So who is investing in Israel? The Chinese?
Israeli start-ups raised US$500 million in February 2018. There are apparently ten overseas stock exchanges looking to possess that Tel Aviv establishment. Intel is considering a US$5 billion expansion plan in the Holy Land.
Yup, overseas investors are still flocking to Tel Aviv and to Jerusalem in order to discover what goodies are available, even when (or because of?) there are uncertainties caused by Trump and Brexit.
To make my point, earlier today, I watched a fascinating 30 minute documentary highlighting the strengths of Israeli innovation. Introduced by Jonny Caplan of the Tech-talk show, the script introduced several companies that were dominating new industries overseas, despite having emerged from the backwaters of the Middle East.
China has been a country looking to muscle in on the ‘start up nation’. Although the IVC Research Center feels that the ‘day of the dragon’ has yet to happen, there has clearly already been an impact to date. Jack Ma of Alibaba is due in Israel in May. About 12% of all overseas capital raised has come from China for the years 2015 to 2017. Times are changing.
What follows is a full copy of the IVC report:
In recent years there has been a lot of buzz about Chinese investment in Israel’s high-tech sector. Not a day goes by without reports in the Israeli media about economic cooperation between Israel and China. All the associated hype gives the impression of China being a major factor in Israel’s high-tech sector. IVC’s data suggests otherwise: the world’s most populous country and second largest economy in fact remains a relatively minor player, with its focus almost exclusively on strategic investments. One Israeli insider with years of experience with the Chinese dubbed their strategy as “drain the brain.” Put simply, Chinese companies invest in innovative Israeli technology that they can utilize for their own specific needs.
The most recent story to receive banner headlines is a planned visit of Alibaba founder and chairman Jack Ma to Israel in May. His company recently finalized a relatively small deal to acquire Visualead, a QR codes startup and announced plans to set up an office in Tel Aviv as part of a $15 billion global R&D initiative. The Chinese retail giant has also invested in several other Israeli startups in the past two years that focus on strategic technologies for Alibaba. Two years ago, Alibaba also invested in Israeli VC JVP’s $160 million seventh fund. No exact amount was given at the time, but it was thought to be around $20 million.
Alibaba is typical of Chinese investors who are primarily interested in Israeli innovation, while the local high-tech sector views China as a huge potential and largely untapped market. An apparent win-win situation for both sides, the data paints a very different picture. In recent years China has become a more significant player in Israel’s technology sector, though IVC data shows that its role is still relatively minor. Chinese direct investments and M&A and buyout activity accounts for at most 5% of the total, and while the percentages and dollar amounts have risen from 2013 levels they have changed little over the past few years (see graph). While for Israeli high-tech companies, few have successfully cracked the Chinese market.
According to IVC’s data, the actual number of Chinese entities that invested in Israeli high-tech companies has gone from 18 in 2013 to 30 in 2015 and to 34 last year, and they invested on average annually in about 40 startups. The dollar amount invested in those startups ranged around $500 to $600 million in 2015–2017. This represented on average around 12% of the total capital raised by all Israeli startups in the corresponding years (see graph)
Startups generally raise from several investors during a round. They also do not usually detail dollar amounts invested by each participant in a round. In fact, the lion’s share of the investments was by Chinese venture capital funds or high-tech companies and were in startups described as having strategic importance. Even if the Chinese accounted for 50% of the funding in those startups (which is highly unlikely), that would still only translate into 6% of the total.
There have been relatively few financial investments by Chinese entities. Chinese participation as investors in Israeli venture capital funds peaked in 2014 and has dropped considerably since then both in actual numbers of investors and actual dollar amounts. The rule of thumb is investors in venture capital funds usually take a maximum position of around 10%. In this category as well, Chinese investment clearly played a relatively minor role.
In the fields of M&A and buyouts of Israeli tech companies, Chinese firms have taken a backseat position to American, European, and even Japanese firms. The only exception was in 2016 when China’s Giant Interactive paid $4.4 billion for Israeli gaming company Playtika, which accounted for 44% of all M&A activity that year. The year before and after, Chinese interest waned sharply, accounting for 8% and 1.1%, respectively. Even if the huge Mobileye-Intel deal is excluded from 2017’s record tally, the percentage would only rise to 3.5% and three M&A deals done by Chinese.
Few would dispute the fact that the Chinese market represents a huge potential for Israel’s high-tech sector and specifically startup companies. However, this market is extremely complex for Israeli high-tech companies, far more familiar with the US and European markets, where they face far fewer cultural and language barriers and more familiar business practices.
The $64,000 question is whether this will change. In November, ten Israeli startups were selected to take part in the first-of-its-kind accelerator program in Beijing. They were chosen from 100 startups that applied, based on their chances of cracking the Chinese market. The accelerator was established by Israel’s Economy Ministry and ShengJing Group, one of China’s largest management consulting and private equity firms, and DayDayUp, a group that focuses on connecting international and Chinese investors. This represents a small but significant change that could start a trend, which could have long-term impact on the China Israel high-tech equation.