a16z Podcast - a16z Podcast: Open vs. Closed, Alpha Cities, and the Industries of the Future

Episode Date: February 19, 2016

The principal political binary of the past century was the political 'left versus right'. But in the 21st century the binary has shifted -- the battleground now is 'open versus closed'. Those states and societies that embrace economic, political, and cultural openness will have a better shot at competing in the software and technology-driven future, argues Alec Ross, author of the new book The Industries of the Future. Ross, who worked on the first Obama presidential campaign and was the advisor on innovation to Hillary Clinton when she was Secretary of State, joins the a16z Podcast to discuss his views on the industries (and cities) of the future, how they are playing out across a 196-country chessboard, and what we all can do to prepare ourselves and our children for what is to come.

Welcome to the A16Z podcast. I'm Michael Copeland. And today, Sonal and I are lucky to have Alec Ross with this on the podcast. And Ross is a new book Out Industries of the Future. He was the senior advisor for innovation to Hillary Clinton when she was Secretary of State. And, Alec, you also worked for President Obama during the first two years of his initial presidential campaign. That's right. He actually, the reason why Hillary hired me was because I helped beat her. I helped run technology and media. policy for his presidential campaign. And so that when she then became Secretary of State, she recruited me to run the innovation agenda, though I should note from at the very beginning of this podcast, that did not include responsibilities for home-brewed email servers. Let's just get that out of the way. I'm glad you got that out of the way. We're going to talk about Hillary Clinton and politics later. But, Alec, welcome to the podcast. We're glad that you're here. Thank you. Yeah. One of the things, you know, that really

intrigues us about the topic of your book is we've covered a lot of different countries and experiences and how each of those regions encounters tech with voices on the ground in each of those places from Nigeria, Kenya, South Africa, India, China, Myanmar. We've just covered a lot of different regions. And we think you have a really unique perspective that goes across like 196 countries, the view of the entire chessboard and how it all comes together. And so we're really interested in hearing your perspective starting from there. My assistant did me a realtor service recently where she actually totaled up my travel

over the last five or six years. And apparently I have traveled the equivalent of 25 circumferences of the globe. Wow. Wow. Two round trips to the moon with a side trip to New Zealand. In terms of the mileage, felt like trying. Getting some good frequent flyer miles out of that.

I am. But look, it's been a wonderful experience. And part of what I've seen is that there are some very interesting things happening around the globe in terms of innovation, technology development, entrepreneurship, and what the benefits to states and societies are for that. And I've come to sort of one sweeping conclusion that's forward-looking. And that is, I think that the principal political binary of the 20th century was left versus right. It was the political left versus the political right. But in the 21st century, in the present day, the principal political binary is open

versus closed. I think that the real tension, both inside countries and across countries, are those that embrace more open, economic, political, and cultural systems versus those that are more closed. And the conclusion that I've come to in all of this, thinking about the industries of the future, not necessarily looking back at the 20 years of digitization and the rise of the consumer internet, but looking forward to the next 20 years, trying to be deterministic about how political systems map to economic outcomes. I think that the states and societies that are more open are those that will compete and succeed most effectively in tomorrow's industries. Obviously, there's gradations of open and closed. And so are we talking

China, Myanmar, and then Germany? I mean, when you say open and closed, how do you define it and what are the sort of spectrum that you're talking about? That's a really important question. key word that you brought out there is spectrum. There is no perfectly open society and no perfectly closed society. The closest to a perfectly closed society might be North Korea and the closest to a perfectly open society might be Iceland. But look, the United States is far from being a perfectly open society. What I mean when I say open versus closed is, I mean, I mean, there is widespread acceptance of all types of minorities. There is an active attempt to maximize the role in place for women in the economy. It is the most open system possible to allow for capital

formation, entrepreneurship, innovation. And then basically, and then cultural characteristics that lend themselves to imagination and invention. And so on the far end of this spectrum, you've got certain Western societies and certain Eastern societies. And on the far opposite of that, you've got some former Soviet societies and a decreasing number of Asian societies. I'm glad you didn't paint that as black and white as East and West too, Alec, because that's one of my pet peeves when people talk about open versus closed. It's like they conflate open with the West and close with the East. And I'm just really glad that you're not doing that. I also think is interesting because you're talking about these macro cultural conditions. And there are also

microeconomic ways that open and close play out. I mean, you alluded to it a little bit when you talked about IP and sort of sharing of ideas, but even down to open source versus not even considering technologies that come from outside one's company or non-compete agreements and the movement of people and human capital across organizations. So it's kind of interesting to sort of take that back up a little and think about some of the policy aspects because you, more than anyone, then, has seen this perspective across all these governments. So where does this policy role, especially with government and also outside of government, come into all this? First of all, I'm in violent agreement of everything that you said, Zonal. And government policies

are deterministic in terms of the degree to which these economic systems are open or closed and the degree to which it's easy or difficult to be an entrepreneur. And since you brought up the point that this doesn't sort of hit the west against the east. And it's like, oh, hip, hip, hooray for us white folks in the United States and Europe, you know, against, you know, those of you elsewhere. You know, let me actually pick on the United States and parts of Europe for a moment. So in Europe, you can see an inclination towards being increasingly closed around policies like data sovereignty. Right. So, you know, when you think about, when I think about the kind of policymaking being done by, you know, Eurocrats in Brussels who have never had a private sector job before

or, you know, other white shirt, red tie, pinstriped government officials in Berlin or Rome or elsewhere, they're very stringent rules on how data flows. You're alluding to things like right to be forgotten, safe harbor, those types of data things. Well, also that I have to set up my server if I want to do business in your country, I got to have a server there, right? Exactly. Like, the whole concept of cloud computing is cutting across the grain of what government, of the, of the data privacies that are putting, being put in place. If you think about the business models and the technology development that's taking

place in Silicon Valley and elsewhere, that's, that's maximizing the potential of the cloud governments in Western Europe are basically building a series of regulations and laws that work across the grain of the way that the cloud works. Also, let's be critical of the United States for a second here. The rise of surveillance has the effect of closing us off in many respects. So instead of allowing for frictionless communication and collaboration in the U.S., a lot of what we see are control freak instincts coming from Washington, trying to get access to and control of a lot of our information.

And so I think, you know, the battle between being open and being closed plays out here in the United States as well. Well, let's also remember, and I think you wouldn't disagree with this, given your past history, that these are legitimate concerns that those folks have. I mean, when you talk about those bureaucrats, and I agree that they can be a little technocratic about how they approach things, especially having not had the experience of working in private sector, which is unlike here, there's been a real shift, it seems, in the past 10 years where a lot more private sector employees from the technology industry have been going to

Washington, it does seem that, you know, there does need to be a way to also meet their concerns. And I mean, are there ways to navigate that? Do you see any things that help us there? Absolutely. I mean, when I was in government working for at the State Department, you know, a lot of what I worked on was I worked on counterterrorism programs. And, you know, they're absolutely, I'm a big believer in the work of the NSA in terms of how its mission is defined and I think that they do a lot of great work. The question is, the question is, you know, what kind of framework are they going to work in? And I think that it is perfectly reasonable for there to be close collaboration between the technology community and the

intelligence and law enforcement communities in ways that fall short, of, say, mandating backdoors into encrypted technologies. Oh, yes, I think we are in agreement about that for sure. But the question and what a lot of this comes from, though, is it's not just, you know, the policy and the regulation, but at the end of the day, it's the jobs of the constituents. You know, Germany does this apprenticeship kind of program where there is a middle class in Germany. There are, like, incredible mechanics and carpenters, et cetera. You come from West Virginia. You live in Baltimore.

I mean, you've seen those regions and that city sort of just get, you know, pushed aside. So how do you balance then regulation and policy, and then how do you balance these industries of the future with the work of the future? I'm so glad you asked that. The reason I wrote this book, the reason I wrote the industries of the future comes from the experience of having grown up in a poor rural part of the United States, West Virginia, and having been a teacher in a poor urban part of the United States in West Baltimore. And in this case, part of what I was trying to do writing this book was lighting a path for people from low-income and working-class communities so that they could

understand the forces that are shaping our future. Now, we are a more purely capitalistic society in the United States than is Germany, for example, or then our Scandinavian countries, which have, you know, substantially higher tax rates, but also a very higher, a much higher safety net and a much stronger safety net. And so I do think it is reasonable for us in a world where we are creating more bounty, but also creating more spread, more inequality, and where the challenges are principally directed at the middle class and the working class, I do think it's reasonable for us to look at what the policies are that impact the middle class. and the working class to make sure that they aren't hollowed out.

But where I would start from, where I would start from is looking at what the industries of the future are, identifying where the skills gaps are, where the jobs are, but where we can't hire enough employees to fill the existing jobs, and then reorienting those educational programs that tend to overwhelmingly serve the working class, like community colleges and vocational education, which is not sexy stuff. to talk about. That's not what people talk about at the Cool Kids Table in Silicon Valley. But the very practical matter is that things like vocational education and community colleges serve some of the most vulnerable parts of the working classes. And the key now is to orient

those programs and those educational systems to those jobs, to those areas where there will be substantial job growth and wealth creation. I have actually heard that argument made even here where, you know, that among all the educational paradigms, the one to think about shifting towards is more skill-based, apprenticeship-based, vocational-based, as you're describing. More specifically, Alec, how does that shift happen? What are some of the other things that need to happen underneath all of that? I think this is a case where there's some, the United States could learn something from what other countries do.

I mean, we tend to be very proud of ourselves and of our educational systems. and most of the time that is justifiable. But I do think that there are examples of other countries who are doing this better than we are. And I think the part of what we have to do, for example, is look at where the incentives are. So right now, vocational education and community college is largely funded by very big block grants

that come from federal and state governments. What I would do is I would attach significant conditionality to the allocation of those block grants so that it pushes content, it pushes training towards the industries of the future. You know, I take a view here that unless you change the incentives, you won't change the behavior. So just to be clear, you don't get this grant unless this grant is going toward the industries of the future. Right. Right. Okay. Exactly. Because the education systems are slower to change than, you know, federal governments. And by industries of the future, just for those who haven't read your book yet,

it's robotics, cybersecurity, genomics, big data, just anything where digital technology, honestly, software eats the world, basically, as we would say it. It's software eats the world, but it's also, a lot of it also, I think, is, as you said, it's rooted in the life sciences. You know, the world's last trillion dollar industry was created out of computer code. I think the world's next trillion dollar industry is going to be, created out of genetic code. We agree with that. I think we would actually even put that number at $3 trillion

if I remember the last estimate, if I'm not mistaken. Yeah. So I think, look, you've had podcasts in the past where you've talked about where significant growth will come from. I address a lot of those in the industries of the future. And to your question, Michael, yes, I would orient our, I would create conditionality on how are on how these block grants work so that it is oriented towards the industries of the future could could you have called this book nations of the future instead of the industries of the future i mean is it those nations who kind of grab onto the industries of the future that have a future and how do how do you kind of view those two things side by side

it's it's funny that you should ask that there's a there's a chapter in the book called the geography of future markets which basically does look at this sort of on the 196 country chessboard. But one of the thing that's interesting about this is so many countries, it's hard to think of a country oftentimes as just having one set of conditions. So, like, the United States is very big. And what is happening in Massachusetts or California or Washington State is very different than what's happening in Kansas, Iowa, and Nebraska.

in China with its 1.3 billion people, you know, what's happening in the coastal areas of Southeast China is very different than what's happening in the interior. India, with its 1.2 billion people, is probably the most heterogeneous country on planet Earth. And so a thesis of mine is that, yes, while national laws and while nation states matter, where these things tend to manifest themselves is in metro areas, you know. I think we're seeing that play out in China as well, I think, very interestingly, because the dynamics of what happens in Tier 1 cities is even very different than what happens in Tier 2 cities.

That's exactly right. And I think that we're moving toward a world where there are between, let's call it 10 to 15 Tier 1 cities, Alpha cities, you know, places, you know, you can think of sort of the San Francisco Bay Area as one of these. You can think of New York City as one of these. But I think that of the 10 to 15, you know, 8. 80% of them are outside of the United States. And, you know, below those, I think, are another 30 regions, which aren't dominant in and of themselves, but which are, which can and will flourish, which will contribute to a regional economy, which will play some role in the supply chain for a global economy. But I think the organizing unit for how all this actually plays out is on a metropolitan region basis versus national. That's a very useful framework for thinking about it. Are there top-tier cities that you observed or that are sort of up-and-comers that we might not kind of recognize immediately, like New York and the Bay Area and, you know, London for that matter, or Tokyo?

Shenzhen. Yeah, Shenzhen. Well, you just, look, you just named five of them. I think that there are, I think that there are others that are in terrific positions going forward. I think Berlin is a place where its ecosystem is developing really quickly. and is going to produce some really powerful and important businesses in the future. I think that Tel Aviv and Haifa, especially if you look at what they're doing in cybersecurity, I mean, Tel Aviv and Haifa and Israel are continuing to produce spectacular technology.

But then what I see is a lot of cities competing to join that first tier. And they're doing some things right, but they haven't gotten at all right yet. And oftentimes their national governments really hold them. back. I'm thinking about Cape Town, South Africa. I'm thinking about Sao Paulo, Brazil. You know, there are Jakarta, Indonesia. There are lots of places around the globe that don't have it quite right yet, but are doing some very positive things. And it's going to be an interesting

next 10 years for them that could go in either direction. Yeah, I would add Mexico City to that list, but it's sort of hard to watch as they shoot themselves in the foot sometimes. Well, I like actually, given that, Alec and Michael, the cities you guys just named, what do you think of this theme that we've talked about before, this notion of regulatory arbitrage where cities can do certain things to loosen their policies in order to foster that innovation hub in their community, that ecosystem, while also, and doing it in a way where other people have had those restrictions much tighter so that different cities could then compete

for getting certain things first and then become a hub for something very specific like drones or personalized drugs or whatever the technology is? I think that injecting competitive dynamics into regions where they can very seriously focus on one thing and layer incentives for the private sector to invest and build jobs in one area is all for the good. And I think that there's actually some fairly substantial precedent for this in different ways that we can see from throughout history, from the beginning of industrialization. And even when done unintentionally, we can see that in places where industrialization oftentimes really quickly took root, it was where there were a series of incentives put in place, you know, basically regulatory arbitrage to help unleash it. But, you know, Alec, we've seen over and over in history that contrived efforts as well on the flip side of this for creating innovation. When government-led, you know, top-down innovation efforts alone do not work in creating these thriving ecosystems.

And so given your travels across two times around, the world and then one side trip to New Zealand. What do you think happens to make one area more potentially successful? I hate using this phrase, but the next Silicon Valley of its own, not actually like Silicon Valley versus not. Where I see it fail, where you line up all the tax incentives, where you've got the public-private partnerships, where you've got everything just right, but it doesn't end up working, tends to be a failure of human capital. You know, you don't actually have the people and the entrepreneurs who can execute against the vision. Now, that is a, that's a really tough way of putting it, but it's the God's honest truth. And Bradfeld talked about that in our

podcast about innovation ecosystems as well. He has this theme where it's human capital, but interconnecting that capital as well, like the communities that entrepreneurs form coming bottom up as well. So this is absolutely true. So let's contrast this with the industrial age. So if you think about the industrial age, you know, every medium to big city around the world had, in its big city, it had between five and ten businessmen who really mattered, you know, and they owned the big factory, and they owned the big business. And each city had, you know, it's sort of country club elite. And there were a relatively small number of them, and they were able to help lead a regional economy and lead a lot of people because they created some industrial

age product or service. That's really not how things work today. Every city doesn't necessarily have a small number of elites that has a fairly significantly sized workforce. What you see is that the network effects that are created and the benefits to human capital of concentrate of of real clustering and so you know i even think about a city like chicago chicago has so much going for it but you when you really scratch the surface a little bit um at least for internet-based businesses there isn't much there um that's that's lasting that's created significant employment or other things and it's because at the end of the day you really didn't have the horsepower from the innovation sector

that the human capital asset. The human capital that could execute against the vision. You talk about the code war. And I'm just thinking that, you know, those companies that can execute, or those companies and countries that can execute against the vision or those regions, they often become targets for those people and organizations that can't. And, you know, they want to sort of get what they can, however they can. What is this code war of which you write?

And how is that going to play out? Yeah, so the industries of the future is a fairly optimistic book. It's not a utopian book. It's not a bedwetting dystopian book. I think it's sort of a, and I'm an idealistic realist. But the darkest chapter of the book is about what I call the weaponization of code. I just, I spent too much time in the White House situation room being, you know, being close up witness to what we averted. I believe that the weaponization of code is the most significant. development in conflict since the weaponization of fissile material. The difference being that creating a nuclear weapon requires access to the scarcest of scarce scientific talent and trans-uranium elements, whereas the development of very powerful malware is much more accessible and has a much lower barrier to entry. And to your point, when I was in government, we declassified a national intelligence estimate, which we tend not to do. But we declassified a national intelligence estimate that actually put a number on the amount of intellectual property theft taking place

because of cyber attacks from China at north of $300 billion a year. So, yeah. So there is, there is grand consequence, in my opinion, to the cyber domain becoming an increasingly bellicose weaponized space. Right. It's not just an economic cost. It's a safety cost. You know, there's costs to trust and security IP regulations, everything that comes out of it, thriving businesses, a good environment for creating businesses. But what you're really describing, and because we often have a tendency to describe the impact of weapon is the precursor of weaponization of code is that code touches everything. And so the attack surface has increased considerably. But more precisely, what you're really saying is the asymmetric aspect of that

type of warfare is unprecedented in our history. There's just no other comparison of that. Well, asymmetric, but also it's kind of democratic, right? Like, I can launch an attack from anywhere, right? Right. Exactly. I agree. That's actually kind of the flip side of the coin. So here's what's interesting about this. When you shoot a bullet, you can't reshoot that same bullet. If you pull the pin out of a grenade and throw the grenade and it blows up, you can't reconstitute it and use it again. But with malware, once malware has been unleashed, it can be repurposed and redirected. And so malware, which could be developed by a very powerful nation state, I've seen evidence that the malware that the United States is alleged to have used against Iran

It looks like, if you look at the code base, it looks like much of that code was used by the Iranians against the Saudis in an attack against Saudi Aramco, which ended up destroying 30,000 computers. Oh, wow. So we're talking Stuxnet now? We're talking about, we're talking about Stuxnet. Yeah. And so the thing is that once you release this code out there, it can be repurposed by people who have. are fewer capabilities than the people who created it. There's certainly a derivative and mashup potential that's also unprecedented to your point

with something like code. I mean, I don't think it's that different analogously to what might have happened with, say, putting out blueprints for certain weapons or designs in the past and building on that intellectual property. But what you're describing is that this thing is this dynamic, lively thing that can be reshaped in real time and constantly mixed and put out. And it's easier to smuggle instead of smuggling blueprints, you know, in your, I don't know what, in the false bottom of your briefcase.

And the difference here being that you can have a blueprint for a nuclear bomb, but if you don't have nuclear material, it doesn't matter. And the difference is that with... It's dematerialized in a not good way. It's exactly. We're just talking about zeros and ones here. We're not talking about trans- uranium elements. But the positive side of it, to Michael's point, is the democratic democratization of this. And there is a positive aspect of, you know, what you're describing across the 196 country chess board where there's innovation now coming out of places where it may not have come previously. No, there's no question.

And, you know, a big portion of the industries of the future is focused on improbable innovation. So I write a lot about things that have come out of sub-Saharan Africa, which, you know, when I came out of college 20 years ago, sub-Saharan Africa was thought of as a place of conflict and development assistance. And now, you know, sub-Saharan Africa, not all of it. You know, sub-Saharan Africa is not one place. It is dozens of different countries.

But to make a sweeping statement about it, a lot of that continent has gone from being economically isolated to being an increasingly connected part of the global economy. And because its citizens have benefited from connectivity now for, more and more years, there's some really cool stuff coming out of there that I think is going to help transform that continent. Alec, our people are the people are the people who make this technology, who are writing this code, who are sort of thinking about the industries of the future and helping to create them. What do you want them to think about?

You know, let me take this back in the direction of geography for a moment. In the same way in which anybody who began really investing in China, or 15 years ago and who figured out China to the maximum extent that it can be figured out and who sort of stuck with it over the course of 10, 15 years has done very well. So too do I believe that there is going to be enough growth globally that a lot of today's frontier markets are going to be tomorrow's developing economies. And a lot of today's developing economies are going to be tomorrow's developed economies. So a lot of the advice that I give to the entrepreneurs, to the builders, to the people who are imagining the things that they're creating

being relevant around the globe, is part of what I'm saying is get outside of your geographic comfort zone and think about how you might be able to bring it to places that you would that you would not have thought of intuitively in the same way in which 10, 12, 15 years ago, China was sort of a scary place with opaque regulations and questionable growth patterns. So a lot of what I'm pushing people to do is be more expeditionary, and they're thinking about where they can build their products, where they can sell their products, where they can create you know, where they can create some geographic basis of operation. I just, I feel that good about what is happening in a lot of frontier markets right now.

I would probably add to that, Alec, that we also do that expeditionary exploration and thinking in a way that isn't just treating these places as objects and target markets, but that really goes from the bottom up to truly in-depth understanding the history, the culture, the context, everything that comes down to it, because it would be the opposite otherwise, sort of like the Dr. Livingstone, I presume, model. Yeah, when you do that, when you do what you describe Sonal, then you end up getting the best out of the market. Instead of just being sort of the Silicon Valley dude, you know,

getting on an airplane and showing up someplace to export his Silicon Valley model, when you can really, when you remember, you only have one mouth, but you have two ears. And if you're willing to go to places and learn, understand what the interests and aptitudes are there, figure out how you can really become a part of a community rather than just capturing a community, then, you know, it can be great, it can be great for your company. And it'll make you a better entrepreneur. So, Alex, if I'm a parent, what do I want my kids to, what can I do to help them in this future that you describe in your book? Well, I think that the first, the most important thing is interdisciplinary learning. You know, I think that people who think of learning as

something that should only be rooted in STEM, science, technology, engineering, and mathematics or, oh, well, my son or daughter doesn't really like that stuff. She's an artist. So they only focus on the arts. I think that the people who are going to be best equipped to compete and succeed in the industries of the future are those who most effectively blend that which is technical and scientific with the humanities. And, you know, I even see it now. So let's look at Facebook, for example. Everybody thinks of Mark Zuckerberg, and justifiably so, as having been a great computer science student at Harvard. But what people fail to recognize a lot of the time, I think, is that Facebook has been as successful as it is, as much because Mark and the people who he brought

into Facebook understood behavioral psychology as much as they did computer science. Similarly with Google, you know, part of why I think Eric Schmidt was as effective a CEO of Google for as long as he was, is yes, he had a technical background. He had a PhD in computer science. But then in the second half of his professional life, he immersed himself. He got the equivalent of a PhD in international relations. And so part of why Google was as effective as it was for as long as it was, was because he, even though he had a technical background, really brought a keen understanding of international relations to it. And so, look, I'm using Mark and Eric as sort of sweeping generalization. But in general, I think that the people who are able to combine

a strength in the humanities with a strength that's either scientific or technological is going to be especially well prepared for tomorrow. Alec, thank you so much.