Geopolitics
Your venture capital firm’s next partner may be a Head of Global Affairs.
Venture capitalists are in the business of taking risk to fund bold ideas, but they often fail to imagine an increasingly relevant factor in the success of the startups they fund: geopolitical risk.
Today’s venture capitalists are comfortable assessing technology risk (is this tech legit?), market risk (can this business be huge?), and management risk (is this the team to pull it off?). But they struggle to fully appreciate geopolitical risk, and the political, military, and civil frictions that extend to startups in their bullpen.
In an era of “de-risking” the relationship between East and West — primarily, between the United States and China — venture capitalists have been caught flatfooted.
The recent decoupling of Sequoia is a prime example. For a firm that is typically a decade ahead in predicting technology trends, Sequoia misread the US-China relationship, cleaving off their China franchise years too late, amidst landmark Congressional hearings on TikTok, locked up investor capital, and a Chinese government crackdown on foreign businesses within the country.
Venture capitalists are embracing more patriotic forms of investing: initiatives like Andreessen Horowitz’s American Dynamism practice, the $1 billion NATO Innovation Fund, and America’s Frontier Fund all bet on a rising wave of “nearshoring,” or reigniting an ethos of industrial production and national security. I’m making a bet on Europe’s role here with 201 Ventures, my own more modest fund seeking to advance freedom and autonomy on the continent. This requires a constant observation and sober analysis of global affairs.
Beyond understanding geopolitical risk, venture capitalists need to take action to mitigate it. I predict that venture capital firms will hire a Head of Global Affairs into their partnerships, or tap a qualified partner to take on this task. Buyout firms and hedge funds have recruited inside the Beltway for these roles for decades, with Gen. David Petraeus at KKR, a rotating cadre of retired intelligence officers at Cerberus, and Jared Cohen at Goldman Sachs, for instance.
VCs should hire experts here; a weekly reading of the Economist is not enough. If done right, these partners could help in the following ways:
- diligence: identify, measure, and manage geopolitical risk for new investments
- operations: help portfolio companies navigate export controls, win non-dilutive government grants/financing, stabilize unsteady supply chains of talent or material
- market shaping: help portfolio companies craft messages in line with geopolitical trends, lobby for advantageous policies/regulations, protect winners
Gone are the days of rapid valuation mark-ups. The next great wave of venture capital investments will take longer to develop into billion dollar companies, and the peril of these long-duration vintages is that something spoils the investment in the waiting period. For all the ways it can spoil — technical failures, bad management teams, competition, running out of cash, just to name a few — geopolitics can no longer be cast off as an an unexpected exogenous shock to the system. Limited partners — those that invest in venture capital firms — will demand that geopolitics are considered.
I’m curious to see which firms will move first here.
