In the early days of 2012 to 2013, Israeli entrepreneurs and venture capitalists were ecstatic at the prospect of a potential new source of investment

The article Dashed hopes and expectations: Israeli startups view China with a wary eye was written by Rami Blachman for TechNode.

As you walk into the high rise office in central Tel Aviv overlooking Ayalon Highway, which cuts through this bustling Mediterranean metropolis, you feel the electricity in the air, a place that vibrates with energy. Tables everywhere are strewn with hardware components and paper pads, dozens of engineers and designers of all ages are slouched over computer screens in an open workspace. Yossi Wolf, CEO and founder, bids farewell with a warm smile to a team of executives from a major Asian smartphone maker on an advanced exploration visit.

This is Temi, a subsidiary of Roboteam, a designer and manufacturer of a personal robot capturing market share in the US defense and homeland security sectors, and through a separate subsidiary focusing on the civilian market in China. “Temi is the first robot that truly interacts with humans while providing flawless autonomous navigation, dynamic video and audio experiences, and advanced AI,” proclaims the company.

Yet Temi is a glaring exception, a nascent success story for Israeli startups in China. Despite courtship by Chinese investors from the private and state-owned sectors for several years, the hype so far has yielded little substance: According to IVC Research Center reports, Chinese companies accounted for as little as 1.1% and no more than 8% of all Israeli tech exits between 2015 and 2017.

In the early days of 2012 to 2013, Israeli entrepreneurs and venture capitalists were ecstatic at the prospect of a potential new source of investment, and a new market in China to rival the US. The wooing intensified when, in March 2017, President Xi Jinping and visiting Israeli Prime Minister Benjamin Netanyahu announced an innovative, comprehensive partnership between the two countries. But soon many of the hopes were dashed; by this year the sight of the endless flow of Chinese delegations into Tel Aviv’s Ben-Gurion International Airport has become a fixture in Israel, yet it is eyed with skepticism by members of the local tech community.

Temi stands out as one of a handful of Israeli startups and growth technology companies that have made headway in the Chinese market. The first major deal was the 2016 $4.4 billion purchase of Israel-based Playtika by China’s Giant Interactive. In the same year the billionaire former CTO of Alibaba, John Wu, led a China-based Series B syndicate that invested $50 million in Temi’s parent company Roboteam, as a follow-on to an earlier investment of $9 million. The syndicate’s investment was bolstered by orders of about 100,000 Temi units in China. Baidu is actively promoting Temi through its channels and is expected by some to invest up to $40 million in Temi’s next round of pre-IPO financing between  2018 and 2019, estimated in total to reach $120 million.

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Why has the promise of Chinese investment in Israeli hi-tech largely failed to materialize? First came the gap in expectations, then the peculiar difficulties and uncertainties that characterize the Chinese marketplace. China’s tech landscape is unchartered, high-risk territory for Israeli startups, with non-existing success models and no roadmap for commercialization.

Israeli entrepreneurs seek money and market access; the Chinese delegations come on learning and research expeditions, not with a checkbook. Israelis are enthralled by the welcoming speeches and banquets they received in China, but the Chinese see this as just the beginning of a beautiful friendship, sometimes taken aback by Israeli aggressiveness. It has become clear that the leading Chinese tech companies, including BAT (Baidu, Alibaba, Tencent), and VC firms are not yet as adept as their US counterparts in screening for and implementing earlier stage (e.g. seed, A-C round) cross-border deals, as are most of the deals originating in Israel.

Today, Israel’s tech sector, dubbed the Startup Nation, is a microcosm of Silicon Valley, with an intricate web of relationships, investments, and interests binding mother ship and satellite tightly together. With a negligible home market, for the past 25 years Israeli entrepreneurs have been turning to the United States to scale up, creating continual success stories and high profile exits such as Mobileye’s $15 billion acquisition by Intel, Waze, Datorama, Wix, SolarEdge, Indigo, and a growing list of privately-held unicorns including WeWork, Houzz, Elastic, Infinidat, Payoneer, Outbrain, Lemonade, just to name a few.

In contrast, there has been only sporadic activity originating in China. Baidu invested $3 million in video capture firm Pixellot in 2014, its first Israeli startup investment. In 2017 Alibaba partially acquired its first Israeli tech company, QR code startup Visualead, for an undisclosed amount, laying the groundwork for an R&D center in Tel Aviv. This followed a $5 million investment into the company in 2015. Chinese companies such as Alibaba, Lenovo, and HNA have invested in Israeli venture capital funds Jerusalem Venture Partners, Israel Canaan Partners, and i3 Equity Partners.

A report by market research firm IVC Research Center Ltd. and law firm Zysman Aharoni Gayer & Co. (ZAG/S&W) shows that venture capital investments in Israeli companies totaled $5.24 billion in 2017 in 620 deals, up 9% from 2016, with exits totaling more than $23 billion in 127 deals. In comparison, according to PricewaterhouseCoopers and CB Insights’ 2017 MoneyTree report, US VC funding in that year reached $71.9 billion in 5,052 deals; China’s came in second to the US with a record VC investment of more than $40 billion, or a 15% increase from the $35 billion seen in 2016, finds a KPMG analysis.

Despite the rosy figures and its prospects as a technology superpower, experts in China recognize shortcomings that hinder the country’s aspirations. Gaps in engineering talent, management, and specific technologies have prompted Chinese authorities to open up the domestic market and loosen regulation to attract foreign innovators. As a result, China currently is one of the most welcoming environments to foreign entrepreneurs, making a significant effort even in such thorny issues like IP protection, which traditionally has vexed foreign companies.

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As protectionist walls are erected in the US, particularly vis-à-vis China, Israel emerges as a China-friendly outpost of American hi-tech, with its plethora of deep tech companies that carry that special “Silicon Valley DNA” coveted by China. Yet some in the Israeli government are worried about a backlash from the Trump Administration once Chinese involvement becomes overt and successful.

In the meantime, Chinese venture capitalists are beefing up their approach from passive observation to a more proactive pursuit that favors a long-term presence in Israel’s ecosystem, with the goal of cultivating their brand name among established local US and Israeli funds. They realize its strategic importance in this Great Power game, on the axis of knowledge flow between the incumbent Silicon Valley and the rising contenders in Beijing, Shanghai, and Shenzhen. Temi and former Alibaba executive John Wu are flag bearers in this new trend; the coming months will be decisive for those that wish to follow their trail.

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The article Dashed hopes and expectations: Israeli startups view China with a wary eye first appeared on TechNode.

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