We can’t talk about digital power in isolation from the financial power behind platforms. This new angle reveals new dependencies as the change of macroeconomic tides in 2022 has put many tech companies under pressure. Rising inflation rates have prompted central banks to raise interest rates. This was immediately felt by investors who adopted a more conservative approach to high-risk investments.
This is not a reason for schadenfreude, however. If we follow the chain of investors, the slowdown in tech will have ripple effects for society at large. When money was cheap and markets were going up, startups kept VC investors happy. Rising VC portfolio values meant better returns for their LPs, the pension funds, insurance firms, endowments, etc. This ultimately ensured the viability of defined contribution pension schemes and insurance plans. Institutional investors allocate only a small share of their portfolios into risky asset classes and will not be drastically affected by the downturn in tech. However, it is important to note how our everyday decisions are linked with high finance.
Although venture capital is a highly speculative form of investing, investment decisions have concrete effects in the present. There are now significant sums of money tied up with companies that exist by burning through VC investors’ cash. Irrespective of unsustainable financial strategies, platforms have inflicted lasting damage on competitors or legacy industries. Transport companies like Uber are an obvious example, and a similar case can be made for the effects of accommodation platforms on hotel chains (and family hotels), the impact of social media on newspapers, and streaming platforms’ disruption of the music and film industries. In their absence, we might find ourselves in a position where we are lacking access to important services.
And beyond the platform–consumer relationship, platforms might also depend on each other: As many startups are each other’s customers, one of them going bankrupt has potentially systemic consequences. Cryptocurrency exchanges are a case in point. An extreme example of this is what the Financial Times dubbed the ‘Tesla financial complex’ with regard to its outsized impact on the stock market. This describes a ‘vast, tangled web of dependent investment vehicles, corporate emulators and an enormous associated derivatives market of unparalleled breadth, depth and hyperactivity’.
The upshot here is that if we want to de-platform and scale back digital power, we would first have to de-financialise. Digital power is the product of a distinct financial regime. Yet scaling back financialisation is a task of a much larger order of magnitude. Fiscal, monetary and legal changes that enabled financialisation more broadly, and encouraged flows of money into the VC industry more specifically, are tied up with a broader desire to reignite growth in stagnant economies. Curbing these flows would give rise to the need for a credible alternative growth regime. So, what can be done about this?
Despite being a tall order, challenging the power of established financial regimes is not without precedent. More recently, and especially with regard to the climate catastrophe, activism has focused much more squarely on financial actors implicated in this development. Activist research has revealed how asset managers like BlackRock, Vanguard and State Street amassed power through concentrated share ownership. BlackRock alone currently has $10 trillion under management. The company has put this money to use by purchasing shares in publicly listed companies. As significant shareholders in corporations across the entire economy, asset managers like BlackRock effectively indexed the market, by constructing a portfolio that tracks the performance of large parts of the economy. In other words, when the market goes up, so does BlackRock’s portfolio. A ‘side effect’ of this is that BlackRock as shareholder has a say in corporate governance decisions of a vast amount of companies. How this power is used and to what ends has become increasingly politicised, as activist campaigns seek to coerce the asset managers into matching power with responsibility.
Challenges to asset manager capitalism show a way forward for resistance against the VC-led investment regime. Public market scrutiny needs to be combined with more attention to what is going on in private markets. Interestingly, a few major VC investors have started to mimic the indexing strategy of the big asset managers. For instance, Tiger Global and Softbank’s Vision Fund have embarked on acquiring shares in a very large number of private companies. Due to more lenient reporting requirements, private markets are more difficult to scrutinise. Yet a concerted effort to gather what is publicly available would help to paint a much clearer picture of the investment landscape.
Further, we need a better understanding of what institutional investors supply capital to the VC industry. There remains a lot of work to be done in mapping such relationships and following the investment chain from institutional investors to VC funds to startups. Some institutional investors have public reporting requirements, which could be a starting point and further provide insight into the actual financial performance of VC funds.
Rather than reacting to existing crises, a focus on the financial actors behind Big Tech enables us to anticipate where future problems might emerge. If we want to see what’s next, we should be looking at what kind of funds VC firms are raising, what their purpose is, and what companies are found in the portfolios of the most successful VC funds. This might give a hint to which industries will face pressures next and where the nature of work is about to undergo a major transformation. For instance, there have long been attempts to bring white-collar services under a platform labour system. Preparing for the impact might give workers an edge to organise and anticipate the coming disruptions.
The changing macroeconomic environment does promise change. What kind of change is impossible to say at this point. Challenging digital power starts with changing the supply of capital, and this is profoundly affected by tightening monetary policy. While this is largely beyond activists’ control, historical lessons might be drawn from comparable episodes. Jack Dorsey’s annoyance about the trajectory of web3 should be turned into an activists’ rallying cry. At the heart of the desire for decentralisation is a yearning for the early internet, to restore web 1.0’s noble ambitions before the web 2.0 corporate capture. This has progressive potential. Understanding the incentives of VCs and their institutional investors LPs can lead the way to challenge digital power and realise it.