Free Trade at High Speed

When I saw this news story tweeted by Bill Gurley something jumped out at me that was different than Bill took away:

Inside the story it describes Rocket Internet’s standing in the European startup hierarchy as such:

The Berlin-based group [is] Europe’s largest Internet company

I am not 100% sure this is true, and it obviously depends on how you measure it, or account for the fact that there are a couple billion in cash on Rocket’s balance sheet. But it’s a close enough approximation to make you wonder: how did Europe end up with such a lame company as arguably it’s largest internet company?

I believe this is in part due to trade barriers and the speed at which companies are being built. Everything I studied as an Econ undergrad reinforced that Free Trade is good for to world and all the players in the world — everyone wins. Is that still true in 2015?

The speed at which Google, Facebook and others are able to spread software across the internet to the entire globe has in most cases made these American companies the dominant players in a huge portion of the globe. And newer leaders such as Uber are internationalizing much faster and fighting for global domination much more aggressively than the first generation of American startups.

When I visited China last year, I was seriously annoyed with the Great Firewall and the protectionism and inconvenience it represented. But by opting out of open trade, China gave domestic companies 5–10 years of protection to build competing products to the American ones. And the products that emerged — WeChat, Baidu, Alibaba — are strong domestic leaders, worth a large percentage of the value of their American counterparts, and have market positions that could not easily be challenged by their American counterparts today if the trade barriers were dropped.

Contrast this to Europe — Rocket Internet, arguably the largest Europen internet company, is less than a tenth the size of Baidu, and less than one fortieth the size of Alibaba. The American leaders got good enough, big enough, and well capitalized enough in Europe quickly and crowded out any opportunity for local competitors to flourish.

The free trade argument would say Europeans were made better off — if they hadn’t had good access to Google 2000–2010, they would have had an inferior search experience and would have not reaped the full benefits of the internet revolution. Their citizens would have had to make due with an inferior local product, and total trade would have been hampered.

But China is the countercase: maybe they suffered for a few years with an inferior product, but the payoff is incredibly stong local products. On balance, this looks like a better deal in hindsight.

All this is great for Silicon Valley: as the premier agent of disruption and innovation in the world, they are able to reap profits from all points in the globe at a rate unprecedented in history. To extract profits out of India, the British Empire really had to colonize it, control it, and put boots on the ground. But today, Silicon Valley can colonize the world with software in a few short years. As entrepreneurs and investors based here, this is in our self-interest and part of why it may be the best time in history to be building companies here.

I called Rocket Internet “lame” earlier in this post, and I think that is a pretty accurate representation of Silicon Valley’s collective view of them — copycats of our best ideas, most famous for copying Groupon and then selling the copycat back to them for billions. I still hold this view, mostly. But we should also be self-aware about the fact that by waving the “free trade” flag at Europe when they they resist or regulate our businesses’ ability to operate in their markets, we really are acting out of naked self-interest as much as some abstract principle of fairness. Of course we are huge fans of free trade, as we are the largest beneficiaries of it. China has several hundred billion dollars of market-cap internet companies that I believe argue the other side of that coin.

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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.

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