China is determined to embrace Israel’s thriving tech hub of “Silicon Wadi,” concentrated mostly in the greater Tel Aviv region, and known for its abundance of deep tech startups and close ties to Silicon Valley.

Some in China also see Israel’s tech community as a gateway to better access to US contacts and deals, especially at a time when Chinese investors are being increasingly constrained by US regulators.

Many Israeli startup founders are paying attention, considering their next steps in a more complex world, in which the US path to scale is no longer the only game in town. Israel’s startup economy has been dependent on close ties to Silicon Valley over the past 25 years, a trend that is expected to continue and strengthen, yet collaboration with China is set to increase.

Much of these closer ties have been on display in recent months. Alibaba founder and CEO, Jack Ma, is leading China’s courtship of Israeli innovators: In his second Israel trip in 2018, Ma took part in the Innovation Conference organized by Prime Minister Benjamin Netanyahu in late October, where he heaped praise on his hosts, saying that “Israel knows that the most important resource is the human brain. Israel offers amazing experiences that few countries have—and that is the secret sauce of its magic and success.”

Ma’s trip comes on the heels of an Israel visit by Chinese Vice President, Wang Qishan, as guest of honor at the Innovation Conference. Wang, who is very close to China’s President Xi Jinping, was recently appointed the Chinese head of the China-Israel Joint Committee on Innovation Cooperation, an initiative established in May 2014 to bolster Israel-China cooperation in several domains related to innovation.

Earlier this month at the World Summit AI in Amsterdam, the head of Alibaba’s R&D center in Israel, Itamar Friedman, said that the company was hiring 40 Israeli engineers to develop the company’s next generation of smart retail technologies. The research revolves around some of the most advanced versions of artificial intelligence—automated machine learning (AutoML). Israeli newspapers report that Alibaba has leased office space that can accommodate a much larger team, fueling speculation about its greater designs for Israel.

Painful correction

Such developments come at a time of reshuffle and consolidation among China’s venture capital funds, which constitute one sector in China’s private fund industry alongside hedge funds and private equity. This painful correction, which started a few months ago, is due to, among other factors, falling stock markets and trade war, aggravated by the government’s raising of qualifications for the formation of funds and its debt deleveraging campaign.

The correction is benefiting the robust players, clearing away much of the noisy background and enabling them to tighten due diligence practices. Cross-border investment in promising foreign—particularly Israeli—startups by Chinese VC funds and corporations seems to be around the corner, as they seek to gain access to critical technologies overseas and to differentiate themselves domestically.

Meanwhile, Israel’s VC industry is humming along, maturing by some accounts. Israeli startup companies raised $1.61 billion in new capital in the second quarter of 2018, a 27% increase from a year earlier that brought the first-half 2018 total to a record $3.2 billion, as reported Israel Venture Capital Research Center (IVC) and ZAG law firm in July. Israeli startups raised a record $5.24 billion (in 620 deals) in 2017, up 9% from $4.83 billion in 2016 (673 deals).

Strong tailwind from China’s government at all levels gives this trend an extra punch, as expressed by Zhou Wei, founder and CEO of XNode in Shanghai, a startup and corporate accelerator with a global reach: “Israel is one of the top priorities for Shanghai government this year.” Shanghai, like other local governments, takes its cue from Beijing officials that Israeli and other foreign startups possess key knowhow necessary for China to fulfill its goals of becoming a “smart economy” and “smart society.”

Israel is a unique bellwether in the tech race between China and the US because of its unparalleled closeness to the US ecosystem. From the Chinese side Israel’s famed “startup nation” is viewed as a microcosm of Silicon Valley, with hundreds of disruptive deep tech companies that carry the desired Valley DNA.

Dashed hopes and expectations: Israeli startups view China with a wary eye

Alibaba’s Ma captured the sentiment during his last visit to Israel in May: “In my mind Israel represents wisdom, innovation, and persistence. In Israel I learned one word: Chutzpah—the courage to challenge convention.”

Must-have market

In Tel Aviv, in a balmy early October evening meetup of TechAviv, a non-profit, invite-only global network of top Israeli technology startup founders and investors, Yaron Samid, founder of TechAviv, greets five founders of several of the most promising Israeli growth-stage startups. The LABS TLV co-working space, perched on the 60th floor of a new high-rise in Tel Aviv’s chic Sarona district, looks out over a dazzling, panoramic view of the city.

The entrepreneurs face an inquisitive panel of some of the top venture capitalists in Israel, including Adam Fisher from Bessemer and Scott Tobin from Battery, two Silicon Valley firms that actively invest in Israel.

Omer Keilaf is the founder and CEO of Innoviz, a provider of remote-sensing solutions for autonomous vehicles scrambling to secure its position in the design specifications of the car of the future. With a war chest of $82 million raised from Samsung Catalyst Fund, Softbank Ventures Korea and other Israeli VC funds, Keilaf says his company is on track to generate revenue after being selected by German auto giant BMW Group for its autonomous vehicle production in 2021, and partnering with Chinese Tier 1 supplier of automotive electronic products and services, Beijing-based HiRain Technologies.

The $80 billion funneled into driverless car technology in the period 2014 to 2017, according to the Brookings Institute, is only the prelude; and with Goldman Sachs projecting the first commercially available semi-autonomous cars to be on the road in the next 1 to 2 years.  According to a report by Allied Market Research, the global market for autonomous vehicles will be worth $54.23 billion in 2019 and increase to $556.67 billion by 2026. Keilaf cites Bloomberg on China’s aspiration to deploy 30 million autonomous vehicles within a decade, making the country a must-have market for Innoviz.

Another startup, whose founder is attending TechAviv in pursuit of a seed investment round, is, with an analytics and personalization solution driven by machine learning for digital marketers and e-commerce vendors. Roi Sorezki, founder and CEO, seeks $2 million from investors and says the company self-financed its product R&D to the tune of more than $1.5 million and that it now had a deployable, scalable technology.

“For us, China is the go-to-market, where the value-creation cycle is faster than in the West,” says Sorezki, adding that the Chinese market posed serious challenges and uncertainties. “But no question that in our sector the China track has advantages in time to market and valuation over Madison Avenue or Silicon Valley.”

Rami Blachman is a tech entrepreneur and venture capitalist based in Shanghai and Tel Aviv. He is a frequent speaker and writer on China cross-border tech investing and how it relates to Israeli startups.

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