A fierce battle is raging in plain sight between the US and China “about whose economy will drive the technology of the future and set the standards for it,” in the words of former US Treasury Secretary Henry Paulson. While the world’s tech startups are on the cusp of this tectonic change, they face challenges in navigating this fractured landscape.

“Startup companies” is a ubiquitous term for nascent ventures that are formed to bring what their investors hope are transformative technologies to market. Tech startups are a relatively new breed of companies, conceived in Silicon Valley in the 1960s and ’70s by financiers with an appetite for high-risk private equity investing—dubbed venture capital—that can in turn yield very high returns. What was for decades an exotic and often obscure form of investment, in the last several years has gone mainstream to encompass almost every sector of the economy. Tech entrepreneurs are the new celebrities and cultural heroes.

What does this brave new world of bifurcation and decoupling, in which China and the US are on track to produce two increasingly separated tech ecosystems, mean for startup founders? Israeli tech types, often seen as the canaries in the coal mine, are grappling with the problem head on.

The Chinese tech ecosystem in summer 2019 is very different from what it was 12 to 18 months ago—the capital winter has made it leaner and has weaned it off some of its excesses. It is attracting a new wave of Israeli startups in sectors such as autonomous driving and Internet of Things (IoT) that are setting up shop in Beijing, Shanghai, and Shenzhen. Most of them landing in China have war chests of capital raised from global investors within the Israeli ecosystem. Their founders hope to create new success stories in China to rival what their peers have been staking in Silicon Valley for decades.

Trial and error

With no established model of success in China, Israeli startups focus mostly on gaining market presence in the country and less on fundraising, figuring their way around on a trial and error basis. One factor playing to their advantage is the growing interest among businesses and investors in China—where consumer services such as Tencent’s WeChat and Alibaba’s Taobao marketplace have dominated the internet for years—in software used by large and smaller corporations. The vast majority of Israeli tech companies create software used by businesses.

Arbe Robotics and Innoviz regularly appear in the media at the top of lists covering the most promising Israeli tech firms. Both make sensors and perception software for smart vehicles, yet they approach the Chinese market differently.

Arbe has pulled in $23 million mostly from Israeli VC firms. It supports around 10 relationships with car brands and auto part suppliers in China out of an office in Beijing with a low-key Israeli manager who focuses on operations and shuns publicity.

Innoviz has raised a whopping $252 million from Samsung, Softbank, China Merchants Bank and Shenzhen Capital (a venture capital fund), thus breaking through the unicorn threshold. Innoviz, in contrast to Arbe, chose Shanghai for its China headquarters and has wisely hired a Chinese national as country manager—Rosana Su, a high-profile former executive at Mobileye, an Israel-based maker of vision-based driver-assistance systems that Intel acquired in 2017 for over $15 billion.

“We have partnered with Chinese automotive supplier HiRain Technologies, a global supplier, to some of China’s largest automakers, but we also believe in building Innoviz’ brand as a key player in China’s emerging automotive industry,” explained Su, who is a much sought-after speaker for conferences and events.

The importance of IP

Bifurcation elevates the status of intellectual property (IP) in China to new heights of importance. Dr. Ziv Rotenberg, partner at Gornitzky law firm in Tel Aviv and an expert on Chinese law, thinks that protectable IP rights in China now carry more strategic value for Israeli startups than ever before. “If your company is US-based, which is the case for most, your China IP is also crucial, since your investors, acquirers, or business partners in the US may have lower prospects for their businesses in China now and may consequently resort to their IP as a way to generate value in China,” says Rotenberg.

A more radical viewpoint is promulgated by Amir Galor, founder of Innonation, a matchmaking platform for Chinese and Israeli entities. At an Israeli Chamber of Commerce gathering in China in July, Galor went further to say that technology companies will need to create two wholly separate business units covering legal structure, IP, data hosting, operations, and strategy—one for China and the other for the US. This is a tall order for multinationals, and even more so for young upstarts with limited resources.

Some Israeli technologies fall under the definition of dual-use, civilian and military, and thus are subject to intense pressure from national security regulators in the US and Israel that call for defense-related business to be split completely from purely commercial applications.

Temi is a Tel-Aviv-based personal robotics developer, which started out as Roboteam, a supplier of tactical robots to the US Military, the FBI, and the Israeli army. The company now operates a factory in Pennsylvania, enabling it to serve as a defense supplier to the US government, and through another unit headquartered in Shenzhen, it produces and sells civilian robots in China.

One company that is staking its future from the get-go both in China and the US is HighRoad LaunchPad, a Tel Aviv-based accelerator that invests in startups that solve pressing urbanization problems. Eyal Hoffman and Guy Zaks, HighRoad co-founders, led a delegation of their portfolio companies to Nanjing TechWeek in late June, where they garnered interest from Ford Motor, Bosch Home Appliances, and BASF Venture Capital, as well as the local municipal government.

“China is at the epicenter of urban innovation. Our goal is to build a ‘center of excellence’ in Nanjing trained by our best practices that would feed Israeli and Chinese startups into Nanjing and other cities,” explained Eyal. “The help of local government will be crucial to success,” he added.

Ziv Rotenberg, the forward-thinking Tel Aviv lawyer, asserts that the decoupling of the economies of China and the US is increasing the need to protect IP in China. “Just look to American chipmaker Qualcomm that has made billions licensing its technology to Chinese smartphone makers such as Oppo and Vivo,” he said. The new world order is opening new opportunities for tech entrepreneurs to make money in China—and they are on a path to discover them.

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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