US or China: Israeli startups must choose

Guy Lachmann and Ronen Nir  / Photo: PR

Top Israeli experts at the Israeli Go Global forum warned startups about the risks raised by the US-China trade war.

"Out of the 30 startups that have been successful in Israel in recent years, only four of them conduct major deals with China (over $25 million revenue), while almost 100% of them have a significant presence in the US," revealed Viola Ventures General Partner Ronen Nir at an online conference organized by the Israeli Go Global forum, which assists Israeli startups entering global markets, and Managed by Yotam Tzuker of CQ global and Guy Katsovich of Fusion LA.

In the conference, which dealt with the fallout from the trade war between the US and China on Israel's high-tech sector, Nir presented data about the involvement of Chinese venture capital funds in Israeli investments, which showed that while the capital raised by Israeli companies has grown significantly in recent years, the Chinese remain a relatively marginal player in terms of their investments.

Nir also referred to the opportunities for Israeli companies in China and the risks contained in them, and pointed out that among other things startups in the automotive sector can enjoy enormous business potential there as well as regulatory freedom, and there is also a healthcare sector that is not expected to come under US regulation, all emerging with regard to existing business connections with China.

Adv. Guy Lachmann, Partner in the High Tech Group at the Pearl Cohen law firm said, "As economic relations between the US and China worsen, so the complex impositions will increase on Israeli companies that receive money that originates in China. This complexity currently poses a difficult dilemma for companies, to the point where they need to choose between raising Chinese capital, which would be followed by severe damage in their ability to work in the US market or even the complete closing of the door."

In Adv. Lachmann's assessment, due to the deep bias of the Israeli market towards the US, the many complications will severely hurt the incentives to receive Chinese investments and we expect to see a significant reduction in it. The vacuum that will be created as a result of this could be filled with great success by other Asian countries, with an emphasis on cooperation with Japan."

Flint Capital Principal Adi Levanon said, "It's not easy to enter China, to grow there and to do business. There are difficult regulatory restrictions and also raising Chinese money changes the face of things in terms of this. As a result, most Israeli startups focus on growth in the American market in order to avoid subsequent complications."

On the other hand, the entrepreneur Danny Hadar, who represents Chinese funds in Israel belonging to Fosun, which is traded in Hong Kong, said, "In order to avoid regulatory risks on the American side regarding the Chinese market, we are promoting less sensitive sectors, such as for example health. The target in companies that we are investing in is 10% and not the 20%-25% that many times other venture capital funds are asking. We are trying to be rather quiet and look on from the side and not raise exaggerated demands in terms of intellectual property. This is the investment policy we have decided on in Israel."

According to Adv. Doron Latzer, Senior Partner at Pearl Cohen law office, "Since the First World War the US has been the only power and in recent decades a power has arisen that has influenced the balance of power, and this issue is here to stay."

As to the influence of the trade war on Israeli high-tech companies, Adv. Latzer explained that, "In American law there exists a CFIUS instrument which gives the US President powers to determine if direct investments in the US might be a danger. More than that, it's possible to decide retroactively that a deal is invalidated. In the past, there were instances in which companies did a deal with Chinese entities and retroactively the administration found out about the deal and decided that it was invalid and the sides were forced to cancel it. Therefore, Israeli companies that want to raise money from Chinese investors or are working in China must be aware of the process."

Yoram Yaacovi, Venture Partner in West Fountain Global Fund, which manages $600 million for investment outside of China said, "The trade war between the US and China also has an advantage: More money is being directed to Israel because in the US, the company doesn't even try to invest. If in the past the money from the fund was mainly distributed and a little in Europe and in Israel, now there is much more money available to invest here, and it's possible to find suitable investments. Whoever wants to enter China, it's important to find a strategic partner to have alongside.

Keren Maimon, Managing Partner Brilliance Ventures, which is oriented to the Chinese market, agreed that in most cases a company cannot both focus on the Chinese market and also the US market. "In the reality in which we live today, a company that is in its growth stage must choose between going to the US or focusing on China. It's a strategic decision that every entrepreneurs must take. It's true that there are no small difficulties in China, but it is also the largest market in the world." - on September 10, 2020 © Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Guy Lachmann and Ronen Nir  / Photo: PR
Guy Lachmann and Ronen Nir / Photo: PR
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