Many Chinese firms have been investing in the Israeli market over the past two years. The investment logic of these companies is to introduce Israeli products or technology, mainly in the high-tech and healthcare sectors, to the Chinese market. In addition to acquiring local mature firms, such companies are now pouring investment into Israeli start-ups, either directly or via local funds.
Israeli companies, which are mainly start-ups in their early stages of development, used to find it difficult to woo over Chinese investors, who usually favored mature companies that had stable growth.
But now, things are changing.
"As Chinese investors became more experienced over the past two or three years, their targets shifted from traditional and mature projects to start-ups," Batia Tocatly, CEO of Israeli start-up Business and Project Promoters, was quoted as saying in a report published on domestic news site 21jingji.com on Saturday.
According to the report, Business and Project Promoters can receive up to two to three inquiries from Chinese investors per month on average.
Favoring start-ups
Chinese investors like Yao Xin, venture partner of BlueRun Ventures China, have recently shown their interests in the Israeli market.
On September 7, a consortium led by BlueRun Ventures, Microsoft Ventures and OurCrowd.com invested $32.5 million in Airobotics, an Israeli automated industrial drone maker, according to media reports.
Yao, who is mainly focused on early start-up investment, said in the 21jingji.com report that his team considered investing in Israel because they believe the country is highly innovative with a good performance as a result of globalization.
From March 2006 to March 2016, more than 120 Israeli high-tech companies obtained funding from China. Meanwhile, in 2015 alone, 18 Chinese investors came to Israel, according to Israeli research company IVC Research Center.
Also in 2015, China's direct investment in Israel's start-ups reached $467 million, and that number was estimated to have increased to $500 million last year, IVC said.
Israeli start-ups have become attractive to Chinese investors due to their advanced technologies and low market valuations, according to the 21jingji.com report, which is based on interviews with people like Yao conducted during the 2017 DLD Innovation Festival.
Hosted in Tel Aviv, Israel from September 3 to 7 annually, DLD is one of the most important yearly events for new firms in Israel, usually attracting hundreds of start-ups, venture capital (VC) funds, angel investors and transnational companies from across the world.
Israel's medicine and healthcare sector is one of Chinese investors' favorites.
In fact, many Chinese companies are now seeking Israeli medical apparatus providers - usually available within the cosmetic surgery industry.
And these apparatuses have the potential to rapidly spread within the Chinese market, said Ran Nussbaum, co-founder and managing partner of Pontifax, a leading healthcare-dedicated VC firm based in Israel.
Israel is known as an R&D hub for start-ups in the medical and biotech industry, so much so that many globally established pharmaceutical firms, such as Johnson & Johnson and Philips, have set up R&D projects in the country.
In the view of Tocatly, another reason behind China's favoritism toward Israeli start-ups is that they can be easier to have a stake in, compared to when investing in mature companies.
Shift to local funds
After years of exploration, Chinese investors have found it difficult to secure good targets alone, therefore, they have gradually shifted toward partnerships with local funding bodies to be able to enter the Israeli market.
At least 16 Israeli VC funds have acquired Chinese investment since 2012, data from IVC shows.
For example, Israel's VC firm Carmel Ventures closed its latest investment fund worth $194 million in 2014. Investors included such major Chinese companies as Internet giant Baidu Inc, mobile services provider Qihoo 360 Technology Co and financial conglomerate Ping An.
Nussbaum said that Pontifax's funds have been invested in by leading Chinese healthcare provider Fosun Pharmaceutical.
"One thing that Chinese investors have learned is that if they want to realize innovation and finally become world influencing ones, they must acquire Israeli firms with relatively low valuation by cooperating with local VC firms, then look for advanced technology," Nussbaum noted.
Concerns loom
However, as China rolled out new rules on overseas investments this August - which restrict "irrational" acquisitions of assets in industries ranging from real estate to hotels and entertainment - Israeli start-ups have become concerned.
Now, Israeli start-ups tend to be more prudent when picking up Chinese investors, given China's tighter control over capital outflow, said Tocatly.
"If the promised cash cannot be received on time, it will probably mean the end for their businesses," Tocatly noted.
According to Reuters' calculations, Chinese investment in Israel has evidently cooled down this year, with a volume of only $106 million covering nine projects as of September 14.
By comparison, the scale of cross-border acquisitions by Chinese companies in Israel rose to $16 billion in 2016, according to Reuters data.
In addition, Israel's high-tech circle has also expressed concerns over Chinese investors' lack of an international long-term view, compared with those from the US.
Chinese investors put too much emphasis on the application of Israeli technologies in their home market and making remarkable profits. As a result, they neglect the long-term development plan of these Israeli firms, not to mention helping those firms to expand into other markets beyond China, according to an article published in domestic magazine Sino Foreign Management in February.
"If you want to innovate, you need to enter the local ecosystem and participate in the R&D," Ziva Eger, CEO of International Investments and Industrial Cooperation at the Israeli Ministry of Economy, was quoted by 21jingji.com as saying.
So far, 300 international companies have established R&D centers in Israel, among which, there are only three to four Chinese companies, Eger said, noting he hopes more Chinese companies can settle in Israel instead of just flying back to China as soon as acquisition is completed.
