Photographer: Qilai Shen/Bloomberg

Chinese Investors Back Israel Startups Amid Silicon Valley Froth

  • Money-hungry startups throng Alibaba bash at Tel Aviv bar
  • Targeting `core technologies,' including storage and big data

It was standing room only at Tel Aviv’s Mad Men-inspired Zou Bisou Bar on Nov. 17. Representatives from more than 150 Israeli tech startups drank wine and beer, munched finger food and jostled to get a business card into the hands of an investment team from Alibaba Holding Group Ltd.

Chinese investors are a common sight in Israel these days. Companies like Alibaba and Baidu Inc. are looking for promising innovations that will help them compete globally, while a host of angel investors are hoping to get in early enough to profit from promising startups. For Israeli tech firms it’s an opportunity to tap a huge market and a new pool of investors. In a typical deal, Alibaba invested earlier this year in Visualead, giving the e-commerce giant access to a leading startup’s mobile marketing technology.

“The Chinese are looking for leaving-the-nest technology,” said Sephi Shapira, chief executive officer of MassiveImpact International Ltd., a Tel Aviv-based mobile advertising company that generates half its sales in Asia. “They need technology to help with user experience, big data, anything to take the product they built for the Chinese market and make it work externally.”

Technology investment from China is growing 50 percent annually, according to IVC Research Center, which expects the total raised in financing rounds with Chinese participation to reach as much as $500 million this year, up from nearly nothing in 2011.  Eyal Rosenthal, who runs the Infinity Israel-China Fund, predicts investment in Israeli-related technologies and industries will reach $10 billion by 2020, with direct investments in tech companies exceeding $2.5 billion in the next five years.

Special Appeal

While Chinese investors are also scoping out the U.S., Israel holds special appeal. Israeli firms are relatively affordable at a time when more than 100 Silicon Valley startups are valued at $1 billion-plus. What’s more, Washington often subjects deals involving foreign companies to scrutiny to ensure they don’t threaten national security -- a costly and time-consuming process that can end in rejection.

“Israel is more accessible than Silicon Valley, where Chinese may be treated with suspicion to a certain extent,” said Haggai Ravid, CEO of Cukierman & Co. an Israeli investment house that opened two offices in China this year. “When they come to Israel, we like them and they like us.”

Bilateral Trade

The flurry of Chinese investment coincides with efforts on the part of the Israeli and Chinese governments to boost bilateral trade. In 2013, Israeli Prime Minister Benjamin Netanyahu proposed in Beijing that Israel “be the R&D lab for China.” Last year, the Israeli government hosted a conference in Tel Aviv, where some 350 Chinese businessmen and government officials met with tech entrepreneurs and scientists. Meanwhile, Chinese President Xi Jinping, seeking to reduce the role of state-owned enterprises, is encouraging the growth of private-sector technology and service businesses.

Earlier this year, Baidu, a Web services company, invested in a content discovery firm called Taboola and Tonara, which sells a sheet music app. The Xio Group, a closely-held Chinese investment firm, acquired medical laser technology company Lumenis Ltd. In March, Alibaba invested in the VC firm Jerusalem Venture Partners, which hosted the Zou Bisou Bar bash.

Encouraged by all the deal-making, Israel’s Ministry of Economy is planning a China-Israel Technology & Investment Summit in January in Beijing that will host more than 1,000 attendees.

Violence Concerns

There are obstacles to overcome. The Chinese have concerns about a spasm of violence that in recent weeks has killed 19 Israelis and more than 90 Palestinians, most of them in attempted attacks or clashes with security forces. For their part, Israeli startups fret about the potential theft of intellectual property.

To overcome such qualms, Duncan Chiu, whose Hong Kong-based Radiant Venture Capital has invested in eight Israeli startups, woos firms by pointing out that the vast Chinese market can deliver millions of customers in a matter of days.

With as many as 7,000 Israeli startups selling everything from virtual reality software to cyber security products and online navigation systems, Chinese investors have a wide array of technologies to choose from. While Chinese companies have invested in mobile and marketing startups, typically they aren’t looking for “cool and funky” applications, said Fiona Darmon, Jerusalem Venture Partners’ chief operating officer.

“They are interested in what Israel has always been good at -- core technologies such as storage, big data, connectivity, cloud.”

The Chinese government wants to learn how to recreate Israel’s high-tech economy. Chinese companies want technologies that will help grow their business and infiltrate global markets. Others hope to profit from early-stage startups.

“We are clearly seeing a trend of Chinese investors investing as angels,” said Ying Wang, who runs the China desk at PricewaterhouseCoopers’ Israel branch. “And they really believe in Israeli startups.”

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