstacles like languages and culture that are the problem. I think that Brexit is irrelevant when it comes to soft obstacles.

Ben: And from here, it gets worse, presumably, with Brexit, because when you read your newsletter, it seems that you oscillate between sometimes being more bullish about Europe, sometimes a bit more pessimistic about Europe? Doesn’t Brexit make you more pessimistic?

Nicolas: I don’t know. The fact is, if you immerse yourself in the world of startups, you realize that hard borders are not that much of a problem. It’s more soft obstacles like languages and culture that are the problem. I think that Brexit is irrelevant when it comes to soft obstacles. It won’t make it harder to communicate across cultures and languages. The only problem that will have is that how do you solve the problem of fragmentation? You don’t solve it by enacting rules in Brussels that say now there is no border where there was one before.

You solve the problem of fragmentation by inspiring a common culture in which everyone from all across Europe can work together at building successful tech companies.

You solve the problem of fragmentation by inspiring a common culture in which everyone from all across Europe can work together at building successful tech companies. And we have a very interesting precedent in that regard, which is the financial services industry. If you go in the building of a large investment bank in London, you encounter people from all over the world who all speak English with very different accents, who obviously come with a very different cultural background, but yet they’re still able to work together because they brought together by a single culture that is the culture of the financial services industry. They have a common language to exchange information, i.e. Balance Sheets, P&L statements, Cash Flow statements. They have common tools that they know how to use — a Bloomberg terminal, Excel spreadsheet — and they have a common culture and everyone knows what they should expect when they joined that particular industry in terms of work ethics, relationships within the organization and so on. And that culture exists because it’s been shaped by successful ventures in the financial services industry. An industry that has grown so large that they’ve imposed the culture and passed it down to the next generations.

The problem we have in Europe is that we don’t have those large tech companies that would shape the common European culture for building tech companies and impose that culture on smaller startups. And because we don’t have that, we need to wait for that first generation of highly successful European tech companies and once they make it at great expense and with great pain, because they are still fighting against an adverse environment and trying to overcome the fragmentation. If they make it, they will crystallize the culture and that culture will spread out of the organization and impregnate entire ecosystems. In turn, that will make it easy for people from all over Europe to come together and build tech companies together, even though they don’t share the same language or the same cultural background.

So Brexit doesn’t really make a difference. Maybe it will make it a bit harder to build successful tech companies in Europe, because it will be harder for entrepreneurs on the continent to raise funds from VCs in London. But Brexit or not, we will still need to wait for those highly successful European tech companies for the culture to emerge and to make it easier for people to work together.

if you read history, you realize that the fragmentation of Europe has long been an asset, as opposed to the unity of countries. The fragmentation can be an asset because it fosters competition between different countries which experiment with building new institutions or creating different context for entrepreneurs to succeed.

Ben: So, the good news is that Brexit doesn’t make a material difference to the likelihood of a large European tech company materializing?

Nicolas: No. It can even make it easier actually, because there used to be a time, if you read history, you realize that the fragmentation of Europe has long been an asset, as opposed to the unity of countries such as the EU, China especially, also the US, even though it’s a federal system. The fragmentation can be an asset because it fosters competition between different countries which experiment with building new institutions or creating different context for entrepreneurs to succeed. And entrepreneurs can eventually shop around the different countries to find the right place for them to build that venture. And that’s what happened many times in the past and that was that’s what explains most of the prosperity that has characterized Europe over history. So Brexit maybe will reinforce, foster even more competition, because breaking free from the European Union will make it possible for Britain to invent their own institutions to support entrepreneurs, and that in turn will force countries on the continent to align themselves, and so maybe it will accelerate things.

Ben: So you’re starting to paint what could be a positive picture of post-Brexit Britain, and I think for many of us that didn’t want Brexit to happen, and we’ve sort of come to terms with it but haven’t yet thought about what might be some of the positive outcomes down the road. So, in addition to a slightly elaborating on what post Brexit Britain could be in a positive sense, I want to get your view on Dominic Cummings, because you wrote a very interesting piece about Dominic Cummings a few weeks ago, which was pretty critical. You were trying to answer the question of whether he could transform the British Civil Service, but regardless of whether he can or he can’t, do you think he might have some sort of Grand Master Plan for post-Brexit Britain? Because he may have many faults, but he does seem to be at least pretty good strategist or was at least when it came to winning the LEAVE campaign. So long question, but what could be the positive post-Brexit outcome, plus do you think Dominic Cummings has that kind of vision in light?

Nicolas: So, for context, Dominic Cummings is a special adviser to Boris Johnson as Prime Minister, and he used to be the chief strategist and campaign manager for the official LEAVE campaign before the referendum in 2016.

Ben: He came up with the slogan…

Nicolas: Take back control

Ben: Correct.

Nicolas: Yes. You can see that in a rather good movie with Benedict Cumberbatch, about Dominic Cummings.

Cummings is interesting because he used to study history. So he’s not a technologist per se, but he’s a nerd. He is interested in those new things and he’s probably dived quite deep into technology and the transition that technology is fostering at the moment, and so he understands what’s going on. And unlike many people that are for Brexit, I don’t think he has an ounce of racism in him. It’s not about kicking the immigrants out of Britain. For him, it’s mostly about, if we’re going through this transition, we need room to maneuver, and we need to be able to try as many different things and to experiment with new policies, new institution building, and for that, you don’t want to belong to the European Union, because supposedly the European Union imposes many, many constraints on what you can do as a sovereign country. So if you want to experiment in a radical way you need to unshackle what the European Union imposes, and to experiment and to innovate and so I think now he has the satisfaction of seeing Brexit actually happen, and he’s expecting that now Britain will be free to implement radical reforms, and to deliver radical transformation in the interest of the country and of its inhabitants.

The way you transform an organization is by re-positioning it around solving problems that didn’t exist before or that you couldn’t solve before

What I’ve been criticizing in my article is the fact that if you read the journalists— again, I’ve never met Cummings. I don’t know what’s in his head — but apparently, his obsession when it comes to implementing radical reform is about transforming the Civil Service, reshaping the state, turning the stage from what it is today, that is a very top-down, hierarchical organization entirely designed for mass production of public services, to a state that is more agile, more innovative, more responsive to the demands of the public, which are all good ideas and we can all agree with that.

But my article is critical. It’s critical because first, I know both worlds. I used to be a senior civil servant in the French government, so I know bureaucracy from the inside. I’ve seen generations after generations of politicians vowing to transform it from the top down. It never works, but I also know the tech world, probably even better than Dominic Cummings, because I’ve been working with entrepreneurs for almost 10 years now, so I know what it takes to transform an organization. And what it takes is not that you seize control of the organization from the top down and force everyone to change. The way you transform an organization is by re-positioning it around solving problems that didn’t exist before or that you couldn’t solve before, and so I think that’s what the British states should do at the moment. You shouldn’t try to transform the way the Civil Service works. It should focus on problems that have become so critical and that technology makes it possible to solve, and build new agencies, new organizations, new policies at the margin to solve those problems. And then if it’s successful, then you have a redistribution of resources that successfully absorbs the failing if you want.

Ben: Not to belabor this point too much because we want to move on to other things than Brexit, but in Cummings’ plan or at least what we know of Cummings’ plan — which isn’t that much — he is talking about new agencies. He is talking about a UK style DARPA organization. So why do you think that he will fail in creating new institutions and gradually making the state more agile and more responsive?

Nicolas: Yes, but gradually means 30 years. In 30 years, maybe the new agencies built by Dominic Cummings and others will have become so successful and so large that will become a model for the rest of the organization to reshape itself. But it’s 30 years is what it takes to change organizations as large and as old as Western states such as France or the UK, extremely centralized organizations that are huge and employ literally millions of people, and so I think he should prioritize. Does he want to build new agencies in which he gets to be the head of one of those new agencies, with all the resources and the autonomy that he needs to try new things? Or does he want to transform the entire organization from the top-down? And if you try to do both, there’s a high probability that you will fail on both fronts.

Being in the European Union or not, doesn’t really make a difference if you are a start-up in one of the non-harmonized industries, and for some reasons startups are mostly located in non-harmonized industries, because harmonized industries are those that are already dominated.

Ben: And then last question on Brexit, but is the flaw … because again, I think when you talk about creating a UK that’s more agile and able to respond faster to this new economic paradigm, that doesn’t sound like a bad thing, but is the flaw that in order to create the flexibility to do so, to reform the state or… we don’t know how quickly that can happen anyway, is the flaw that the UK is no longer part of the single market, so it doesn’t have this large addressable market for its new companies to sell into? Could there have been a better outcome where it was a softer Brexit with more autonomy, but with still access to the hundreds of million EU consumers?

Nicolas: Well, to be frank, I don’t think it makes a huge difference. There’s a thing called the Single-Market, which in theory provides you with a guarantee that if your company established anywhere in the EU, you can market and sell your product anywhere else in the EU. But in fact, the Single-Markets, few people realize this, it only exists in certain industries, such as manufactured goods, financial services, electricity, airlines, railways, and a few others. And so if you are a start-up in one of those industries, then you can enjoy the benefits of the Single-Market and Brussels will be here to provide you with the certainty that wherever you are established, you can compete in another country member state. If you don’t belong to one of those industries, well it’s much more difficult, because the regulations will be different and no Brussels-enacted legislation forces member states to harmonize their regulations in industries such as healthcare, public transportation at the city level.

And so, being in the European Union or not, doesn’t really make a difference if you are a start-up in one of those non-harmonized industries and for some reasons startups are mostly located in non-harmonized industries, because harmonized industries are those that are already dominated, extremely capital intensive. Like, you don’t want to compete on the market for electricity if you are a start-up. That’s simply too hard. You don’t want to come up against the incumbents in that particular industry. So you might, in theory enjoy having a single market for electricity, but in fact, it’s impossible to penetrate, to enter that market. So startups end up in more mundane industries, such as business services, health care, education, and all those industries, by coincidence, are very different from one country to another. So I don’t see Brexit making a lot of difference.

Ben: Listening to you, it sounds like you’re relatively sanguine about Brexit, and I guess at the heart of what you’re saying is you believe that entrepreneurship will harmonize Europe faster and better than politicians ever could, which I guess is inherently why you switched from being a civil servant to starting The Family.

if you tackle a big problem, if you harness the power of technology to solve that problem, and if you raise funds from venture capitalists, then you can deliver great things and make a real difference and a real impact. And so that’s where the power is.

Nicolas: Exactly. That’s the idea. Well, like many people working for government, I was disappointed by what I observed from up close, and the worst thing is in government is the politicians and the very low quality of the leadership. And then you encounter entrepreneurs and you realize that if you tackle a big problem, if you harness the power of technology to solve that problem, and if you raise funds from venture capitalists, then you can deliver great things and make a real difference and a real impact. And so that’s where the power is. Power is not only scale, it’s also agility and ability to experiment with new things having nothing to lose, which is definitely not the case in the government’s spheres.

Ben: Just a challenge that slightly, and let’s talk a bit about the U.S., because the U.S. doesn’t have Europe’s problem in the sense that it has several top of the food chain, massive tech companies, and for a long period of time, that was galvanizing the institutions in the U.S. There was alignment between tech, business and politics, particularly during the Obama years. But things have moved against those tech companies, and they’re not able to exert the influence that they were, and yourself, you’ve talked a lot about how damaging Donald Trump has been for Silicon Valley. I think you even had a piece that was called exactly that or something to that effect.

Nicolas: Yes.

Ben: So is it enough to just have massive tech companies? I mean, because …

Nicolas: No, it’s not enough. Definitely not. What I usually explain is that if you want to be a developed prosperous country in a given paradigm like the entrepreneurial age, you need to run a race that’s effectively divided in two parts. So the first part of the race is about building successful tech companies, capitalist organizations that generate increasing returns to scale at the largest scale possible. And then once you have that you have that wealth, that value that can be realized into wealth and that wealth can be reinvested in developing your economy by spinning out to other industries that don’t generate as high returns. But that doesn’t happen if that particular country is not provided with the right social contract, and so that’s the second part of the race. Once you have the large tech companies, you need to build the social contract to guarantee that the wealth they create and the power that they accumulate is used to developing the entire economy, as opposed to enriching just a small group of people.

Ben: So in the US, why didn’t that second part happens? So the US created massive, global, world-leading tech companies, but it didn’t put in place a social contract, but it looked for a time like it was going to. You had Obamacare. You had some sort of alliance between Silicon Valley and Obama. What went wrong? Was it a problem with Obama, because implicit in some of the things you write, you see him as a very good strategist but failing versus somebody like Roosevelt in terms of visibility to get stuff done? Was that his problem? Was he just not effective enough?

Obama was open minded and extremely charismatic and inspired a lot of respect all across the world and so Obama could vouch for Silicon Valley companies and say, “okay, trust them. I know them. They’re my friends. We’re working together. We’ll find a solution for them to pay a bit more taxes, but not too much. We’ll find a solution to regulate and protect your privacy, but please, let’s stay friends”.

Nicolas: Well, we don’t know whose responsibility it is, but it didn’t work. It didn’t deliver. I think that was the plan. Obama was clearly extremely supportive of Silicon Valley and Silicon Valley companies, including by negotiating free trade agreements with Asia and with Europe, to foster the growth and to guarantee that they would have access to those large markets outside of the U.S. In exchange, you can even say that Silicon Valley was extremely supportive of Obama in many respects, especially by providing a lot of money to his campaigns and providing a lot of talent to staff his administration. And so had another Democratic president being elected after Obama, they could have continued that stream of build up this alliance between the dominant capital-intensive companies of the day and the forward-looking progressive leaders willing to build a new social contract. That didn’t happen for many, many reasons. Part of them are completely random. But because it didn’t happen, the US is now losing ground, and you can see that by the day.

A very concrete consequence of Trump’s election is that Silicon Valley has lost support in Washington DC, especially when it comes to negotiating free trade agreements, because Trump has officially put an end to negotiating all of that. He effectively ceased negotiating on both sides of the U.S., and then he also closed the borders for immigration, which makes it harder to hire talent in Silicon Valley. Plus, he took the side of backward-looking incumbents in many industries, as opposed to supporting innovative entrepreneurs trying to transform those industries. And the result is that Silicon Valley has been slowed down, and not only have they been slowed down by the Trump administration, the Trump administration has also transformed how we view the U.S. from the rest of the world. So before that, people were a bit worried about large U.S. tech companies manipulating data and crushing competition from legacy players, and so on. But when you looked at the U.S., what you saw was Obama and Obama was open minded and extremely charismatic and inspired a lot of respect all across the world and so Obama could vouch for Silicon Valley companies and say, okay, trust them. I know them. They’re my friends. We’re working together. We’ll find a solution for them to pay a bit more taxes, but not too much. We’ll find a solution to regulate and protect your privacy, but please, let’s stay friends.

Today when you look at the U.S., you see Trump and everyone hates Trump, except for the fringe of Trump supporters in the US, and so Silicon Valley is not protected by its own government anymore. The government has become a liability, both in terms of what they do at home, but also in terms of the image that they’re projecting abroad.

Ben: Crystallizing a magnet on negative.

Nicolas: Yes, exactly, and so I think it’s not a coincidence if many U.S. tech giants have been renouncing competing at a global scale, precisely during that period. Uber renounced competing in China just a few months before Trump’s election, then they left Southeast Asia, sold their operations there to Grab. And what I see is more and more U.S. tech companies will retreat onto the U.S. market, and it’s now impossible for them to compete in China and it is lost forever. It will become more and more difficult for them to compete in India, another very large market in Asia. Africa is up for grabs but the Chinese are extremely aggressive on the ground and securing market shares and supporting local entrepreneurs with Chinese capital and Chinese platforms, and Russia is also out of grab for U.S. tech companies. So at some point, what they’ll have is the U.S. market, part of Latin America and maybe part of Europe unless we Europeans embrace Chinese products, or we Europeans build our own solutions that are adapted to the European context that is effectively very different from that of the U.S.

Ben: See, you are making out like this has changed the course of history. Listening to you it sounds like there’s some permanence to this new situation, but it could just be a blip. And I’m going to refer you to an article that you wrote, I think three years ago called President Trump, or the Twilight of the Conservative Gods, which for those of us that didn’t want Trump elected, we took a lot of heart from that because what you essentially said in the article is that Donald Trump is the last, the most extreme Republican before a reset towards an era of democratic control and the reconstruction of the state bodies and infrastructures, tuition. Do you still subscribe to that view? Could it be a blip?

the U.S. needs the world less than it used to in the past

Nicolas: So I still subscribe to that view with two caveats. One of them is that what we didn’t expect is how influential Trump would be in terms of reshaping the U.S. political system. That’s especially true for the judiciary. So he’s already appointed two justices in the Supreme Court. He will probably appoint one or two more, especially, or even more, if he’s re-elected. They’ve also appointed a lot of judges. So basically, if you control the White House and the Senate in the U.S. system, you can appoint as many judges as you want, and that’s the case for the Republican party at the time and judges are appointed for life in the U.S. system. So any Democratic president that comes back to power after Trump will have to deal with a judiciary that will be ready to strike down any progressive regulations or laws that are enacted by a new progressive majority, a Democratic majority. So that’s one thing.

The other thing, so the judiciary — Trump is also actively destroying the government in itself. It’s now understaffed, under-funded. A lot of people are traumatized. It’s riddled with corruption at every level, and that’s all because of Trump. And so you can say, Okay, we’ll erase all of that and rebuild. It takes time to rebuild a government once it’s been damaged like it is today. And the first thing is the U.S.’ standing across the world. There will be many relationships and many alliances that won’t exist anymore once Trump leaves power. And all of that in the context, that’s the other caveat, is that the U.S. needs the world less than it used to in the past, because they don’t have… well, China is officially a rival, but it’s not as frightening as the Soviet Union once was. They’re not officially at war, and they don’t have missiles pointed at each other. The U.S. are now almost independent in terms of energy. They have oil, gas, natural gas, and so they don’t need to be as present in the Middle East to secure oil supply for the economy to grow. And so many people expect the U.S. to just go back to the isolationist approach that used to exist before World War Two, and simply ignore the rest of the world. So if it’s a deep trend and long term trend, Trump will only have accelerated that one.

When it’s your time, it’s your time. It’s about being in the flow. So your best chance at winning is to be in the flow. Maybe that’s not enough, but staying in the flow is the best chance you have to go as high as possible. When you are in the flow, there’s something that makes a real difference and whatever happens to you, it makes you stronger.

Ben: You have a theory in politics, which I think we can summarize very simply as when it’s your time, it’s your time, and so it wasn’t Hillary Clinton’s time, but you think it’s Elizabeth Warren’s time? However, of late she’s been dropping quite a lot in the polls, do you still think it’s Elizabeth Warren’s time?

Nicolas: Well, the thing with the polls during a primary season is that as long as you’ve not reached the first primaries, you don’t really know where people stand. Because the two first states that hold the primary or caucus that is Iowa and New Hampshire are very weird and unrepresentative of the U.S. as a country. And so they usually can bring the whole pack in a direction that’s very different from national polls and change the nature of the equation because if you have a momentum building up in these early states, then you can recover.

So I know that Warren has been behind in the polls for a while or a close second. Now she’s receding because there have been several controversies, plus there is apparently redistribution from her to Bernie Sanders. I don’t know, but when it’s your time it’s your time. It’s about being in the flow. So your best chance at winning is to be in the flow. Maybe that’s not enough because being in the flow doesn’t guarantee that you’ll be at the bar at the day of the election. But staying in the flow is the best chance you have to go as high as possible. And again, maybe that’s highest at the bar, maybe it’s not, but when you are in the flow, there’s something that makes a real difference is that whatever happens makes you stronger. And the example I use to explain that is Obama. So Obama was obviously in the flow during the first campaign, the 2008 campaign.

But at some point during the primary, he was in a fierce competition against Hillary Clinton already, and there was controversy around raging speech by Obama’s pastor that was captured in video in which he was railing against the US and typically the image of the angry black men that frightens white voters in the US. And so the Hillary Clinton team said that’s over. That will ruin Obama and we will recover and win this race, and then she’ll be elected president. It didn’t ruin Obama because Obama was in the flow, and what he did after that was say, okay, that’s a very big problem, probably the major PR crisis that he had to overcome during that particular campaign. But what he said is, I’ll use this opportunity to make a big speech on race, which he did in Philadelphia. And that speech was so mind-blowing and was so eloquent and so deep that everyone forgot about the raging of the pastor, and then focused on that speech that Obama had made in Philadelphia. And that’s what being in the flow means is whatever happens even though it looks as if it’s very negative, then you can always recover from it, absorb the energy and then move forward.

We’re clearly at a point when Silicon Valley has been extremely successful at growing tech giants, and when the U.S. needs to enter the second part of the race that is building a social contract, and you can’t enter that second part of the race without putting bold ideas on the table.

Ben: So if Elizabeth Warren might not be in the flow, who is in the flow in the Democratic race?

Nicolas: I still see her as the most in the flow. You have some years where nobody’s in the flow like in 2004, if you remember that campaign. There was a very large pack that ended up being dominated by John Kerry who lost the election badly against George W. Bush because he had no exceptional charisma, no bold ideas, nothing. And so some years… that’s all you have. You have uninspiring candidates competing against each other, and no one’s using the flow. The one that’s in the flow is the one from the opposite side.

Ben: How much of a problem is it that Elizabeth Warren wants to regulate and break up big tech?

Nicolas: Well, I don’t think it’s a problem. I think it’s part of being in the flow. We’re clearly at a point when Silicon Valley has been extremely successful at growing tech giants, and when the US needs to enter the second part of the race that is building a social contract, and you can’t enter that second part of the race without putting bold ideas on the table, and she has bold ideas, and you know that’s the rules in politics and government. There’s a very long distance between the initial intent and what comes out of the many bargaining and negotiations at the end. But having someone that’s willing to open the conversation is very important. It’s a signal that says, we’ll get in that race for building a new social contract, and maybe that social contract will be the one that we need to have to have a more inclusive and more sustainable economy.

There’s a common thread that links Obama, Trump, Macron, Ocasio-Cortez. They came from the margins, were not identified as the prominent politician and overcame that obstacle by using technology to create a direct relationship with the voters, which is now possible. So all those politicians have been digital-age politicians when it came to campaigning. But campaigning and governing are two very different things, and I still have to witness a politician that masters the art of governing for the digital age.

Ben: Do you think Elizabeth Warren is a digital age politician, or do you think somebody like Alexandria Ocasio-Cortez is more of a digital age politician? And do we yet have any digital age politicians in Europe?

Nicolas: Well, that’s the thing. There’s a common thread that links Obama in 2008, Trump eight years later, Macron the following year, Ocasio-Cortez in 2018, and all those politicians… they came from the margins, were not identified as the prominent politician, as a front runner, and overcame that obstacle by using technology to create a direct relationship with the voters, which is now possible. So all those politicians, all highly successful by the way, have been digital age politicians when it came to campaigning. But campaigning and governing are two very different things, and I still have to witness a politician that masters the art of governing for the digital age. All of those failed at reinventing what government is about once they’ve won their election. Obama failed to do that. He was stuck in the gridlock of Washington DC and was unable to use the support, the massive popular support triggered by technology that he enjoyed during the campaign.

Maybe Trump is the most advanced for the worst, because he knows how to leverage the power of his supporters that are angrier and angrier by the day and retracts on government, but some people would argue that he didn’t achieve anything that really matters to him because nothing matters to him probably beyond being famous and wealthy, and so Trump has been a tool used by the Republican Party to achieve lower taxes and more conservative judges on the benches. That’s all but Trump himself didn’t achieve anything meaningful that matters to him in terms of policy outcome…

Macron has likely failed in terms of governing. He mastered the art of campaigning in the digital age but didn’t translate that into a new form of government, and Ocasio-Cortez, it’s still too early to say. But I think Elizabeth Warren, to come back to your initial question, is the best we can have in terms of a politician that’s been learning how to campaign in the digital age. She’s been pioneering new techniques to orchestrate network dynamics between her supporters, including the selfie lines. If you want to Google that…

But Elizabeth Warren, and that’s the key for why I think she’s in the flow. She’s a consummate professional when it comes to governing. She knows every detail related to the mechanics of government, how policy is designed, implemented and so on. She knows how important it is to appoint the right persons in the right positions, and so if she wins, and that’s a Big IF, but if the flow is enough to put her above the bar, then she wins, we will have probably the most expert president in a very, very long time when it comes to governing and to deliver policy outcomes. And I think voters sense that, and that’s very important to them. They can’t explain it because they don’t really know the art and science of government. But they can sense that she’s serious when it comes to government, as opposed to people that have just soundbites.

Ben: With the space that’s being left as the United States retreats from globalization and retreats from international diplomacy and international agreements, is it China’s moment? Will China rise up and usurp United States? There’s a great section in your book about the Belt and Road Initiative. Is China, through the Belt and Road Initiative, going to become the new global superpower?

Nicolas: Well, so the Belt and Road Initiative is a program designed to build infrastructures to connect China to the entire Asian continent and towards Africa and maybe in some parts of Europe. And it’s meant to support trade, and to strengthen the connection between China and the rest of the world. I think there are many precedents. It resembles the Empire that the Portuguese built the 16th century. It resembles to a certain extent the British Empire in the 19th century, with the exception that the British really wanted to govern entire countries, whereas the Portuguese a few centuries earlier, were not interested in submitting entire populations to their will. They just wanted outposts to be able to trade and to access the riches that were in the different parts of the world. And so I think the Chinese are more in that spirit. They’re not interested to submit other countries to their power. They are interested in developing their economy and to supporting their companies growing, and to strengthening their regime and they know because the regime has many adverse negative characteristics from a Chinese population point of view. It’s acceptable only if the economy is doing well.

Ben: Yeah.

Nicolas: And the Chinese economy will do well only if Chinese companies manage to expand abroad and do more business with other countries. So that’s why Belt and Road Initiative was designed. It’s to support and to sustain the continuous growth of the Chinese economy over the long term, even though most industries or companies are reaching a cap in terms of their capacity to grow on the domestic market. So what they’re interested in is more trade, more connections. And as such, they won’t be really comparable to the US in the 20th century. The U.S. was interested in security and matching the Soviet Union. Here the Chinese are interested in just trading and inspiring support in other countries for their regime. They don’t want to be bothered when it comes to domestic affairs.

When I wrote the book that was two years ago, it seemed as if China was succeeding on every front, especially because of Trump orchestrating the failure of the American Empire. Today I would say the current situation makes many people less bullish on China because the economy’s slowing down. Xi’s regime is tightening the bolts a bit too much.

Ben: When you say ‘tightening the bolts’, you mean …?

Nicolas: Well, imposing surveillance and…

Ben: Yes. Okay.

Nicolas: …repressing freedom of expression and there was a long time during which even Western media played along because everybody wanted to be friends with China. But now what we’re witnessing in Western media… it’s all out. Now we can write at length about Muslim people being forced to work and the Uyghurs and so on, which you didn’t read as much about that few years back because there was still…

Ben: Is that a Trump effect because of the trade war, and I guess the sort of indirect pressures he is applying around the world to do less with China?

Nicolas: I think it’s the Trump effect. I think Trump has precipitated the realization that maybe the U.S. will have to become self-sufficient, and maybe large US tech companies will have to renounce competing in China. And so if you don’t need to compete in China anymore, why bother trying to make friends with the regime? It’s useless. So it effectively becomes a mandate for those who are genuinely shocked by the treatment of the Uyghurs to write at length about that, because it doesn’t go against the economic interests of the U.S. as a nation, because they’ve renounced doing business in China. I’m not sure it’s true for every U.S. company, but I think that the radical change those past two years has been that well, it would be nice if we could do business in China, but since it’s too difficult, let’s just renounce it and reposition our entire economy.

Ben: You write a lot about how innovation is a three-player game, so you have the State, Capital and the Entrepreneurs, and you also talk about how the state best deploys resources when they are mission-oriented. Is the Green Deal, which I’m not sure something you’ve talked about much or written about much, is the Green Deal the mission to galvanize those three players? In particular, is it Europe’s opportunity to create something, our new industrial sector or a new group of companies that can be world beating?

I like to be a bit more radical and talk about ‘war’. What matters is that we must wage a war against something, because being in a state of war is extremely liberating for entrepreneurs. You don’t have to waste too much time explaining what you do if you’re in a state of war, as opposed to what many entrepreneurs do all the time, which is trying to explain what they’re trying to do and no one is understanding.

Nicolas: So to be fair, those are not really my ideas, but rather those of economists like William H. Janeway and Mariana Mazzucato. The idea that the entire thing that we call entrepreneurship, or VC-backed entrepreneurship, is in fact enabled by the state spending a lot of money in basic research, infrastructures, and so on. And that most of that world, the world of entrepreneurs, owe their biggest successes to the state having set a goal and having mobilized an entire nation towards reaching that goal.

And so, Silicon Valley can be seen as a byproduct of the US trying to best the Soviet Union on many fronts, including technology, and because it was a matter of life and death, the price that you had to pay was not really in a question. And so the U.S. Government was ready during the Cold War to spend whatever it took to discover new technologies, to implement those new technologies not only in the military, but also at a larger scale. And all those people who make fortunes in Silicon Valley were just piggybacking on that effort.

Mariana uses the concept of the mission. So we must be on a mission together if we want the state to provide the direction as to where entrepreneurs should go, and what kind of problems they should try to solve. I like to be a bit more radical and talk about war. What matters is that we must wage a war against something, because being in a state of war is extremely liberating for entrepreneurs.

First of all, war is preceded by speeches and explanations and slogans that everyone listens to, and so when you are an entrepreneur participating in the war effort, whenever you talk to anyone — an investor, a customer, potential customer, your mother, your friends — they all understand what you’re trying to do because it’s all part of an effort that everyone understands deep inside. So you don’t have to waste too much time explaining what you do if you’re in a state of war, as opposed to what many entrepreneurs do all the time, which is trying to explain what they’re trying to do and no one is understanding.

The other thing is that you don’t have as many enemies, as many obstacles in your way. You read a lot of stories about entrepreneurs trying to disrupt an industry and having incumbents against them, lobbying the government to enact stupid regulations that make it impossible for startups to enter that particular industry. But in fact, if you’re in a state of war, you can point out those incumbents that are lobbying the government to enact stupid regulation. Instead, they’re going against me that is part of the war efforts, and so as such they are enemies of the nation, and so it becomes more difficult if you in a state of war to resist the rise of startups and to slow down their success.

I think we need to find another war, and that’s why I’ve introduced this idea of Europe as a developing economy, because we have many examples in the recent past of countries that have managed to develop their economy by waging a war against under development, because being underdeveloped is humiliating. You see yourself as poor, lagging behind, and so each leader comes up and says, we’ll fight a war against this under development, and that will take a lot of effort.

Ben: So to reframe the question then, should Europe wage a war against climate change?

Nicolas: Well, I don’t know. I think Europe is not that impacted by climate change, too… Well, nobody knows. So far, it’s been a miserable failure. We’ve failed at inspiring a fighting spirit when it comes to climate change. I think in countries such as Australia that’s burning at the moment, it will become soon, quite easy to make people realize the connection between that abstract thing that is climate change or global warming, and what’s happening around them and actually threatening their life, and suddenly it becomes a matter of life and death. And that’s what war is about.

But in Europe, we were lucky in a way that we’re in the part of the world that will be the less impacted by climate change, except maybe for the Netherlands, who are in danger of disappearing altogether. So I think it’s difficult to inspire that fighting spirit in a region such as Europe where people see the world burning far away from them, but don’t feel really concerned, and it’s even difficult for them to realize the connection between the immigration waves and the fact that some of those immigrants are actually fleeing regions that are deeply impacted by climate change.

So I think we need to find another war, and that’s why I’ve introduced this idea of Europe as a developing economy, because we have many examples in the recent past of countries that have managed to develop their economy by waging a war against under development, because being underdeveloped is humiliating. You see yourself as poor, lagging behind, and so each leader comes up and says, we’ll fight a war against this under development, and that will take a lot of effort. And that will implement radical reforms like what happened in South Korea in the 1970s, or Taiwan in the 1960s. And then you deliver economic development as a result of having waged a war against under development. So you need to find something that resonates in people. It’s either problems that they experience on a day to day basis like housing is unaffordable in large cities where all the jobs and all the opportunities are concentrated. Maybe the French president that would wage a national war against housing and affordability would inspire that fighting spirit, and would manage to implement radical measures like expropriating real estate owners in dense urban cities. Maybe, I don’t know…

Twenty years from now, we are not sure we will still have prosperity because if we don’t have the growth drivers that are large, successful tech companies that accumulate value and realize that value into wealth, and a social contract that orchestrates redistributing that wealth at the scale of entire societies, then we will be lagging behind. And that’s the lesson of the history of technological revolutions.

Ben: So I understand better what you’re trying to achieve by calling Europe a developing economy, and I remember the newsletter that you had where it was called something like they had stopped celebrating sort of second tier IPOs because we shouldn’t dress up where Europe really is in terms of tech, particularly vis-a-vis the U.S. and vis-a-vis China.

Nicolas: Yes, exactly. That’s it. It’s still good to live in Europe. We have good public services, good infrastructures, good hospitals. Most things are affordable, except for housing in Paris and London and Munich, but the fact is, we have that today but 20 years from now, we are not sure we’re still have all those things because if we don’t have the growth drivers that are large, successful tech companies that accumulate value and realize that value into wealth, and a social contract that orchestrates redistributing that wealth at the scale of entire societies, then we will be lagging behind. And that’s the lesson of the history of technological revolutions. It’s not because you dominate in a given paradigm that you’ll be the dominant economy in the next paradigm. You need to do what it takes to reposition your entire economy, to redesign your social contract to make the most of the new technology of the day and Europe has been failing miserably on that front. And that’s why people like me like to insist on the fact that yes, there are some successes, some promising things happening, but we’re still lagging way behind the U.S. and China and we need to have more of a fighting spirit to catch up on them.

Ben: And so it’s been only one or two years, but it’s not quite two years but it’s getting on for maybe two years since you published HEDGE, and looking back on it, do you think you should have written a book first about how to build giant tech companies and then this should have come later how you redistribute the wealth dividend?

When you start talking to those politicians about jobs and opportunities, they realize that there’s a connection between the everyday life of their voters, their constituents, and those small startups are trying to scale up and you can have a conversation that’s more constructive and more serene.

Nicolas: Well, the idea of writing that book was not mine. It was that of one of my co-founders, Oussama Ammar, who told me one day like with Trump, so he had a sense that Trump’s election will amplify the tech backlash worldwide. So his intuition was that now the Americans will start experiencing what entrepreneurs are experiencing every day in Europe, that is hostility, widespread hostility towards what they’re trying to achieve. And because we are French, we built The Family initially in France. We have a technique to counter that. How do we fight the backlash in France? We fight the backlash by changing the conversation from tech companies are disrupting the world to… governments are failing us by not building the right institutions, in which the value created by tech companies will benefit everyone. And when you manage that it’s very effective because you talked to some Civil Servant or some Minister, who is raging against tech companies that oh, they’re not complying with the rules and destroying jobs and we will regulate them to death and you say, well, maybe the problem is not that tech company.

Maybe the problem is that you’ve been failing at the radical imagination that we need to design new institutions for a radically new world, and maybe that’s the key to creating more jobs and to provide more opportunities to people. And so when you start talking to those politicians about jobs and opportunities, they realize that there’s a connection between the everyday life of their voters, their constituents, and those small startups are trying to scale up and you can have a conversation that’s more constructive and more serene.

So Oussama’s intuition was that it’s starting in the U.S. — the tech backlash is crossing the Atlantic and will intensify in the US, and maybe we can share our playbook about changing the conversation from disruption to designing a new social contract with the Americans and HEDGE was written for that. The problem is that it didn’t, didn’t really resonate, because it’s not Silicon Valley’s impulse to switch to discussing social policy when they have problems with the government. But maybe it was a bit too early.

Ben: It was a necessary book, whether it was too early or not. It had to be written and I was just flicking through it in advance of this interview. It hasn’t aged. It’s still fresh.

Nicolas: It’s a very fundamental topic and a very important discussion to have. So I think the book will remain relevant for many years to come. And maybe at some point, people will realize that now it’s the new battle that we need to wage, imagining that new social contract. But had I started by writing a book about building tech companies, that wouldn’t have been of interest for Americans because they know how to do that. And I didn’t know enough about Europe at the time to explain how we should proceed in Europe to catch up.

Now it’s two years later, I’ve been living in London for many years. I’ve been crisscrossing the continent, speaking to many people, including in the U.S. and read many more books. So I have a clear view of how you build tech companies in Europe.

I think government policies have been misguided so far. Government has been focusing too much on how do we support companies, and how do we attract more companies in our local ecosystem, whereas most of the efforts should be on how do we force companies that are starting to grow in our local ecosystem to expand at the pan-European level.

Ben: And I mean, that’s the effort that you’re supporting across Europe with The Family, because it started in France, but you are in Berlin, you’re in the UK, and the proposition has changed too, because it was a platform into which entrepreneurs could plug in to get the support they needed to grow. And since then you are now providing capital into some of this companies, as well as a program to bring talent into Europe, particularly into Berlin. So what’s next for The Family in its mission to support European entrepreneurship?

Nicolas: Well, that’s a tough question because The Family is more than a mission-oriented organization. It’s also a business venture that needs to square up its ambition with the resources that we have. So what we have today is a growing portfolio of startups, some of which are getting quite large, reaching quite a large scale. And so we’re starting to be able to exhibit those as examples of what should be done, and reverse-engineer the best practices that we’ve been experimenting within The Family, but we are still dependent on the state of the pan-European ecosystem. If it doesn’t lift up companies as much as it could, then we’re taken aback by the entire ecosystem. We can race slightly ahead of the pack, but not that much ahead. We are still dependent on where the ecosystem is. So I think today on that front of thought leadership and reflecting on tech companies in Europe, the next stage is to foster that conversation that’s still not happening about building tech companies in Europe. What I see happening is local conversations about how to attract more startups to Paris or to London or to Berlin, which is not very promising, because that’s not the way to do it.

Ben: Is that almost zero-sum stuff?

Nicolas: It’s zero sum stuff, and it means that you resign yourself to rely on a single city for building startups, which cannot succeed because you might find capital you need in that city. You will struggle to attract all the talent you need in that city, and you will certainly not find all the customers that you need in this particular country. You need to be able to cross borders to find customers in other countries and so on. I think government policies have been misguided so far. Government has been focusing too much on how do we support companies, and how do we attract more companies in our local ecosystem, whereas most of the efforts should be on how do we support? How do we force companies that are starting to grow in our local ecosystem to expand at the pan-European level, which is part of the development playbook for South Korea and Taiwan, by the way, back in the 20th century?

You need to prioritize supporting companies that are strong on foreign markets, as opposed to companies that are stuck in your domestic market. So nobody does that because nobody realizes the common points between the current state of Europe and the state of East Asian countries as you did decades back, but I think there’s more and more interest the fact that we have a new EU Commission, the fact that we have the context of Brexit that inspires many questions. The fact that we, as The Family, have more of a platform now to voice ideas and to share them with a larger audience.

Ben: Do you have practical examples of companies and founders that are making those leaps, are crossing those borders?

Nicolas: Not that many. So in a recent newsletter, I mentioned the example of an entrepreneur that’s not part of The Family, but he’s a good friend called Vincent Huguet, so he’s the founder of Malt, which is a freelancing platform that’s very strong in France, and they’ve decided that the next opportunity for large scale expansion was Germany, and they reflected on how to conquer a market like Germany, because Germany is very different. Freelancers are not the same as in France. Corporations are not the same as in France. The geography is different. It’s a decentralized country, as opposed to France being extremely centralized in Paris. And what he decided is that he had to move there, to lead the efforts and be on the front line. And so he moved to Munich, he found someone to manage the French operation and decided to move to Munich to send a very strong signal that Malt is very serious on the German market. And so it’s a signal towards potential customers in Germany, if the CEO lives here, that means they’re serious, and it’s a signal to his organization. That is, if we don’t make it in Germany… I’m committing myself to conquering Germany by settling there with my wife and kids. So Vincent is a rare example. And don’t know of many others actually, but I think it’s too rare, and it’s explained again by cultural differences, problems with languages.

Ben: And a lot of friction.

Nicolas: Yes!

Ben: But you yourself have lived from France, to United Kingdom and now you’re going to move to Germany. So you are practicing what you preach.

Nicolas: Yes. Which is good.

Ben: It is good, yeah.

Nicolas: We’re doing that as a family, so my wife and kids, because both my wife and I have been shifting our work to a place where we can work mostly remotely. So The Family is an organization that is extremely welcoming to remote work. So I work mostly from home, except when I travel for important meetings and so on. Laetitia Vitaud, my wife, has her own company, and that can be operated from anywhere. And then we want our kids to learn many different languages. So we don’t have a problem with leaving France and putting it put them in English school in London and then leaving London and put them in a German school one year from now in Germany. We know that they’ll have the challenge of not understanding a word for a few weeks, and then, because they are kids, they learn extremely fast, and I think it’s the most valuable asset that you can provide children these days.

Ben: Because it’s not about language, it’s about culture.

Nicolas: Yes, language is only the practical tool that you use every day to communicate with others. But when you attend a school in a different country, you are deep inside a very different culture that you learn. You might not be able to describe it, but you learn it instinctively and it makes your brain more effective at adapting to different circumstances.

Ben: Fantastic. Nicolas, thank you so much for coming in to see us in Geneva and being part of this podcast.

Nicolas: Thank you for having me.

Ben: That was really fascinating and enjoyable. Thank you.

Nicolas: Thanks.

An Unpretentious Case for Blowing Some Tailwind into Airbnb

August 2018 marks ten years since Airbnb was founded. The company is now facing a perfect storm of challenges, but it is precisely in storms that its future might lie. This article explores new opportunities, as well as the obligations the platform has to its stakeholders.

At the end of the article, as per the custom with low-cost airlines, please don’t forget to clap.

When almost-broke, early-millennials Brian Chesky and Joe Gebbia decided ten years ago to turn into an online business model their initiative of renting air mattresses in their flat to the attendees of an upcoming conference who might have otherwise struggled to find hotel rooms, investors were pretty skeptical about the potential.

After all, people renting out their properties, especially in shore locations during the summer or in the mountains during the winter, was long-established in the offline world, and there were already some internet businesses at the time that were trying to move this world online. It was through this old-fashioned prism that Brian and Joe’s vision was found to be wanting to operate.

But slowly, and with a lot of unscalable effort, their idea took shape and the hotel industry started to feel the initial wave of impact in their economics of conferences: a surge in demand vs. a limited, not enough supply of hotel rooms was allowing them to charge higher rates during these events. However, the Air Bed and Breakfast business was now absorbing that extra demand, lowering therefore the ceiling of how high hotel price surges could go.

Brian and Joe didn’t see Airbnb as a vacation rental company (by vacation meaning the traditional rental of an entire beach house or a mountain cabin for 1–2 weeks), but rather as the embodiment of the new dynamics of urban life and travel: fast-paced, millennial-driven, price-sensitive, centered on personalities and experiences rather than comfort, yet still authentic and artisanal.

Of course, the hotel industry was serving a different clientele, and besides the limitations on the price surge during big events, they didn’t foresee any loss in actual market share. “What is Airbnb?” is how CFOs were replying to industry analysts even in 2013, when asked about the threat.

But Airbnb was-smartly-also focusing on the supply-side of its two-sided marketplace, positioning itself as a way to enable the ever-growing population of (young-)tenants to monetize their rented urban real-estate (a feature which was mostly available only to property owners), by mainly sharing rooms (and hence co-living, rather than renting out the entire flat) to travellers who, if not for Airbnb, would not make the travel in the first place as they couldn’t afford (or couldn’t find) hotel rooms, or they would simply crash in at friends or family (yes, that crazy uncle).

Fast forward to present times, Airbnb is now a global platform, considered as a real threat by the hotel chains, as it has moved aggressively, in pursuit of growth, to target, on the demand-side, anyone from the conference-goers, the one-night standers, the city breakers, the business travelers, to the long-form beach-house vacationers.

Starting from a beautiful idea, an urban safety layer to cover excessive demand during peak times, Airbnb created an incredibly successful, fast-growing and profitable business, projected to sell circa 250–280 million room nights in 2018, which in turn generates incredible consumer surplus, while also enabling the supply-side to monetize an asset that was otherwise very expensive to use and generating exactly zero-income. That is, before the supply-side got seized by wealthy multi-property owners, professional landlords, real-estate investment vehicles etc.

Lately, Airbnb seems to have reached its invisible growth asymptote, as it faces multiple challenges, a perfect storm believed to have already contributed to carving out some 10%-15% of its current growth rate in 2018. This pressure is exacerbated by an upcoming planned IPO:

  • backlash from local communities over the platform’s increased role in driving up housing prices, by shifting long-term rental supply to more lucrative short-term tourism (locals who might not want to, or be able to partake in the extraction of benefits from tourism by making available their owned/rented house);
  • increased scrutiny from regulators, who are trying to limit/ban the supply-side of short-term apartment-rentals, to mitigate the effects described above;
  • increased pressure for sustainable growth, both from private investors who are now willing to liquidate their venture investments but also potential new pressure from future investors as the company prepares to go public;
  • increased competition from hotels who are adapting their offering by either reducing prices (in some markets it can now be even cheaper to take a hotel room than Airbnb) or by making the experience more personal, with plans to even aggregate available housing stock from apartments nearby and distribute them through the hotel reception/website;
  • increased competition from other aggregators, such as and, who have successfully started to move beyond the traditional aggregation of just hotel rooms by using their proprietary distribution channels to move into the aggregation of private properties such as apartments and houses, or otherwise known as “alternative accommodations”.

Of course, Airbnb will continue to diversify (experiences, restaurants) and grow into emerging markets like Africa, China, India and Latin America, but the reality is that, in order to grow faster in its core business, it needs more sustainable supply to be available, as well as it needs to find the most efficient acquisition cost (on both sides of its marketplace).

That is, the platform needs to manage its imminent product/market unfit: convincing more people to try out hosting, while managing the housing impact dilemma, as well as finding ways to embed itself more deeply into where future customers who might never try Airbnb are found.

Inside a passenger aeroplane (1926). No seatbelts. More legroom.

Some of the world’s first passenger airplanes were built as luxury aircrafts and flew somewhere in 1913/1914. The first such planes were built to offer a great deal of comfort, with spacious fuselages incorporating the passenger saloon, a washroom, comfortable chairs, a bedroom, a lounge. But gradually, the focus on comfort shifted more towards security, and then to operational efficiency, to lowering prices and eventually to adherence to timetables.

The airline industry expanded to provide services to every country in the world, playing an essential role in the global economy, eventually becoming a public utility and being regulated as such in some countries (meaning route and price control). The deregulation that started in the 1970s led to the creation of the low cost airlines, started by the American domestic carrier Southwest, proliferation of which led to a more market-driven industry, where the levels of service and price are allegedly determined by customer.

The first airline to offer cheaper transatlantic fares was Icelandic airline Loftleiðir in 1964, often referred to as “the Hippie Airline”. Many young Americans travelled to Europe after graduation, to experience the “old-world culture”, and they were more concerned with getting there cheaply than comfortably or even exactly on time. Loftleiðir were not famous for speed or punctuality, but flying with the company became a sort of rite of passage for those young “hippies” Source: Wikipedia; Photographer: Gary Miller

Indeed, the incumbent players saw a big hit in market share and profitability, which forced them to enter a downward price spiral (made possible also by the efficiency innovations that were constantly deployed to lower the cost of air travel), or launch their own low-cost brand satellites to compete against the new competitors.

Faced with this new competition, traditional airlines have also discovered the strategy of co-operation (Star Alliance, Sky team, oneworld) which contributed further to lowering operational costs (through code-sharing ticket-office sharing, linkage between frequent flyer programs etc.) that would increase competitiveness and which would be later on extended cross-industries (with hotels, car rental agencies etc).

The real cost of air transport has more than halved over the last 40 decades
The real cost of air transport has more than halved over the last 40 decades, Source: ICAO, IATA, via Aleksandra Fedosova’s Thesis

It is true that the democratization of both long-haul and short-haul flights brought about by the appearance of low-cost airlines meant that consumers, faced with the novel opportunity to travel the world, would ignore things like comfort or scheduled times for departure/landing. It was the experience of flying that mattered.

But in present times, flying has become a part of life for the urban class, it is so ubiquitous, that it no longer represents an experience in itself, no matter how hard some very few airline companies still try to differentiate the in-flight service.

The value has shifted entirely to the place of destination, and so, in most cases (in the economy class), for both leisure and working-travelers, their main expectations from the airline industry (being it traditional or low-cost) is simply a minimum of comfort (a floor, however, for which every year consumers seem to be willing to go lower) and paramount safety. With the advent of flight aggregators like Kayak, the airlines were commoditized even further, with the only differentiation when choosing a flight, in the eyes of most consumers, being reduced to: 1/ departure, landing time; 2/ direct or with stops; 3/ what is the airport of departure and landing. Probably in this order. Of course, there are variations, like a very good frequent flyer programme might make one trade-off the flight schedule and choose a certain airline to accumulate further points. But in reality, most FFPs are useless and stuck in a different era.

So it seems that, with airlines, consumers are happy for the time being to allow this trade-off: in-flight comfort and quality of services to be sacrificed in return for safety, affordability, adherence to timetables and choice, at scale. In an ever-challenging competitive landscape, airlines are happily shifting investment from comfort to operational efficiencies, safety procedures, and route optimisation, hence more value is distributed to the customers in the form lower prices.

The only problem appears that when airlines fail to do the one thing that consumers expect them to do, which is move them from point A to point B over air, safely and on time—be it because of extreme weather conditions, union strikes, missing pilots, delays followed by inability to depart since the destination airport does not allow night-flights etc. — , the tacit agreement is no longer valid. Consumers should expect the best possible comfort and quality of services, at scale. In this situation, exhausted airlines have no excuse for not acting like a tech company, offering ever-increasing quality and personalization at scale, to manage the unpleasant situation.

However, there are plenty of cases where cancellations and delays end up with having lots of passengers stranded overnight in a city where they weren’t supposed to be. And in this situation, the whole airline/airport experience is simply, awful: lack of (personalized) communication despite being active users of airline mobile-apps, long queues, and a high chance of ending up sleeping in an airport — mainly because of the same equation I discussed at the beginning of this article: excessive demand vs. limited supply of hotel rooms.

Later on, they changed it to ‘stormy weather’
When they keep you for three hours with no information, standing in queues, of course you miss any chance of finding any accomodation. By the time you would want to search one on your own, it’s already too late.

As I was flying from Munich towards home, and so after one hour of waiting at the gate with no feedback, two hours of staying in a queue, tired and dehydrated, we were told that the hotel rooms have been exhausted and we should feel free to grab pillows and blankets from “over there” and find our way in the airport until the next day.

Of course, some airports might have some sleeping beds (usually occupied), but some not. But generally speaking, in today’s world of increasing customer expectations, if one is not on a political campaign tour like Robert F. Kennedy above, one should not sleep in an airport. Even worse than the poor in-flight experience, airports themselves have, in general, the worst possible customer experience. Sleeping in one is simply dehumanising (unless you’re Tom Hanks shooting The Terminal).

So how does Airbnb’s challenges (the locals’ backlash, the regulators scrutiny, the growth slowdown, the loss of initial strategic vision, the increasing acquisition costs) link with airlines’ incapacity of acting like a tech company (at least when they fail in their main activity)?

It has to do with Airbnb’s recent strategic re-positioning, announcing its intention of becoming a company that operates on an infinite time horizon and also one that truly caters to and is therefore measured on metrics relevant to all stakeholders (not just the shareholders): but also to its employees, to local communities, to its partners ecosystem.

“We think that a company should survive to see the next century, not just the next quarter. A 21st-century company should eventually become a 22nd-century company. By having an infinite time horizon, a company can be more audacious, take more responsibility for what they make, and create more lasting change. […]

What is the purpose of a company? I would say its purpose is to realize its vision. But even this is no longer enough. We must realize our vision and ensure our vision is good for society. This means that we must have the best interest of three stakeholders in mind: Airbnb the company (employees and shareholders), Airbnb the community (guests and hosts) and the world outside of Airbnb. To be a 21st-century company, we must find harmony between these stakeholders.


If people are good and mostly the same, then we should be able to offer more than people sleeping in one another’s homes. We imagine a world where every one of us can belong anywhere. A world where you can go to any community and someone says, “Welcome home.” Where home isn’t just a house, but anywhere you belong. Where every city is a village, every block a community, and every kitchen table a conversation. In this world, we can be anything we want. This is the magical world of Airbnb. We will probably never fully realize this vision, but we will die trying.”

1/ The airline industry represents the industrial-era model of supply side economies of scale, focused on driving operational efficiency at the expense of quality. When airlines fail to deliver on their primary role, they become reliant on the hotel industry.

2/ The hotel industry is the embodiment of depersonalised customer experience, with pricing power derived from scarcity of supply. The problem is that, in the digital age, poor experience due to limited supply is no longer acceptable.

3/ Airbnb is a tech company that has specialised in matching supply and demand on the short-rental accomodation market (and relative to hotels, Airbnb can tap into a much larger supply).

A leap of faith

The sequence above alludes to the role of tech companies. When certain peaks in demand exceed the fixed supply, rather than accepting a suboptimal experience (sleeping in airports) or a pricing disadvantage imposed by the licensed professionals (expensive hotel rooms in emergency situations), tech companies such as Airbnb can tap into the multitude, activating amateur-hosts as a third safety layer to absorb the excessive demand, all while offering superior experience and fair pricing.

This has happened in the taxi industry as well, where Uber and Lyft acted as a layer serving previously underserved segments by the taxi industry (either certain neighbourhoods or, unfortunately, certain races). In a way, as I remember reading on Twitter, now infamous Uber CEO Travis Kalanick might have done more against black and poor neighbourhood discrimination than our favourite activists. Furthermore, in cities like Paris, a new layer was developed by startups like Heetch, who operate at the frontier, where Uber drivers (in pursuit of better returns to make up for their increasing costs as they transition towards semi-professional), have stopped serving night-time party goes who need to get back in the suburbs in the morning. Heetch, operated by amateurs, serves that peak in demand.

As articulated by Nicolas Colin in his latest book HEDGE, technology business models enable an alliance between the professionals and the amateurs:

“…we should explore the idea of how amateurs could become allies of licensed professionals instead of foes. In my view, technology is showing us ways in which it will be possible to put a ceiling on the number of workers while satisfying consumer demand even in the most extreme circumstances. The stake is to prevent rent-seeking and ensure that demand is always served at the highest quality and largest scale. The goals should be to impose occupational licensing to professionals in exchange for certain benefits… while simultaneously using amateurs as a backup.


If an additional workforce is needed to match certain peaks in demand or serve particular segments of the market, the solution is there: inviting amateurs so that they focus on those slots and segments where demand cannot be met by the professionals alone. If contained on this part of the market, amateur supply can reinforce the professional workforce instead of weakening its bargaining power.”

I understand that the most optimistic, libertarian people out there would rather invent tech to fix the weather, or would lobby to dismantle pilot unions or remove pilots altogether, or would double down on streamlining airport and fleet operations in the hope that all of these will completely eliminate flight cancellations and overnight delays. But, unfortunately, as the number of flights worldwide is only going to increase, it is fair to assume that these cancellations are going to stay with us. And airlines are ill-equipped and lack the incentives to create a process for the scenario that is outside their core: the actual flying. So all they do is customer-service-washing.

Many of these flight cancellations, due to the chaos they create and due to inadequate mitigating processes on the airlines side, will result in people having to sleep in airports overnight, since more often than not, one of the situations will incur: 1/ the hotel supply in the area will be exhausted; 2/ by the time the airline organises itself, it’s already too late to leave the airport; 3/ in some cases, airlines might not even have the obligation to provide accomodation, as they would rather wait for the consumers to claim financial compensation instead (which doesn’t necessarily happen and that process itself is painful, since regulators don’t actively work to enforce and streamline it).

Airbnb’s opportunity, as well as obligation — Heathrow cancels more than 200 Sunday flights and warns of further disruption, January 2013, source:

Banking on the idea that people are inherently good and would step in to help others while in need, and that strangers can trust each other, providing the right identity verification mechanisms are in place, Airbnb could and should go back to its roots and take the ambitious effort of enacting this safety layer.

First, it could engage airlines to explore platform integration, while providing in the same time design-thinking consultancy to these companies to help them streamline the digital process post-flight cancellation: in a world where smartphones are the norm, consumers should have the option to choose between queuing or engaging with the airline over their mobile — both the list of next flights available for the next day, and the list of available accomodation, either at a hotel or through Airbnb, can be made, almost Tinder-style, available to users in real-time.

Not only can Airbnb help both airlines and the hotel layer re-design the process of allocation emergency accomodation during overnight flight cancellation through smartphones, but it can also provide the necessary extra supply of accomodation (either rooms in shared flats, or entire flats) to absorb the extra demand (while also serving it in a highly personalized fashion, based on a better understanding of the preferences of end consumer). In the end, what other entity is better placed to list, at any given situation, be it emergency or not, all available, un-utilised housing stock, in pretty much any city in the world?

Second, it should engage regulators and local politicians, to convince them of the societal value of this initiative (since it is basically making possible the enforcement of consumer protection regulations which otherwise would be impossible to be respected). This will in turn create the necessary political pressure for airlines to undertake this modernisation (otherwise, airlines don’t have much incentive to do it, since no matter how badly they treat consumers, there is limited impact on the decision of those consumers to avoid that airline in the future). This can also be a better-starting point for Airbnb to launch discussions on obtaining some sort of a licensing procedure for its hosts (particularly the ones that are willing to join this specific programme).

Third, it should launch a targeted campaign especially with locals living in proximity of airports, to create this reserve army of emergency hosts. New conditions must be agreed, different from the current vacation-oriented hosts have, since emergency hosts must be willing to answer midnight-calls, allow showering at night etc. This can be either converting existing hosts into the new programme, or convincing a new cohort of people to join the platform as emergency hosts, people who otherwise would have never done it: due to many reasons, such as they don’t think they need it, they don’t think the hassle of sharing flats for the whole summer is worth it etc. But faced with the opportunity of hosting, on rare occasions, a traveller in need, while generating income at a premium with no real marketing effort, this could break the ice.

MPs vote on expanding London Heathrow Airport, June 2018,

This is also a way to give something back to the people who live near airports and have to deal with the unpleasantness of it (noise, air pollution). It also creates the possibility for Airbnb to convert, at a later stage, these emergency hosts into more permanent vacation-hosts, to further fuel its growth-based business model (we established that it is critical for Airbnb to find more supply, if not build it from scratch).

Also, through the integration with the airline platform (technological, consensus, data sharing etc.), Airbnb can be embedded in the flight check-in process, and can better communicate with the airline which passengers have a history of using Airbnb, and therefore, in the case of an overnight cancellation, who would be most inclined to accept such an accomodation, instead of a hotel. This way, hotel rooms could go to the fussy ones, while Airbnb rooms could go to the others who would rather sleep in a “trusted home” than an airport. It also gives Airbnb the opportunity to obtain some kind of consent for data-sharing for passengers who never used Airbnb before (i.e. “in case of flight cancellation and no hotel supply, would you be willing to receive alternative accomodation options from Airbnb?”). This, in turn, is a channel for acquiring future Airbnb vacation-guests, who might have never used the service hadn’t been for the pleasant surprise they had when Airbnb saved them that night.

Add UberPool’s ability to create in real-time routes for multiple passengers depending on the direction of their destination, and you already have a much faster way to organize collective transport to the accomodation, in the middle of the night, rather than the slow process of contracting emergency coach-buses that leave every 45 minutes.

It does feel like a gargantuan effort, but Airbnb has proven once that it is willing to do unscalable things (i.e. visit apartments to take better photos) to convince people of its value. Furthermore, it now faces the perfect storm of challenges, and this kind of strategic re-positioning helps to mitigate some of them:

  • Backlash from local communities — Airbnb can find an ally in people living close to the airport, by giving them an opportunity to monetize their real-estate asset in an infrequent, almost effortless way. This can also shift some of Airbnb’s growth, at least temporarily, away from entire-flat vacation-rentals in the city centers (since emergency-hosting can be preponderantly in shared-flats, near airports).
  • Increased regulatory scrutiny — Without sacrificing growth, Airbnb can re-position itself as a safety layer for absorbing extra demand and reduce, if not eliminate, the big number of people sleeping in airports due to flight cancellations / delay. This can also help create a new licensing mechanism for emergency-hosts, further legitimising Airbnb’s business.
  • Increased pressure for growth — This creates a new market for Airbnb, converting hosts that would have otherwise never converted, and similar with guests.
  • Increased competitive pressure—By being the controlling node in this layered network along with airlines and hotels, Airbnb can embed itself in today’s ever-growing flight industry, and become the de-facto safety layer for emergency accommodations. This in turn re-establishes the public perception that Airbnb is a friend (and a saviour) of the hotel industry, which increases its competitiveness in the areas where they compete head-to-head.

It is normal to be skeptical about this, but if, against everyone’s opinion, Brian and Joe proved 10 years ago that inflating mattresses and renting them online can evolve into a multi-billion business, we should not underestimate their ambition and power.

It can start as small experiments (with selected airlines, at selected airports), and then further iterated upon. This not only raises the potential of increasing the frequency of interactions between guests and Airbnb (on top of the few times guests interact with Airbnb, maybe 2–3x per year for vacation-rentals, Airbnb can grab more share-of-mind if it manages to embed itself in the airline check-in process). Scaling this by working with airlines, with regulators and politicians would create a reserve army of hosts, as well as a streamlined process of matching supply and demand, which could potentially absorbe even the most extreme conditions:

Air Travel Disruption and Porte Ouverte

Achieving this safety layer is possible, especially if it combines an infinite time horizon with the power of the multitude and its potential in bringing together professionals and amateurs, but most importantly, the attractiveness of a world where, anywhere you might be stranded for the night, there is a welcoming community where someone says — “Welcome home!”