Israeli Startups Must Lose Their ‘Guerilla Mentality’ to Succeed in China

The guerilla mentality that drives product development and early stage growth in Israeli startups can be their downfall when scaling in China, according to one VC.

“They treat the business as a command or combat unit,” explains Amos Avner, a founding partner of Startup East, a Pan-Asian startup accelerator and microfund based in Israel. “It’s less about building a big company, a big structure. It’s very results driven.”

“It’s very, very good when you start a company, to work this way,” he says. “The disadvantage is [Israeli startups] don’t have enough patience. It can create frustration, it can lead to a pivot. In the worst case, it can close the company.”

The relationship between Israeli and Chinese startup communities has grown rapidly over the past two years. In 2011, two Israeli companies, PTL Group and Elan Industries, launched the China Industrial Incubator Initiative in Changzhou to help overseas SMEs establish and develop manufacturing capabilities in China.

Companies like Startup East and Upround Ventures, founded in 2013 and 2014 respectively, have risen to meet the needs of Israeli startups who are seeking  to connect with investors in Asia. Ping An Ventures, Alibaba, Baidu, and other Chinese investors have invested millions of dollars into Israeli startups, including Waze, which was acquired by Google for $1.15 billion in 2013.

“A lot of Israeli companies will think that if they build a good enough product, people will want it,”  says Benjamin Peng, the business director at Yafo Capital, a Shanghai-based investment firm and financial services company that focuses exclusively on American and Israeli technology and overseas M&A projects. He believes this is inhibiting their expansion in China.

During an event jointly organized by Startup East and Yafo Capital in Shanghai last Monday, seven startups from Israel presented their startups. Each company, from Internet-of-Things hardware startup Gemsense to medical imaging diagnostic startup Collage, had a clear pitch about the quality and technical innovation behind their product. After almost every presentation, a Chinese investor from the audience would ask, “What’s your business model?.”

“Some Israeli startups don’t even think about their business model,” says Mr. Peng.

He cites the example of Valtech Cardio, an Israeli startup that specializes in mitral and tricuspid valve repair and replacement. According to Mr. Peng, Valtech Cardio focused almost solely on product development for seven to eight years in Incentive, an Israeli technology incubator owned by Peregrine Ventures.

“Their team was almost all technical people,” he says. “There were hardly any employees dedicated to business development.”

In September, Valtech Cardio was bought by HeartWare International for almost a billion dollars. However, the success of Valtech Cardio’s acquisition might have more to do with HeartWare International’s existing base of consumers and familiarity with the industry, not Valtech Cardio’s business development, says Mr. Peng. In fact, before Valtech Cardio was bought by HeartWare International, their product, Valtech Cardioband, did not have CE marking approval, which is required for placing medical devices on the European Union market.

Most Chinese investors want to know about the startup’s business model, says Mr. Peng. Marketing and sales – both very local operations – are a key component of succeeding in China’s market.

In addition, Israeli startups who are not savvy about the cultural differences between Israel and China may find it difficult to form partnerships with Chinese investors.

“Israeli startups are more direct, more aggressive. The Chinese are more reserved,” says Mr. Peng. “Sometimes [a Chinese investor] will say something positive to give the other party face,” he says. “For example, they might say, ‘We look forward to working with you in the future.’ This can lead to feelings of disappointment on the other side.”

More Israeli startups are educating themselves about Chinese culture and the dynamics of the Chinese market. Researching the Chinese market, knowing the local players and competition, “makes a lot of difference,” says Mr. Avner. Before bringing the Israeli startups to China, Startup East gave them a few weeks of preparatory training on cultural nuances, how to pitch to Chinese venture capitalists, and more.

Both Chinese startups and Israeli startups have a lot to learn from each other, says Mr. Avner. “When I look at Asian companies, especially Japanese and Korean, some Chinese, they are more focused on the process,” he says, referring to the business development process. “They understand that it’s a long process and it takes time.”