China’s evolving global tech expansion – a lens from the Middle East

As a global venture investor – focused mostly on early-stage tech startups - the worlds I’m in are very different, but not utterly distant, from traditional conversations in Washington, DC on China, and the world.

Here, in my nation’s capital, the discussions are appropriately very top down. The machinations of big government, financial institutions, NGOS and corporations are assuredly key drivers of the world as it is.

In the world of tech startups and innovation, conversations are invariably bottom up. New generations and their enterprises are setting the agenda for the world that is coming.

This blog, in many respects, has long been dedicated to the idea that among the greatest tech trends of our times (putting aside AI now, which I’ll come back to) is not the tech itself but the near universal access to it. Billions in regions that still rarely make it to the top of the agenda in our top-down institutions have super computers in their pockets, and now have been using generative AI since its release and are reshaping the very face of business and innovation globally.

In this rise, it has not surprised me that both so much is shared among innovators in rising markets and that China would become a model for them as a former emerging market themselves. For all the obvious cultural and geographic differences, they all have navigated challenges not contemplated in the West - navigating particularly hard last mile logistics, dealing with rapidly changing regulatory regimes, educating millions of consumers to use fintech who never had a bank account among others. It should come as no surprise that massively successful companies in China are often models for how it is done to the rest of the world as much as Silicon Valley.

Part and parcel of these changes, and if you had asked me for a prediction pre-covid, I would have told you that it was inevitable that China would be entering these global markets aggressively in technology - through investment, acquisition and market expansion. Alibaba, in fact, acquired top players in eCommerce in Southeast Asia, Turkey and Pakistan, and Didi ride sharing in Latin America.

But, in fact, these, and of course TikTok, have been exceptions that have to date proven me wrong. Very little Chinese venture capital has invested in tech startups abroad, little money invested in regional funds. Much operating expansion has been about, say in the case of WeChat in Latin America, expanding first and foremost to be usable by millions of Chinese abroad.

I recently unpacked why this is with some smart Chinese and global investors who have been exploring the Middle East as a case study. As one said to me, “Chinese tech and venture capital are there and not there” and the best way to unpack is in five categories:

The first are the large, tech driven traditional businesses, comfortable for centuries in buying and selling commodities, manufactured goods and financial services. The rules of the road are tried and true, and they have been beating a path to MENA and especially the Gulf for years.

The second are the tech and algorithm first enterprises like TikTok, who are now everywhere. The essence of their service requires not more than a dozen or two dozen employees on the ground to localize their services and they have been off the races in MENA as they are around the world.

The third are Chinese tech startups who have come to the region first and foremost with hopes to get funding from sovereign wealth funds and perhaps some market expansion, but success stories here are very few to date.

The fourth are Chinese tech venture capital firms who have been testing the waters for some years, MSA Capital for example has made some investments in Egypt and Saudi Arabia — but there is no sizable footprint.

And finally, there are the great tech infrastructure enterprises like Huawei and Alibaba Cloud, who are clearly looking for investment and market access in MENA as they are everywhere else.

What is going on? For what I am hearing there are a few elements:

The near global access to tech I’ve described is exciting but also a two-edged sword. At one side it is an opportunity to reach new customers more easily and affordably than at any time in history, but with this opportunity comes choice.

So, for example, serious Chinese venture capitalists are looking for outsized, multi-billion dollar returns, and these are not easy to find in most rising markets. Why invest in Riyadh or Jakarta startups when third and fourth tier cities in China are larger, more understandable and offer less risk?? Opportunity cost loom very large here.

Smaller venture capital firms, at the same time, have difficulty sourcing great early deals. With the rise of great regional entrepreneurs has come the rise of great and sophisticated local investors - who invariably get in on the best deals even more so than Silicon Valley.

The big infrastructure players, on the other hand, have proven remarkably good at playing a remarkably long game to get customers. As one investor told me, “Huawei spent 10 years to crack Yemen. They will do what it takes anywhere.”

Having said all this, I sense the past is not prologue and things are changing rapidly.

Saudi Arabia and the UAE have made it clear - in word, capital, and regulation, that they are open for tech innovation wherever it may come from. They are subsiding salaries for innovative talent, making access to visas, office space and capital easier than ever. Their efforts are about local and regional opportunities and being a magnet for the best tech, scientists, and academics to build in the Gulf. There was, I am told, a major gathering a few weeks ago for Saudi and Chinese tech enterprises and over $10 billion in deals were signed.

And I believe AI will put this interconnectivity on steroids.

Within a month of GPT 3 released a year ago, every startup in my portfolio or that pitched me from every corner of the globe was using generative AI across their businesses - from email efficiency, to marketing campaigns, to sales scripts, to programming migration. Every regional venture capital group had had their off sites to rethink their theses. As I wrote here , despite the great tech fire wall, young innovators regularly in China use all the AI tools from both their country and the US.

The cost and ease of being global day one has never been cheaper and better.

Whether and which national top-down institutions wants this to happen in our new world of turning inward is yet to be seen.

For me the takeaway in MENA and everywhere is that global expansion will be driven by opportunity costs compared to other markets and at home, and ease of market access and ability to localize to any given market. With China and the US at increasing tech loggerheads, more expansion will be sought elsewhere. Any region that is viewed as easy to enter will see not only more China and US attention, but from any builder anywhere seeking to rapidly grow her business. Favoritism for local and regional players, however, will never be higher especially in crucial sectors like fintech and security, especially as such local competition now is progressively of global quality.

Whether and which national top-down institutions wants this to happen in our new world of turning inward is yet to be seen.