Exponential Finance: Why Investing in Technologies Can Save You during the 2020 Crisis
Just three decades back, the world economy was revolving around the US-Soviet rivalry. After the demise of the Soviet Union, it has transformed into what is now seen as competition between China and the US-UK alliance. However, the current situation is also changing and shifting to what has already been called “The New Economy”.
I believe there are two reasons for this transformation: the surplus of resources (read: capital), and the abundance of technologies.
The overall amount of privately-owned capital has reached USD 5,2 trillion; at the same time, we see that new centers of technological leadership have grown all over the globe. Innovations are now made not only in the Silicon Valley, but also in many other locations such as Europe, Middle East, and South-East Asia.
USD 5.2 trillion is a huge sum, and its owners seek new ways of managing and investing this capital, which go beyond the traditional and well-explored equity markets and encourage the birth of new asset classes (such as cryptocurrency, as Tim Draper believes). These new asset classes are becoming more and more focused on exponential technologies which private capital enters using private placement model. The flow of funds into exponential technologies, in turn, drives technological growth, which creates a cycle that will accelerate in the near future.
Picture 1. Private capital markets, assets under management now total ~$5.2 trillion
The technological growth is no longer concentrated in the Silicon Valley: now, innovations are also built in such tech hubs as London, Berlin, Hong Kong, Singapore, Dubai and Israel. Moreover, the Valley’s technological development has always been accompanied by investment expertise used by venture capitalists to identify the best investment opportunities.
Today, many such experts are based not only in the Valley but also in Europe, Israel, China, and South-East Asia, thus letting private capital all over the globe leverage their knowledge to invest in local technological companies. This, too, stimulates the technological development in these new hubs.
The abundance of capital and technological growth jointly encourage the global mobility of talent that eventually concentrates around the hubs. Moving cities, countries and continents for studies, volunteering or work projects is becoming the new norm. Surely, it has certain risks (“What if I won’t make it?”) yet promises greater success (“What if I become the next Elon Musk?”) than spending your whole life in your hometown . As said by Facebook’s CEO Mark Zuckerberg, “in a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks”.
Picture 2. Global Startup Ecosystem Report 2019
Furthermore, constant change of social groups caused by mobility exposes you to new ideas and experiences instead of repeatedly reaffirming the things you already believe. Today, it defines our competitive advantage when it comes to career development. In addition, since the practice of mobility becomes more and more popular, in the near future it may become established to the point where people from different countries will live and work together, no longer associating themselves with just one particular state or nation.
However, the paradigm where constant change becomes the norm is influencing how owners of private capital manage funds and make decisions. A standard 10–12-year venture fund lifecycle becomes too long in a fast-changing world. During this period, the very economic landscape in a certain industry or region may change beyond recognition. This creates the demand for new asset classes which would be profitable, low risk, and provide short-term liquidity (at least 3 to 5 years). We are going to see the increasing demand for such investment opportunities both in venture capital industry and direct investments into private tech companies.
In addition, the demand for such assets has to grow in the next decade, largely because of the new economic crisis predicted to hit in 2020–2021. Being associated with overheating of the economy, it will likely hit production and consumption trends, yet private capital will continue to search for new investment opportunities.
When working at Intel, I once met Andy Grove who said a very important thing that we refer to today as a strategic inflection point: “A strategic inflection point is a time in life when the fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”. I think that such opportunities to rise will probably be seen in tech startups focused on new solutions in fintech, AI, and sharing economy, which will be in demand both among consumers and business.
Following this demand, AI will develop and by late 2020s it may get to the point where computers will reach and exceed human level of intelligence.
