Big risks, big rewards await Israeli firms in China, says expert
There’s plenty of Chinese investment money looking for a home – but Chinese investors prefer to keep their money at home, notes David Fuchs
The next stage in the Israel-China business relationship, according to investment maven David Fuchs, is to bring more Chinese investors into the Israeli investment ecosystem. “In just the first quarter of 2015, Chinese venture capital funds raised more than $7 billion, while just a very small percent of that gets to Israeli companies. The current level of investments in Israeli companies from China is just the tip of the iceberg of what could be.”
But gaining access to the “big money” will come at a price. “For cultural and economic reasons, Chinese investors are much more interested in companies that have a presence in their country,” said Fuchs. “Therefore, Israeli firms that want to tap into Chinese venture capital in a big way are going to have to set up shop in China.”
In fact, more Israeli companies than ever are either doing just that, or at least thinking about making the move.
The possibility of a China presence for Israeli companies – and tips about how to pull that off – was the theme of a special seminar in Tel Aviv Tuesday sponsored by Israel Venture Capital (IVC) Research Center, the VC industry’s information-gathering and distribution umbrella organization. Among the seminar’s topics: “Operating in China: What every Israeli business needs to know,” “Fundraising and financing in China,” and “Legal and Business Aspects in Investment Transactions with Chinese Investors.” Speakers included experts from both China and Israel, as well as representatives of firms that have already tried their hand at opening operations in China.
As one of those experts, Fuchs discussed the opportunities – and challenges – for Israeli companies seeking to gain a foothold in China. A former investment banker who has brokered dozens of deals between American investors and Israeli tech firms, Fuchs is a managing partner of Synergy Funds, which raises money specifically to help Israeli companies open branches in China. “We help Israeli companies get established in China, deal with the bureaucracy, get operating licenses, and hire local management, and we use our connections with Chinese investors to help companies raise funds for their expansion into China.”
According to Fuchs, Israeli companies that want to do business in China are missing out if they do not open operations there – especially from a financial standpoint. According to figures released by IVC, Chinese VCs can be expected to invest some $500 million in Israeli firms this year, which is three times more than in 2013 and constitutes a significant chunk of the total of $1.2-$1.5 billion Israeli companies are likely to raise from investors this year.
But that money will not necessarily be distributed equitably, said Fuchs. “The investors who come to Israel are the big VCs, which either operate funds in China that specialize in foreign investments, or have joint investment funds with Israeli partners. Either way, they are not the mainstream Chinese VCs, and to get to those, companies need to have a local presence.”
Not that there’s anything wrong with foreign investments; it’s just that Chinese investors feel that their market is big enough to warrant attention. “It’s just the way they approach things,” said Fuchs. “What a technology can do in Israel or Silicon Valley doesn’t impress them – but if you can show them how it makes sense in their city, let alone their province, they will be very impressed.”
At stake, Fuchs said, are annual venture capital investments worth billions; in 2014, Chinese VC investments totaled $15 billion, while the private equity market was worth $60 billion – and those numbers are likely to grow this year.
While investments by Israel and US VCs grew a respectable 30%-50% in 2014 over 2013, the growth in Chinese investments was some 300% for that period – and there’s no reason to believe that growth will not be even greater for 2015. “Rumors of the decline of the Chinese economy have been greatly exaggerated, as these figures show,” said Fuchs. “What has changed is the focus of investments, which has moved on from manufacturing and IT to areas like life sciences and mobile tech.”
As with almost everything else in China, it’s the government that sets the tone by throwing its support to specific industries, he noted.
Developing a presence in China comes with caveats. Among the top concerns for companies with a Chinese presence are preserving intellectual property (IP) and cultural issues (different work methods/habits, different ways of relating to workers/clients/investors, different ways of communicating). The purpose of Synergy and its partners (most notably PTL Group, which does the on the ground work of “settling” Israeli firms in China) is to provide the “soft landing” Israeli firms are looking for, and deal with the problems that are likely to crop up.
The Chinese are increasingly aware of IP issues. “It’s true that China has a reputation for being a ‘dark hole’ for IP, where ideas, plans and products are stolen and duplicated, with almost no recourse for the usually Western victim,” said Fuchs. “But they are determined to change that.
“In his first speech, and in the opening lines of that speech,” Fuchs noted, President Xi Jinping mentioned the need to ensure the safety of intellectual property. The Chinese realize that they are going to have to get their house in order if they want to attract Western business, and that realization is good for Israeli companies that want to conduct operations in China.”