Until recently, it was mostly founders rejected by mainstream Israeli and American VCs who were pitching to Chinese investors, hoping that they would identify a potential overlooked by their Western peers. Now a different breed of startup founders, fund and accelerator managers think that the time is right to devote some serious resources to China.
The Infinity Group is a Chinese-Israeli private equity and investment banking firm that has been active for over 20 years but is now winding down many of its Chinese funds. Infinity, whose funds focused almost entirely on China domestic deals, is now pivoting to international entrepreneurs with an eye to China, showcasing the newly minted Innonation Powerhouse twin co-working spaces in Beijing and in Tel Aviv. Competing head-on with co-working giants such as WeWork and NakedHub, Innonation positions itself as a platform that fosters cross-border activity between Israel and China.
The company hopes to build on the traction gained from a series of China-Israel investment summits it has been organizing by that name since 2016. Amir Galor, founder and managing partner of Infinity Group says he hopes Innonation will emerge a niche player that offers members high-value services.
AgriNation is a new Israeli venture capital firm that invests ticket-sizes of around $1 million in Israel-based technologies that make agriculture and food production more efficient. It wagers that by appointing Matan Vilnai, Israel’s former ambassador to Beijing and a former army general, as chairman, it will entice Chinese investors and companies to collaborate. AgriNation went further by signing on Kingenta, a Chinese producer of specialty fertilizer, as “anchor” limited partner in the fund, alongside two major business groups in Israel, Avraham Livnat and CTS.
Despite trade war tensions and the escalation since the arrest of Huawei CFO in Canada, recent moves and statements by China’s government help to make it friendlier to foreign entrepreneurs. A draft law released in December prohibits authorities from the forcible transfer of intellectual property, and if it adopted will go a long way in protecting foreign firms’ intellectual property rights in China.
In November, China’s President Xi Jinping announced a number of measures that will expand imports and liberalize key sectors in the economy, predicting that China’s imports of goods and services will exceed $40 trillion in the next 15 years. In April at the Boao Forum, Asia’s Davos, Xi named the southern province of Hainan as the focal point of reform and opening up, in an effort to woo foreigners.
The profile of Israeli tech companies pushing into China is more diverse: Innoviz and Similar Web are mature Israeli startups in the automotive and digital marketing sectors. The firms boast a significant Western customer base, strategic corporate relationships with names like BMW, and tens of millions of dollars in their coffers from US and Israeli VCs.
Founders of these companies and others are in China not for a lack of choice—their well-funded ventures enable them to be selective and pick investors—but because they assess that by selling to Chinese businesses and consumers they can dramatically raise the valuation of their companies. Still, the abundance of venture money in China does not go unnoticed.
Chinese media reported that Chinese artificial intelligence companies raised a combined $31.7 billion in the first six months of 2018, representing almost three-quarters of the worldwide total of $43.5 billion. With fewer attractive domestic deals to go around due to Chinese VCs’ tightening of due diligence on prospective portfolio companies, foreign innovators are better placed in 2019 to win the confidence of Chinese money managers.
Earlier-stage hopefuls too in certain sectors search for seed investment in China. Companies with products that have hardware components look to Shenzhen for its intricate network of manufacturers, a place where some of the world’s most agile makers of hardware cluster together. Avi Lior, a serial medical device entrepreneur from Tel Aviv, wants to raise $1.5 million and is pitching to incubators in Shenzhen and Haikou that may also offer money to incubate his company, OrthoKinematica, a designer of artificial discs for the upper human spine.
This is a sharp departure from an approach that prevailed until not long ago, which was predicated on luring Chinese investors to make cross-border investment, predominantly in US dollars, while paying little attention to the Chinese market. This often resulted in a mismatch between the goals and expectations of both parties, Chinese and Israeli.
One example is the trouble facing WakingApp Realities, an augmented reality platform for developers and designers, which raised $5.75 million in 2015 from Youzu Interactive, a Shanghai company. WakingApps’ management in Israel sidelined the China market and gave priority to sales in the West. The company is now said to be floundering—three and a half years after its last round of financing, in December 2018, it announced that it has eked out $2.6 million from an American producers of smart glasses.
The current wave of Israeli innovators turning their sights to China to display a stronger commitment than their predecessors to building their brand and cultivating deep-seated relationships in the country. They arrive at a time when China is emerging as a dominant player in several sectors such as automotive, e-commerce and smart manufacturing, and their ambitious goal is to compete head-on with Chinese startups for local market share.
China is still an outlier for the mainstream of Israeli startup founders that are trained and programmed to make the leap to Silicon Valley. Yet China is opening up more rapidly than many in the West realize. Expect more mainstream innovators to explore what this receptiveness means for them.