When Pebbles Interfaces, an Israeli gesture-control start-up, needed to expand into Asia in 2013 it turned to Xiaomi, one of China’s largest smartphone manufacturers, to help it complete an $11 million round.
It was among the first Israeli tech startups to receive funding from a Chinese company. It will most certainly not be the last.
Israeli high-tech companies and the venture community have traditionally looked at the U.S. as a source of funding and as a primary market, particularly in the software, Internet and media sectors. But times are changing and Israeli companies are increasingly looking east.
It’s not surprising: if predictions are right, ten years from now China will have overtaken the U.S. as the world’s largest economy. Technology will play an important role in helping China move ahead. So, “as Israel has innovative technology solutions to offer, we are beginning to see a growing Chinese interest in Israel, alongside a growing Israeli business interest in China,” says Chemi Peres, a co-founder and managing partner at Israeli venture firm Pitango Ventures.
Indeed, the ties between Israel and China’s tech sectors are “growing tremendously year on year,” says China specialist Yair Geva, a lawyer in the high tech and M&A group at Israeli law firm Herzog Fox & Neeman.
A lot of M&A Activity
The investments — which were nonexistent until about three years ago — began with deals targeting traditional sectors. China National Chemical Corporation acquired Israeli agrochemicals manufacturer Makhteshim Agan Industries in 2011 in a deal worth over $2 billion. Han’s Laser Technology, a Chinese supplier to Apple, bought Israel’s Nextec Technologies in 2013 to expand in the market for laser measurement devices used in the auto and aircraft industries. Earlier this year Bright Food Group, the dairy and consumer-products company backed by the Shanghai government, purchased Tnuva Food Industries.
There has also been a lot of M&A activity in the medical devices and pharmaceutical sectors. Now the focus is turning to the Internet sector. Last year Israeli startup company Cortica, which develops photo identification technologies, raised $20 million. The lead investor was one of China’s big four Internet companies. (It chose not to disclose its name publicly.)
“Tencent, Qihoo 360, Alibaba and Baidu are all very active here now and are considering opening accelerators here,” says Geva. “We will see real M&A activity in this field as well. Once this happens Israeli companies will be even more open to focus on the Chinese market as opposed to only looking at the U.S.”
The reason for this investment is “Chinese companies are seeking access to cutting-edge technologies and the way for them to do that is to invest in an Israeli start-up company and in parallel to have some sort of business development with that company. That was the case for Cortica and it is the case for Pebbles Interface,” says Manor Zemer, a banker at Lanta Capital Holdings, a Tel Aviv consulting company that mainly focuses on seeking investment opportunities and business cooperation for Chinese technology companies and venture capital funds in the Israeli high-tech arena.
Venture Investments Are On The Rise
Another example is Visualead, a QR code design maker, which has formed a joint venture with Renren, a Chinese messaging system similar to Twitter, and recently moved to Shanghai.
Along with M&A deals, venture investments in Israeli start-ups are on the rise. Horizon Ventures, the venture capital fund of Hong Kong billionaire Li Ka-shing, is now among the most active venture firms in Israel. It has invested in more than 25 start-ups in Israel in the last three years, says Horizon Ventures’ Gilad Novik, a scheduled speaker at the DLD Tel Aviv Innovation Festival.
Some of the investments are being made indirectly. Israeli venture firm Pitango Venture Capital has raised money from investors in China, Korea, Taiwan and India for a fund. “All of those investments were first-time investments in Israel and I think this trend will continue to grow,” says Peres.
“In many cases China is willing to invest in Israel assuming there will be matching funds. It is always a challenge to find matching funds. We need a little more time to redefine the way we work with China and the Asia-Pacific region as a whole but the potential is huge and we are just at the beginning.”
Genesis too is “starting to look at China and Chinese corporations and investors as a potential source of funding for our fund,” says Jonathan Saacks, a partner at Israeli venture firm Genesis Partners.
China’s Focus On Israel Will Continue To Grow
Amid all of the activity the number of government-funded R&D projects between Israel and China is dramatically increasing. “Every year with China there are more agreements and activities and I believe in the next few years there will be almost the same or even more cooperation between companies in Israel and China than there are with the U.S. ” says Avi Luvton, executive director of Asia Pacific in Israel’s Chief Scientist’s Office.
Ties with academic institutions are also being strengthened not only through R&D projects but also due to a $130 million grant to Israel’s Technion University from the Li Ka-Shing Foundation. The contribution is a part of a larger deal in which the Israeli university will partner with China’s Shantou University to establish a technology institute to be called Technion-Guangdong Institute of Technology, in Shantou (Shantou is a city in China’s southern Guangdong province). The new institute will be built with Chinese funding, but will grant its graduates a Technion diploma.
“China’s focus on Israel will continue to grow, and so will its interest in the Middle East as a whole,” predicts Peres. “These two trends offer opportunities for cutting-edge Israeli technology companies as well as the region as a whole.”