This article first appeared in my column on the investor magazine Equities.com.

Historically, investors looking for potential growth opportunities have hyper-focused on American companies emerging from tech hubs such as Silicon Valley, New York, Boulder and Austin. However nowadays, with early stage valuations on the rise, increasing political instability and possible economic isolation caused by recent elections, it may be time to rethink the original framework for predicting future growth investment spaces.

President Trump’s refusal to join the Paris Climate has isolated the US if not economically, then at least politically. The same goes for post-Brexit UK and parts of continental Europe which — although having prevented a larger catastrophe thanks to the positive outcomes of recent French and Dutch elections — is still being held back by increasingly tense social, political and economic climate.

The social and political situations of key players in the global economy poses multiple questions for investors. Will President Trump’s protectionist policies help U.S. businesses or weaken their competitiveness? Will reviving talks with China toward a bilateral investment treaty give U.S. firms broader access to the Chinese market? Will multi-nationals jump ship from London post Brexit? What impact will the reversal of the Dodd-Frank Wall Street reform have on the stability of the system?

More, does any of this even matter?

This article is not intended to dive into the full economic impact of the current political madness. There has already been enough written on the topic, and most people will have made up their mind on the political and economic threat of rising populism. The aim is to look at how the changing political climate across the world will have an impact on the engines of our economies, growth businesses, and how it will effect the expansion of future growth markets:

How Important Is Location?

For corporates and large scale global manufacturing companies, location has traditionally always been extremely important. Companies choose base countries based on factors such as bilateral trade agreements, political climate, tax regulations and access to suppliers. As such, leaving aside the broader effects on a country’s economic relationships, Trump’s protectionist policies, support for certain corporations and potential treaties with China might seem extremely influential factors for corporates, who are constantly looking for new market opportunities.

However to be blunt, even these factors are less important nowadays. These policies are meant to support big conglomerates who know how to make themselves heard in the political space. But the time when European or US oligopolies would have a large headstart over their Asian counterparts has passed. During my time in private equity I have seen a fair share of producers of high quality products who seemed to be well protected until Asian competitors ramped up their skillset to produce the same quality at lower costs. And cost is not a criterion that these western companies are able to compete on.

If companies want to remain competitive, their competitive advantage needs to stem from innovation. The innovative businesses who create entirely new markets or products are the ones that drive not only competitiveness but also job growth, and so far big corporates haven’t been the ones who excelled at this.

If we are searching for new growth markets, the typical demands of a location (bilateral agreements, materials, suppliers) become less important. Highly innovative, technologically advanced companies, especially SAAS enterprises, don’t rely on any of these factors.

The ‘raw materials’ that keep the cogs turning in forward thinking tech companies are the talent which they bring on board, the bright minds which are constantly inventing, and improving. So while location is important, it is for totally different reasons. The key requirements for these growth companies are not based on trade agreements, or suppliers, but instead proximity to universities, space to grow and scale, and a liberal environment that attracts foreign and homegrown talent

Talent Needs Space and the Right Conditions to Grow

In comparison to corporates, there are different patterns at play for innovative growth companies. As the success factors for companies have changed, the success factors for countries who compete for economic leadership have changed, too.

Let’s look at the success factors that help build startup ecosystems.

In his book Startup Communities, Brad Feld first highlights “Feeders” – these are the essential drivers of startup communities like universities, entrepreneurship programs, VCs, non-profits, government schemes, mentors and investors.

Then access to talent is critical for startups and growth companies. This ranges from skilled developers, designer and marketers, to experienced entrepreneurs and an infrastructure of mentors and investors. Richard Florida refers to this abundance of talent as the creative class, and argues that these educated, highly sought after people want to live in nice places and enjoy a liberal culture with a tolerance for new ideas. Most of all, they want to be around other creative-class individuals, which creates a strong network effect between creative communities.



With respect to those network effects, Paul Graham writes about the importance of “being in a place where startups are the cool thing to do and chance meetings with people who can help you.”

An open society is crucial. By open, I mean not only tolerant but also a meritocracy where people have the freedom, the means and the education to innovate, try new things, and build ventures, without being held back by ‘old boys’ networks that hinder progress by hoarding opportunities and blocking outsiders from jumping in.

Since the beginning of the startup revolution, we have seen that a society based on old boy networks will not feed talent, but instead lead to inflexible corporations that fail to act at the right time and push change. And change is what these times are all about.

The current political climate with Brexit, Trump and the divide between conservatives and progressives is creating a toxic environment that is far from the perfect field to plant new startup ecosystems. This is why liberal democracies like France and Canada are seeing space to capitalize on their neighbours’ weaknesses and have relatively young leaders that represent a new generation who are ready and willing to shake things up.

While Emmanuel Macron is courting US scientists after Trump’s withdrawal from the Paris Climate agreement, Canada is successfully tempting U.S. companies and talent north, with Facebook (FB)Google (GOOGL)Uber and Microsoft (MSFT) recently having opened offices there.

The Emergence of the City State

However if you live in a country whose political climate has just made a U-turn, here is some good news. While political leaders, their governments and their policies undoubtedly play a big part in defining how attractive a country is to the creative class, this doesn’t mean that particular cities or ‘hubs’ cannot flourish by themselves.

Led by California, dozens of states and cities across the US have already stated their intentions to ignore Trump’s withdrawal from the Paris agreement. Silicon Valley will continue to boom regardless of Trump’s meddling, and Sadiq Khan remains as influential in the future of London as Teresa May. The impact of the cities on a growth space may actually be higher than the impact of the country, as cities, states and hubs end up micromanaging themselves.

How to Predict Growth Markets in the New Landscape?

For growth companies, political macro factors of a nation may be of lesser importance than the type of infrastructure and society a city or hub offers. As investors we need to shift the focus from macroeconomic factors to the factors that attract talent, and from nations to cities. But how do you assess such an environment?

In short, follow the talent. See where migration is happening as illustrated in Quartz’s map of migration from 2005-2010. These are fast changing times, and to keep up to speed, ecosystems need a steady flow of the best talent out there.

Then you may want to assess which educational institutions matter and their admission policies. Do they offer open access or act as a breeding ground for the new generations of old boys clubs? Is society within an area segmented or is it open? Look at income distribution within a society and how it changes over time. Is it monopolized or does it reflect true opportunities for everyone?

The European Commission and KMPG offer lists of key innovation hubs. Compare several of them and watch how they develop. When looking at those report, it is critical to look at the criteria they apply. While some focus on the quality of local universities, others focus on R&D activities by startups. Some focus on the number of well known unicorns, and others focus on the whole infrastructure. Your focus will depend on the stage you invest in. While places like Berlin or Lisbon provide attractive early stage opportunities, the more developed US cities will provide a richer supply of larger, fast-growth companies.

In calling Berlin home, a city that not only has built and has torn down walls, I am fortunate to find myself in an environment that’s a perfect breeding ground for growth industries. While Berlin has long suffered from extraordinarily high unemployment rates, thanks to liberal immigration policies and a welcoming culture, it is now attracting talent from all over the world, which produces an astonishing output of new businesses and jobs. Despite the negativity and fear mongered by politicians, investors need to look through the smoke and find liberal climates, where innovative companies can find the space to grow.

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