Judah Taub is Managing Partner at Hetz Ventures, a top seed stage VC based in Tel Aviv. He lectures on time-management & creative thinking.
In 1992, political scientist Francis Fukayama published The End of History, painting a rosy future where globalization and cross-border business thrive. This movement towards an international outlook has permeated practically every industry in the years since Fukayama’s pronouncement, including the worlds of venture capital and startups.
Recent events, however, have shown that this vision may not have as much staying power as originally believed. U.S. and China tensions and the Russian invasion of Ukraine are examples of geopolitical events that have reversed some of the trends in global interconnectedness.
Accordingly, founders and investors ought to understand two key related reverse trends that I believe will shape our increasingly deglobalized world.
1. Multiple Winners, Multiple Regions
Consumers have adapted to the landscape provided by Big Tech—the behemoths that dominate the global tech economy that include Microsoft, Alphabet, Meta and Apple. Startup founders, too, have bought into this idea, aspiring that their startups will be the next multinational phenomenon. But I am certain that this will change. In the future, each tech space may have multiple winners, their main point of differentiation being the location and geographical region from which they operate.
The recent case of Nvidia illustrates this point. In October 2022, the Biden administration introduced a series of export restrictions that prohibited Chinese companies from purchasing advanced chips and chip-making equipment unless they obtained a license.
To further strengthen these controls, the U.S. worked toward persuading the Netherlands and Japan in January to restrict the export of technology utilized in chip production; these are countries that possess some of the most advanced chip manufacturing technologies worldwide.
The result: Chip manufacturers like Nvidia are pressured to choose between marketing their chips to the U.S. and its allies or the Chinese market. Chinese chip imports in early 2023 were down 30% compared to the same period last year, and Nvidia’s total revenues fell by 6% in the quarter after they began complying with the new U.S. regulations. The chip maker’s commitment to the U.S. market looks to cost it dearly since it will no longer be able to sell its most cutting-edge products in China. Of course, some other firm will eventually fill that void.
I believe startups will need to put evermore thought into where they choose to sell their products or expand overseas. Founders will have to include careful considerations of geographical and political factors as an important part of any high-tech business plan.
But geopolitical disruption opens the door to new opportunities; distinct and partitioned regional markets mean there can be more players—and more winners—in any given tech vertical. This partitioning will likely be bipolar, with at least one big winner in both the U.S. and Chinese markets.
One can already see this trend in industries ranging from automobiles (BYD versus Tesla) to social media (Baidu versus Alphabet). It follows that this bifurcation will increasingly affect startups as well. A movement toward deglobalization could also buck the trend of consolidation in the VC industry, providing a unique chance for smaller players.
2. Where Capital Comes From Matters
I predict that choosing where to accrue your capital will become increasingly important for both founders and VCs. The days where VCs can raise capital from around the world seem to be waning as geopolitical tensions lead to more reliance on “local” limited partnerships in the fund’s region or “friendly” regions.
This reverse trend will likely be driven by an awareness of both compliance and risk from investors and startups. Compliance and regulatory restrictions are illustrated by the example of U.S. legislation that passed in 2018, “allowing government agencies to review investments by Chinese VC funds and requiring those funds to disclose their funding sources.” As a result, Harvard Business Review reports that Chinese VC investments in the United States nearly halved.
Even outside the bounds of current regulation, founders and VCs may increasingly seek to de-risk capital by avoiding foreign investors as a means to hedge against future legislation or political developments. Funds think long-term; even if much isn’t happening now, political risk ten years from now should still be a key consideration.
This orientation towards the future heightens the impact of geopolitics on VC when compared to other industries. Sequoia Capital’s recent decision to split into three firms—with two separate firms covering China and India—seems to be an acknowledgment of the growing difficulty and complexity of raising and deploying capital in both the U.S. and China.
It is an age-old maxim that we are “prisoners of geography.” So it is in the world of VCs and startups. I think the aforementioned reverse trends are cause for funds and companies to head for new and different money. Places like the Emirates—flush with cash, ready to spend it and relatively unattached to U.S.-China dynamic— look attractive. Earlier this year, prominent American VCs like Andreessen Horowitz, Tiger Global and IVP sent teams to the Gulf (paywall). Conversely, Chinese VCs are now expected to raise 20% of all their U.S. dollar funding in the Middle East.
As geopolitical trends play out, the ever-important question of “where?” looks to become all the more critical. I believe that founders and investors should take heed.
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