China’s budding enthusiasm for Israel startup

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2013 marked the beginning of China’s new-found interests in the potentials of Israel startups. Within the past 3 years, the ardor seemed to intensify. According to some sources, 20% of the funding for Israel startup now comes from China. The number of Chinese nationals visiting Israel increased by 91% year-on-year, and 40% of the visitors went for business purposes. The rosy prospect has attracted the strategic investments, albeit in the spirit of exploration, from China internet giants as well. For instance, in 2015, Alibaba poured USD5 million in Israeli cyber security startup ThetaRay; In 2014, Pixellot, a video capture firm, locked in USD3 million from Baidu. Chinese conglomerates are thinking big in building R&D centres or incubators in Israel. The Kuang-Chi GCI Fund & Incubator was launched in May 2016 in Tel Aviv. It is said to be the first Israel-based fund and incubator set up by a Chinese technology company. The trend also has spawned a bunch of consulting firms or advisory platforms claiming to bridge the two sides and facilitate the cross-border investments.

Israel startup is appealing in the eyes of Chinese investors in many aspects. It requires no prescient talent to endorse the Israeli expertise in technology innovation. According to Zirra, Israel garnered total sum of USD3.58 billion for startup investment in 2015. Though the figure was small in absolute value compared with USD60 billion in the US, USD12 billion in Europe or USD 20 billion in China, Israel actually stands the highest in terms of investment dollars per capita, that is 423 versus US 186, Europe 16, and China 14. Israel startups have gained solid eminence in the frontiers of life science, cleantech, IT&enterprise software, semiconductor etc. Though China has been grown to be a global leader in the customer focused and efficiency driven innovation in the past decade, it still fails to be the top competitor in the hard-core science or engineer based technology. China is in high demand of these technologies and has a gigantic market to gulp them down.

On the other hand, Israel is often too constrained, by market resources and size, to nurture its local startup into a global level mammoth. Israeli startups look for overseas money injection; in 2015, it is estimated that more than 70% of investment funding were outside Israel, mainly from the US. On top of that, the valuations of many Israeli startups are much lower than those in the US, or China, so Chinese investors perceive Israel is a good market to source bargain deals.

In addition, based on Sanpeiventures current experience in Israel, we believe Israeli entrepreneur mentality is quite distinct from the other part of the world, especially China. Israeli entrepreneurs cling to the principle of “black or white” and conduct very straightforward business communication, that is a “yes” is “yes”, a “no” is “no (In contrast Chinese might say “maybe” for the sake of politeness upon dealing with a business inquiry, even though beneath the surface a definite “No” answer has already  been formed).  They also do not hold a strong belief in the dogma of hierarchical corporate culture. Underlings beam with confidence and pride that they are empowered to challenge the opinions of the upper echelon whereas in China corporate culture tends to wield a top-down control and the bottom of the corporate ladder is trained to perform the act of deference or even subservience. Israeli ethos might be very salubrious for the early or growth stage of the startup, but once company expands into a much massive scale, silos are unavoidable, flat organization structure would not necessarily work in the best interests of the company and impose mounting pressures on the shoulders of the entrepreneurs. These elements partially explain why many Israeli startups often seek expedient M&A exit, rather than the final home run IPO, though above reasonings might engender heated debate.

Currently, more than 70% startup exits in Israel are via M&A, and among them about 50% are acquired by North American companies. In this regard, Israeli startups are very open to fast exit option, which coincidentally echoes with Chinese investors preference in seeking startups which generate a quicker return in the shorter period of time.

Having said these, many Chinese enterprises are still in a wait-and-see phase toward Israeli technologies. They want to select startups having the mature product already acquiring large client base and are unwilling to take on the ones just showcasing prototyping or pilot project as fearful of additional costs and risks. Yet most Israeli startups probably are not positioned to cater to such Chinese style of taste and criteria. Chinese investors, blinkered from their extreme monetary pragmatism, are prone to underestimate Israeli entrepreneur’s dreams, visions, and strengths. Some Chinese background VC firms even negatively conclude Israel is not their cup of tea, but more ideal for multi-national corporations to implement a cross-border investment strategy. China Internet giants usually choose a conservative approach, becoming LP for a local or western investment fund, scarcely leading any round of fundraising for the Israeli startup. Examples include Alibaba’s partnerships with JVP, Lenovo’s investment in VC Vertex, Baidu and Qihoo360 investment in Carmel Ventures.

Though the commercial chemistry between China and Israel is fervent, the mutual flirtation has been constant lately, to strike a true business marriage is still in need of a time-consuming process of understanding between the two sides. A new silk road of technology between China and Israel has to be further widened.

Cecilia Wu

A witty, nutty and frosty writer who hopes to jot down moments of inspiration from her daily life

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