The new realities of a Covid world where travel restrictions are the norm have forced a hard reckoning on the Israel tech sector. As if that is not enough, the country’s legions of venture capitalists and startup founders are faced with tensions between the US and China that may not be disappearing any time soon.
The sector’s strong connections to the US continue to dominate, despite new avenues in Chinese markets. Yet, contrary to common wisdom, there is no need to pick sides in the superpower spat. In most cases, an Israeli startup can commercialize and raise capital simultaneously in the US and China.
The overwhelming majority of Israel’s startups are still oriented toward Silicon Valley, as they have been for almost three decades. In 2020 Israel tech startups are so far boasting another banner year, with $7.5 billion raised from investors in the first three quarters of the year, of which $2.74 billion was raised in Q3, a 24% increase year-on-year, according to IVC, a research firm.
Rami Blachman is a tech entrepreneur and venture capitalist based in Shanghai and Tel Aviv. He is a frequent speaker and writer on China cross-border tech investing and how it relates to Israeli startups.
Close ties to the US have helped power Israel’s startups through the pandemic period. Like the American ecosystem, they’ve enjoyed strong access to VC funding despite the challenges. This makes it hard to imagine pivoting away from Silicon Valley and Wall Street, no matter how lucrative the Chinese market may be.
Israeli firms are almost totally dependent on the US for their market and capital, but in the past three to four years China has become a viable option—not a full-blown alternative—for scaling up, for building up a startup’s valuation, and, potentially, for exits. As Covid-19 disrupted usual business patterns, Israel’s tech companies have stepped up their engagement with Chinese partners to explore this new option.
One such company is Arbe Robotics, a Tel Aviv-based maker of 4D imaging radar for autonomous vehicles, with offices in Texas and Beijing, that has gained from its China presence since the outbreak of Covid-19. Arbe’s relationships with Chinese automotive supplier Hirain Technologies—and with Arbe’s investor BAIC Capital, the investment arm of one of China’s largest automakers—have helped the company weather the downturn in Western auto markets.
Earlier this year, Israel-based Lidar startup Innoviz Technologies Ltd., which has raised $252 million from investors including from China-based VC’s New Alliance Capital and China Merchants Capital Management, partnered with Xi’an and Xiamen-based companies to deploy autonomous trucks in the port of Tianjin, one of the biggest in China. The project will fuse Innoviz’ Lidar systems into up to 600 trucks, providing them with sensing, mapping, and location functions.
For these companies and others, having Chinese investors has not wrought a backlash from American or other investors.
Yet numerous other startup founders are calculating risk differently and steering their companies away from China, at least temporarily, to preempt any potential conflict of interest—real or perceived—with customers and investors in the US.
In a recent event analyzing the US-China trade wars and their impact on the Israeli startup scene, an alarmist view was voiced by Guy Lachmann, partner at Tel Aviv-based Pearl Cohen law firm, who said that companies that raise Chinese capital could face “severe damage to their ability to work in the US market or even the complete closing of the door.”
A different, more balanced tone was struck by Amir Galor, founder of Infinity Group, a private equity fund based in Tel Aviv and Beijing. Galor, considered one of the most seasoned Israeli entrepreneurs in China, warned that “Israeli startup founders ignore China at their own risk. Unlike what you may hear in the media,” he said, “they do not have to take sides in the conflict.” Indeed, my own experience points to the same conclusion, that in most cases—dual-use civilian and military technologies aside—a company can operate unhindered in both China and the US.
Meanwhile back in China, corporations and cities are finding that it is harder to capture the attention of foreign innovators without the glamorous offline conferences and luscious banquets that were the mainstay until the outbreak of Covid-19. Convenors are turning to hybrid online-offline video conferences, with local participants in person and international guests by video: Xi’an, for example, is planning a computer programming conference in October, and Haikou a fintech summit in November.
Despite glitches, these virtual summits still have pull for foreign entrepreneurs. They’re not just drawn to the size of China’s economy, but also to the promise it holds of fast time-to-market and the oversize valuations garnered by its startups.
However, for Israel tech startup founders it is not always clear who the audience for these virtual summits is, or if the agenda is worthwhile. For founders, time is the most precious resource. Staying laser focused on their immediate targets is a matter of survival, and therefore participating in seemingly vague digital events related to China, which is often not their number one priority, can seem like a distraction.
Startups must think out-of-the-box — and savvy founders should take advantage of the crisis to look beyond their current financial “runway” to where the next opportunity lies. For many Israeli startups, the answers may lie in China.