While relations between China and the US continue to go downhill, relations between Israel and China are headed in the opposite direction. Just last week, China's Vice President Wang Qishan was the guest of honor at the opening ceremony of the Israel Innovation Center, together with Alibaba founder and chairperson Jack Ma. This friendliness is also reflected in greater involvement by Chinese investors in Israeli high tech since the beginning of the year, according to a new IVC report obtained by "Globes."
According to the figures, Chinese investors have been involved in 12% of the financing round by Israeli startups this year. This represents an increase in comparison with the numbers for 2015-2017, when the proportion was 7.5-9% of financing rounds. The Chinese also participated in six of the 17 large financing rounds ($50 million or more) this year - 35%, also a higher proportion than in previous years. In addition, they took part in a quarter of investments of $20 million or more.
In general, investors from China are showing interest in more mature companies raising large amounts. In 2015, Chinese investors were involved in 31 financing rounds of up to $10 million and 21 rounds of over $10 million. This year, they were involved in 35 financing rounds of up to $10 million and 27 rounds of over $10 million. Although IVC lacks precise segmenting data of the amounts that Chinese are investing in these rounds, it believes that Chinese investors account for 7% of the capital raised, compared with 5-6% in previous years. This may not be a revolution, but it is a significant trend that is likely to surprise entrepreneurs who have been exposed to another side of the investors from China: frequent visits by delegations and wearying discussions ending without any actual investment.
Adv. Tehila Levi Lati, who manages the ZAG-S&W law firm's China desk, tells "Globes" that Chinese involvement is becoming stronger even though the government in Beijing is enforcing stricter criteria for investment outside China. "In recent years, the Chinese government's policy has been to bring new technologies to China. Up until 2016, this was done through investments outside the country, and it was very easy to get approval. Since 2016, however, the process has pretty much come to a halt, and they have begun enforcing significant restrictions on outward investment," she says.
The new difficulties are leading to some selectivity, as a result of which Chinese investors are showing a preference for large deals. While the activity of Chinese investors in 2014 and 2015 in the Israeli market was picking up steam, arousing great hope and enthusiasm, creating an atmosphere of investment in anything that moved, it appears that, since then, the number of deals has stabilized, but their quality has improved.
Investment or industrial espionage?
Up until 2015, a many of the deals involving Chinese investors were small ones of up to $5 million, but things have changed completely in recent years. In 2018, the proportion of deals larger than $20 million was 33% of all the deals in Israeli high tech companies involving Chinese investors, a 50% increase in the proportion of deals of this type in Chinese activity in comparison with 2015, when large deals accounted for only 17% of Chinese activity.
"The Chinese feel more confident in large rounds, because these are usually at the later investment stages. In addition, they like investing together with other players," says Levi Lati. The result is that despite the drop in Chinese investments outside China, investments in high tech in Israel have not declined; they have simply changed direction. "Today, when a Chinese company wants to invest outside China, it takes a long due diligence procedure and approval from both the Ministry of Economy, Trade, and Industry and the State Administration of Foreign Exchange." The restrictions significantly reduced the amount of Chinese money invested outside China, but then Trump entered the picture. "Following the trade war, the money that is invested has changed direction. Israel is one of the places that China regards as a source of technology."
In order to understand what investors from China are looking for in large financing rounds by Israeli companies, we spoke with entrepreneurs who raised such investments for their companies. Doron Myersdorf, founder and CEO of StoreDot, a company that develops technology for high-speed battery charging, raised $42 million in 2014, half of it from Chinese fund Lucion Venture Capital. Several private investors from China invested in the company before this round.
Myersdorf told "Globes," "The private investors rely on the due diligence of a large company like Samsung, which also previously invested in us. It was fairly quick and took about three months. We never had a round led by a Chinese company. They usually follow the lead of a large company in an existing round, and they never bargain over the price. They have a lot of money, and they aren't sophisticated enough to negotiate over valuations."
Mysersdorf nevertheless warns his colleagues about a not uncommon scenario, in which the enthusiastic Chinese investors turn out to be spies. "We're now in talks with Chinese auto companies that want to invest large amounts, and as with the Chinese funds, they wore us out in the process. They have a great desire to know the details of the technology, and this is something that should be a warning to anyone going through this process. For example, they want to know the exact composition of the formula for the electrolyte we use. You need the personal judgment of the CEO or senior management to discern whether it's genuine, or industrial espionage. Every question they ask you requires judgment before you answer - whether it's something that an investor really needs to know."
Myersdorf says that the work process with the fund that invested in the company took six to nine months, "a process that was really long." The reason that he chose to work with Chinese investors despite the difficulties was that "they have a lot of money, so that's very, very tempting. Such an investor can come in with $20 million. Now we have a $300 million check on the table to open a plant in China, but we're going about this carefully. The advantage is that they will develop the Chinese market for you - and they really will do this - but it will all stay there."
Is the process simple or exhausting?
Innoviz co-founder and chief business officer Oren Rosenzweig says that his company is currently in talks with investors from China and in the process of setting up an office in the country. Innoviz received investment from a Chinese fund named Glory Ventures that joined Innoviz's $73 million second round. Now Innoviz, which is developing a sensor for an autonomous vehicle, is interested in a bigger Chinese investor in order to enter the Chinese market.
"Glory Ventures is a relatively young Chinese fund that invests in the early stages and has already invested in Israel. In one of their investments, they invested with a fund that also invested in us, and the connection came from that," he tells "Globes." "We were in touch for about a year until the second round came, and they were interested in coming in. Up until then, we were concentrating on the US and Germany, where we have a contract with our first large customer, BMW. But we thought that it would be good for someone to help us when we want to start working in China," Rosenzweig says.
"We're now opening an office in Shanghai and recruiting people there. In our activity there, the people from the fund that invested in us helped us a lot. For example, when I was in Shanghai to interview candidates, I did it in their offices. They told us that they had connections with many local auto companies. They also helped us in talks with other investors, and connected us with bigger funds, some of which were their limited partners. Another thing that happened to us in China is that we signed a partnership with a very large supplier of auto components in the Beijing area as part of the focus on the local market.
"The investors helped us understand with whom we should and shouldn't talk. There are so many auto manufacturers and so many investors, and the Chinese market is so big in all respects, that without someone helping you navigate, it's very hard to know with whom it is worthwhile talking and with whom it is not. There are now over 100 local auto companies in China. Just knowing which five are really worthwhile spending time on isn't easy."
Explaining what type of investments Chinese investors are interested in, Rosenzweig says, "From what we're seeing, a lot of Chinese investors we talk with are looking for deep technologies. We see a lot of Chinese funds that aren't afraid of heavy technology. They're able to invest in such companies, they're able to bring people who understand these technologies, and in this context, Israel has a lot of deep technology that fits this profile." At the same time, he emphasizes, "There are companies in China seeking to invest in startups in almost every field, and it's a problem figuring out whether it’s a concern that's really worth talking to. The best way is a personal connection or someone who really knows them."
In contrast to Myersdorf, Rosenzweig says that the investment process was efficient and fast. "They did things very simply and clearly, and it was clear from the beginning that they wanted to invest. Their entire aim was to close the round quickly, make sure that the investment would be in dollars, and all of those things," he says.
In addition, in conversations the company had with investors from China, Rosenzweig encountered several funds in which the Chinese government's presence was prominent. "This week, we had a visit from one of the big funds from China, a large proportion of whose money comes from one of the provinces in China. Part of the agenda in the conversation was what Innoviz could do in order to contribute to the local economy in this province. Right now, however, we won't do something for them that is different from our strategy for what's right to do for the business."
Published by Globes, Israel business news - en.globes.co.il - on October 30, 2018
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