Valley Politics: The Democratic Party’s Love Story With Entrepreneurs
TheFamily Papers #005
By Nicolas Colin (Co-Founder & Partner) & Laetitia Vitaud (guest writer) | TheFamily
The 2012 presidential election sealed a long-term alliance between Silicon Valley and the Democrats. That year, for the first time, Democratic fundraising from Silicon Valley digital companies exceeded that from Wall Street or Hollywood. Digital companies — CEOs as well as employees — have become the party’s strongest and most decisive supporters. And it’s having a transformative effect on the Democratic Party.
Since it became a political powerhouse, Silicon Valley has been a must-visit place for any politician with nationwide ambitions. Hillary Clinton goes to Silicon Valley fundraising events every two months. Jeb Bush praises freelance work and self-sufficiency. Kentucky Senator Rand Paul aggressively cultivates the most libertarian entrepreneurs and VCs. Meanwhile the President himself regularly goes to the Valley to visit his friends and backers.
The 2008 Campaign
The 2008 presidential election was technologically disruptive. The campaigning process itself became fully digital and startup-like. As early as 2007, Matt Bai chronicled “the first real political movement of the Internet age” — the one that made former Vermont governor Howard Dean the first political Internet star in 2004 — in his book The Argument, which described the first progressive bloggers and billionaires that would shape the future of the Democratic Party.
Using digital tools at an unprecedented scale, Barack Obama emerged from the position of challenger to that of frontrunner. And the deployment of digital applications enabled him to bypass the traditional donor circuits that were then still dominated by Hillary Clinton, instead reaching out to the general public. The dynamics he initiated were a powerful argument in convincing enough big donors to finally bet on the new horse. Above all, it sent a signal to Silicon Valley, inspired an interest in the Obama campaign and paved the way for a political alliance that has since radically changed the distribution of political power in the United States.
Unions Replaced by Wall Street
For a long time, the Democrats’ political support mostly came from the unions that were once a political powerhouse in US politics.
American unions used to provide Democratic candidates with many valuable resources: money, muscle on the ground, and a framework of values that resonated with working families. By stressing those values and shaking hands with union bosses, even patrician leaders such as Franklin D. Roosevelt or John F. Kennedy could show that they cared for the common man. Interactions between union leaders and Democratic politicians were frequent and widely publicized. The fact that the AFL-CIO national headquarters are located only a few yards from the White House testifies to the power and influence that unions used to exert in the political system. Then unions became weaker (read this article by Kevin Drum in Mother Jones). Their demise was initiated in the 1970s and accelerated during the Reagan administration, which famously fired striking air traffic controllers in 1981.
As they desperately needed support and resources, Democratic candidates turned to Wall Street to find new backers and donors—either ambitious financiers from a modest background who made a fortune at a very young age, or heirs to rich and powerful families with a taste for philanthropic activities. Wall Street even gave the Democratic party some of its prominent leaders: Robert Rubin, a former Goldman Sachs co-CEO, became Secretary of the Treasury under Bill Clinton; Jon Corzine, another Goldman Sachs co-CEO, spent a big chunk of his personal fortune to become a senator and then governor of New Jersey. As the Democratic party drifted to the center under the influence of the Democratic Leadership Council, Wall Street brought two categories of resources: vast amounts of money, but also the influence of business leaders that was necessary to make the Democrats look more legitimate on economic issues.
Enter The Movie Stars
During the same period, the movie industry played a decisive backup role for the Democrats. It brought less money than Wall Street but the support of movie stars — actors, directors and producers alike — was critical in influencing mainstream voters.
The ideological symbiosis between Hollywood and the Democratic party has deep roots. Jack Valenti, a close aide to President Lyndon B. Johnson, was the chairperson of the Motion Picture Association of America (MPAA) — Hollywood’s lobbying arm — for nearly 40 years. His successor, Chris Dodd, is a former Democratic US Senator and was a candidate in the Democratic presidential primary in 2008. With a few noteworthy exceptions like Bruce Willis, Arnold Schwarzenegger and the late Charlton Heston, most movie personalities are vocal supporters of the Democratic party.
The 2008 Crisis
Increasing economic trouble forced massive restructuring in the manufacturing sector and caused another setback for the unions. More and more manufacturing businesses are now located in so-called ‘right-to-work’ states, where the law makes it difficult for unions to impose collective bargaining. When the government chose to bailout the major car manufacturers in 2009, the only role the unions played was to convince their members to give up their high wages and benefits to save their jobs. After 2008, unions became a mere shadow of their former selves.
Even public sector unions — most notably teachers’ unions — have been considerably weakened, following a large number of Republicans winning gubernatorial elections in 2010. In 2011, Wisconsin governor Scott Walker introduced a budget plan that limited the collective bargaining of most public employees. Walker not only survived the violent political opposition from unions and public sector employees, he was soon imitated by other governors across the country. Unions have not yet found a way to reinvent themselves to attract and protect new categories of workers.
The financial crisis also created a rift between Democrats and Wall Street. The financial sector was discredited by its excesses, the fall of big investment banks (Bear Sterns and Lehman Brothers) and the widely unpopular buyout of the banking sector in 2008. As a result of the crisis, the Obama administration toughened banking regulation with the Dodd-Frank Act and thus upset its supporters in Wall Street. Vexed by their new image of infamy and angry at new regulations that they say make their business more difficult to operate, Wall Street power brokers have abandoned the Democrats and thrown their weight behind their Republican opponents, which was all the more natural with a candidate such as Mitt Romney, who was one of them (sort of).
Turning to Silicon Valley
California has been a Democratic stronghold for more than twenty years (even though it gave the US several Republican presidents: Herbert Hoover, a Stanford alumnus, Richard Nixon, and Ronald Reagan). Several Democratic members of Congress are accomplished Entrepreneurs, like Maria Cantwell, a US Senator from the state of Washington, Jared Polis, a Congressman from Colorado, and Mark Warner, a US Senator from Virginia. Silicon Valley broke into politics the disruptive way. Not only did it not try to work with the Democrats’ other traditional support bases but it even curbed their influence further. The strategy was to seek the direct support of its millions of users instead.
Beating Hollywood
Silicon Valley now holds sway over Hollywood and imposed its own view of copyright in the age of zero-marginal-cost reproduction of cultural works. Two bills, the infamous Stop Online Piracy Act (SOPA) and PROTECT IP Act (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act, or PIPA), would have forced giant digital companies to turn into law enforcers through the mass surveillance of their users’ activity.
But on January 18, 2012, an online demonstration took the form of major websites such as Wikipedia and Facebook shutting down for 24 hours. Mobilized users started arguing that the bills would cause great harm to online freedom of speech and Internet communities. Protesters also insisted there were no safeguards to protect all of the sites based upon user-generated content. On January 18 more than 8 million people looked up their representative on Wikipedia, 3 million people emailed Congress to express opposition to the bills, Twitter recorded at least 2.4 million SOPA-related tweets, and lawmakers collected more than 14 million names — more than 10 million of them voters — who contacted them to protest the bills. Two days later, much to the chagrin of the MPAA, the political position had shifted significantly and the bills were withdrawn.
Marginalizing Wall Street
Power is also shifting from Wall Street to Silicon Valley. As Harvard Business School professor Clayton Christensen explains in ‘The Capitalist’s Dilemma’, the demise of Wall Street is inevitable. The financial sector’s obsession with short-term efficiency stands in sharp contrast with Silicon Valley’s obsession with long-term market-creating disruptions. Traditional financial institutions can’t and won’t go for long-term riskier options.
As capital is now both cheap and abundant, Silicon Valley is completely reinventing the financial landscape, free of the constraints that curb East Coast financiers. It has never trusted Wall Street and its short-term values and has therefore always been very cautious to not cede any control over its startups. Control stays with the founders, whose shares often have 10 times the voting rights of the Wall Street shares. So the amazing value created in the Valley stays in the Valley. The fact that no public digital companies pays dividends, even though these companies are hugely profitable (with a few exceptions, such as Amazon or Twitter), is a break from the past and flies directly in the face of financial markets.
Silicon Valley is now powerful enough to poach many of Wall Street’s talents. Thus Google hired Morgan Stanley’s finance chief Ruth Porat as its chief financial officer — for a pay package of 70 million dollars. And last year Twitter hired Goldman Sach’s Anthony Noto for the same role. In the war to recruit the best and brightest from US universities, Silicon Valley is also winning, as the number of Harvard and Stanford business and law school graduates going to Silicon Valley now equals the number of those going to the financial sector. If the current trend continues, it will soon be higher.
Lobbying Wars
As related by Ken Auletta in Googled: The End of the World as We Know It, Google waited to be in trouble with rights holders before realizing that it wasn’t enough to have the best engineers in the world: they also needed to set foot in Washington, DC and learn how to get closer to Congress. This training period is now over: in the last few years, numerous lobbying wars have been won by Silicon Valley.
Silicon Valley is at the forefront of environmental fights and lobbying, best exemplified by what happened to Proposition 23, a 2010 California ballot proposition that would have questioned the Global Warming Solutions Act of 2006 and endangered the many startups that had seized the opportunity to enter the energy industry. It was defeated by California voters with the help of Silicon Valley, which dubbed the proposition “the Dirty Energy Prop”. Republican Governor Schwarzenegger, as well as Democratic gubernatorial candidate Jerry Brown — who is indeed now California’s governor — both stated they would vote “no” on Prop 23. On all subjects related to the protection of the environment, Silicon Valley leads the way and has considerable political influence.
Silicon Valley has raised massive awareness on net neutrality, thanks in part to John Oliver’s hilarious video, which has racked up more than 10 million views. Net neutrality is the principle that Internet service providers and governments should treat all data on the Internet the same way and not discriminate by charging different amounts based upon user, platform, or content. There has been an extensive debate about net neutrality and many lobbying efforts to question it. On February 26, 2015, the US Federal Communications Commission (FCC) ruled in favor of net neutrality by reclassifying broadband access as a telecommunications service and thus applying Title II (common carrier) of the Communications Act of 1934 to Internet service providers. On April 13, 2015, the FCC published the final rule on its new regulations.
Uber has not yet fully won the fight against all regulatory attempts to curb its expansion in many US cities, but its lobbying power is already gigantic. “Uber’s political influence efforts across the country, be it in Washington D.C. or in all 50 state houses, has been incredibly aggressive especially given how young a company it is,” says Dave Levinthal, who tracks money in federal politics for the Center for Public Integrity. “Any place where they’ve got a political fight on their hands, they’re coming with not just a soldier, but a whole battalion.” Indeed, Uber has won spectacular battles against local governments by relying on its own users: it notably happened in New York City and in Portland, Oregon (read the whole article here).
Uber politics is best illustrated by Uber’s strategic choice to hire David Plouffe, an American political strategist —best known as the campaign manager for Barack Obama’s 2008 presidential campaign—who became Uber’s key strategic adviser. Uber also hired New York’s deputy taxi commissioner and former Governor Cuomo’s press secretary and recruited a political operative in Florida who worked with former Governor Charlie Crist. The list of Uber’s powerful friends is impressive considering the company was founded just five years ago. Often it takes a digital company more years to build up its lobbying power. Uber is one of the first to factor in political influence from the start.
More recently, Silicon Valley defeated the anti-Airbnb Proposition F, the San Francisco ballot measure that would have severely restricted Airbnb-style short-term rentals. The ‘Airbnb initiative’ became the symbol of the tensions in a city where the real-estate market is particularly tense because of the tech boom. On one side, some San Franciscans argued that Airbnb chases out long-term renters and restricts housing supply by making rents ever more expensive. On the other side, some residents maintain that collaborative platforms like Airbnb help them make ends meet and adds necessary revenue. Airbnb is said to have spent $8 million to defeat the measure while Prop F supporters only had $1 million to spend.
Finally, the Affordable Care Act, a.k.a. Obamacare, is the result of a 75-year political battle to implement universal health insurance in the USA. As of 2014, nearly all Americans must have health insurance. Obamacare can be expected to be President Obama’s most transformative and enduring legacy. It was supported by Silicon Valley and best fits an economy of entrepreneurship because it enables entrepreneurs and an increasing number of freelance workers to be covered. More Entrepreneurs and freelancers can now find affordable coverage thanks to Obamacare health insurance exchanges. Obamacare also gave rise to a lot of healthcare startups that wouldn’t have existed without it.
Evgeny Morozov relentlessly accuses Silicon Valley of killing politics. He believes that the Valley’s “solutionist” approach to all problems — the idea that the right algorithms can solve all our problems — is a threat to elected governments and democracy. But Silicon Valley’s approach to solving problems is more political and much more diverse than Morozov says. It has invested in the Democratic Party in the long run to weigh in on the way problems will be solved politically, not just algorithmically. Obama’s healthcare reform is a case in point: it was strongly supported by Californians and Clinton can now capitalize on it for 2016. Obamacare is also in tune with the entrepreneurial age as it makes easier for people to take risks. The Democrats are taking good care of Silicon Valley and vice versa.
More generally policy issues are now taken very seriously by Silicon Valley. Venture capitalists understand they need to lobby against obsolete regulations if they want to promote change. Nick Grossman, of Union Square Ventures, pioneered work on reflecting on the future of regulation and believes that “the future of regulation is to grant companies the freedoms they grant their users, but also bring the same data-driven accountability” to government. Andreessen Horowitz, a $4 billion venture capital firm founded in 2009, now employs a full-time partner, Ted Ullyott, to take care of policy issues. There have been failures, like on the issue of immigration, but spectacular progress has already been made when it comes to defending Silicon Valley’s interests in Washington or in state capitals.
Many Resources
As Washington is now more influenced by the Republican party (and Marco Rubio could be the next President of the United States), support from Silicon Valley to the Democratic Party takes many forms:
- tens of millions of dollars of campaign funds: presidential candidates will depend more than ever on Silicon Valley’s money, as shown by the candidates relentless efforts to woo the world of tech;
- the skills to win tough political battles: a few months ago Obama named former Twitter executive Jason Goldman as the White House’s first Chief Digital Officer. Goldman’s nomination is the latest in a long list of Silicon Valley talent hired to help the Democrats. Obama’s two presidential campaigns were well-oiled startup operations that harnessed Silicon Valley skills (unlike the Romney campaign, which failed spectacularly on that front in 2012 — see also this article). As pointed out by Nate Silver, hackers tend to be Democrats, and hackers’ skills are now critical to win elections—which will ultimately be a big problem for Republicans;
- a trusted relationship with idealist Entrepreneurs who can offer a “vision” many politicians lack today;
- a privileged relationship with millions of voters who use digital applications on a day-to-day basis;
- many media: The New Republic, The Washington Post, and a host of new players now depend entirely on Silicon Valley billionaires. Silicon Valley politics has also become a special subject for technology journalists such as Greg Ferenstein;
- initiatives and resources to make a better government: the “open data” movement promoted by the tech world has already transformed government.
What About Hillary Clinton?
Hillary Clinton is viewed more as respected establishment than exciting startup. In 2008 she was deemed an insufficiently “transformational” candidate for Silicon Valley, which then put all its weight behind Barack Obama. Many of the current president’s Valley supporters are still lukewarm in their support for Clinton. Some started a “Tech for Warren” group earlier this year and tried to convince Senator Elizabeth Warren to run for president. Senator Warren’s “disruptive” way of challenging the status quo appeals to Silicon Valley activists. She took on Wall Street executives aggressively and raised awareness about the country’s level of income inequality like few other politicians.
Clinton knows how critical it is to cultivate Silicon Valley but she is often not seen as a good fit for its culture and has not been as successful in doing it as she should have. A week ago her campaign team received a blow with the resignation of her key fundraising liaison with the tech sector, Emanuel Yekutiel (previous chief of staff for Zuckerberg’s political advocacy group). Clinton openly confessed she found penetrating the tech community “really hard”, even though Eric Schmidt appears to work hard on her behalf.
More Silicon Valley Funds Than Ever Before
Elizabeth Warren has formally and repeatedly announced she would not run for president and as the time for the arrival of new primary candidates is coming to an end, Hillary Clinton will slowly impose herself as the “inevitable” candidate that Silicon Valley has to back. Even though she doesn’t stir as much enthusiasm as her predecessor, there is more money in the Valley than four years ago, as continuous growth in the digital economy has expanded the available funds at the pace of Moore’s law. Raising as much as Obama will not be impossible, even with a less efficient fundraising operation.
Valley donors will closely watch how she decides to address the issue of national security surveillance practices. And each of the Valley’s lobbying issues will play a big part in the campaign. Hillary Clinton will heed the advice of her advisers on how best to woo Silicon Valley key influencers. She may not be as popular with twenty- and thirty-year-old male entrepreneurs but she’s efficiently rallying female networks. She repeatedly raised the issue of gender parity in tech and can count on Sheryl Sandberg as a reliable supporter.
Key Takeaways For Europe
What about politics in European countries? Political systems and digital companies are so different here that it would be preposterous to derive conclusions from the Democratic Party’s love story with Silicon Valley. A few things have to be kept in mind:
1/ It is not yet clear whether the European digital economy will turn liberal or conservative. Left-wing politicians are more prone than their US counterparts to raise taxes on businesses and to impose backward-looking regulations. For instance, the ‘Pigeons’ movement of September 2012, a rebellion of French Entrepreneurs (and VCs) against higher taxes on capital gains, proved that the local digital industry could still join either side of the political spectrum: the center-right opposition came close to capturing the whole constituency and it took Fleur Pellerin’s talent to retain their support for the center-left government. As for the most tech-friendly political leader in Europe, it is not a center-left politician but Britain’s Prime Minister David Cameron, who built his Big Society vision on several pillars, key among which was digital innovation in both business and government.
2/ It is much harder for Entrepreneurs to grab the government’s attention in countries where financing political campaigns is illegal. The graph here shows the positioning of various business players along two axes: the magnitude of their innovation efforts, and their influence on government. The rule of thumb is as follows: the more innovative you are, the less influence you have on government. This is why rent-seeking industries traditionally tend to be the kings in town (think oil, telcos, banking, energy). But there is an exception: in the US, giant digital companies remain innovative even though they’ve reached a very high level of influence on federal and local governments. This is for one reason only: those companies have money; and they spend it to advocate for a more innovation-friendly government by sealing an alliance with the Democratic Party. Without that money, US politicians would never play golf with Entrepreneurs.
In France, President Hollande has no reason to ever meet innovative Entrepreneurs: they don’t belong to the high circles; they don’t have time to lobby him; their business supposedly destroys jobs and hurts powerful corporatist interests such as taxi companies; and they’re not allowed to donate him money for his campaigns. Why bother looking for those guys, inviting them over at the Elysée palace, and listening to their problems? So wherever financing political campaigns is illegal, other ways must be invented to lobby in favor of innovation. Considering the many problems Entrepreneurs still have with European governments, nobody has found the solution yet.
3/ As voters get more worried about their jobs and welfare, it will be easier for politicians to get involved in the digital world. We’ve actually had this experience at TheFamily. If you try to talk to politicians and senior civil servants in terms of “innovation / startups / venture capital / valuation / open source”, they get bored. But if you talk about “jobs / welfare / youth / revenue / building competitors to giant US companies”, they’ll listen. A whole new language has to be crafted in order to share views and ideas about the digital economy with uninterested politicians. We’ve been working on it since Day 1 at TheFamily. It is both a matter of competitiveness for European startups and a way for American digital companies to find more supportive governments whenever they expand their operations in Europe. There is still no love story here between any political party and the digital economy. It doesn’t mean that a love potion can’t be prepared to facilitate the match. If you’d like to work with us pursuing that goal, please come and visit us at TheFamily.
(This is an issue of TheFamily Papers series, which is published in English on a regular basis. It covers various areas such as entrepreneurship, strategy, finance, and policy, and is authored by TheFamily’s partners as well as occasional guest writers. Thanks to Kyle Hall for reading drafts and contributing suggestions, and to Oussama Ammar, Maxime Marzin, and Henri Verdier for the many conversations that led to the first writings on that topic in 2012 [in French].)
