Israel: Hi-Tech firms wary of Chinese investment

Tel Aviv – Growing security concerns regarding the rapid influx of Chinese investment in Israel’s hi-tech sphere, accelerated by warnings from the United States, have prompted some start-ups to reconsider whether to accept financial backing from the world’s most populous nation, according to industry insiders.

Venture capital investors in Israel say some tech companies are factoring those concerns into their deals, particularly as Jerusalem is set to consider proposals from the National Security Council to set up an oversight committee for foreign investments with strategic implications, similar to the Committee on Foreign Investment in the United States (CFIUS).

Gadi Glikberg, a venture funding player in Tel Aviv who helps connect Chinese companies with the local technology market, said the introduction of a CFIUS-like mechanism had seen the excitement of Chinese backing “slowly turning to concern”.

“We have heard that fund managers in Israel are reluctant to accept investment from Chinese entities because this may hinder their start-ups’ abilities to later exit to a US buyer, which is the traditional target,” he said.

“Even start-ups are beginning to challenge the idea of accepting direct investment from Chinese companies, and are charging a premium in their valuations to cover the risk. The sentiment is that companies will need to ‘pick a side’ in terms of who they are working with, be it China or the US.”

Yang Guang, co-founder of Glory Ventures in Shanghai, which has invested in a dozen or so Israeli tech start-ups, said those with Chinese investors might find it more difficult to enter the US market.

“It will mostly inconvenience those in sensitive sectors, such as firms looking to sell military technology to the US,” he said.

As Israel heads into key legislative elections next week, it will be keen to maintain the delicate balance in its relationships with the US – a vital strategic ally – and China, which is its second-largest trading partner after America.

It will mostly inconvenience those in sensitive sectors, such as firms looking to sell military technology to the US.

Meanwhile its technology companies, which tend to be smaller operations that target foreign markets, must also compete smartly as they look to attract Chinese investors pushed away from Silicon Valley by the trade war.

Denes Ban, managing partner at top Israeli venture investor OurCrowd, said the firm had “absolutely” seen cases where Israeli companies were skeptical about the longer-term impact of working with Chinese investors.

“We have seen companies thinking twice about taking Chinese investors’ money because it could affect their potential in the US,” he said.

Despite those concerns, Ban said Israel continued to draw Chinese investors, and a record number attended his company’s annual investor summit in Jerusalem last month.

“Israel is somewhat stuck in the middle,” he said. “What’s happening between the US and China is a huge opportunity for Israel because China needs access to technologies and Israel is still relatively open.”

According to figures from the IVC Research Centre, Chinese investors were involved in 12 per cent of all deals in Israel’s hi-tech industry in the first three quarters of last year, including in 17 financial rounds for start-ups that raised more than US$20 million each

During his visit to Israel in October, Chinese Vice-President Wang Qishan co-chaired a meeting in Jerusalem with Israeli Prime Minister Benjamin Netanyahu on innovation cooperation.

“Israel is still very welcoming of Chinese investment,” said Tehila Levi, a partner at Israeli-American law firm ZAG-S&W who is based in Shanghai and head of its China and East Asia practice.

“Many Israeli companies have unique technologies but they are very small and lack resources, so it’s kind of a good cooperation. In the past, Israeli firms tended to look to the West for funding, but now many of them look to China.”

While much of the cooperation came in the form of direct investment, Levi said a growing number of Israeli firms were heading to China to form joint ventures, raising intellectual property rights issues.

As Washington and Beijing continue to fight a tech war, US Secretary of State Mike Pompeo told Israel’s Channel 13 recently that countries needed to be “wide-eyed and awake” to the risk posed by China, or face potential repercussions such as reduced intelligence sharing with the US.

During a closed-door meeting at Tel Aviv University in January, Nadav Argaman, head of Israel’s security agency Shin Bet, called for the establishment of an oversight mechanism on Chinese investments, local broadcaster Channel 10 reported. As examples, he cited the operation by a state-owned Chinese company of parts of  Haifa port,, the largest of Israel’s three major seaports, and a Chinese construction company building a light rail system in Tel Aviv.

“Chinese influence in Israel is particularly dangerous in terms of strategic infrastructure and investments in larger companies,” he was quoted as saying.

China’s ties with Israel could cause security quandry for US ally

In January, Daniel Shapir, a former US ambassador to Israel, said in an interview with local business newspaper Calcalist that Israeli start-ups would face “real repercussions” when trying to take their technologies to the US market if they had a significant Chinese investor component.

Nonetheless, Israeli investors remain largely bullish on the future of tech cooperation with China. Ehud Levy, co-founder and general partner at Canaan Partners Israel, which focuses on early-stage tech investments, said it was increasingly difficult for Chinese investors to put their money in the US because of CFIUS restrictions, so they were turning to Israel, and the world’s “second Silicon Valley”.

While there had been board discussions about whether Israeli companies should accept Chinese investors, deals still went through if the Chinese source was deemed reputable, he said.

“There is a discussion, there is kind of a buzz about it,” he said. “I’m not concerned. I think it’s a kind of short-term bug that will not affect things in the long-term because there is an intrinsic economic value, and there is good synergy between Israeli innovation and the needs in China.”

Yang said he did not think the Israeli government would even agree to a CFIUS-like mechanism as it would hurt start-ups’ funding options and their ability to enter the Chinese market.

“If the CFIUS mechanism is passed, it would affect a third of investors,” he said. “A lot of Israeli VCs have Chinese limited partners. Realistically, the Israeli government will not be so foolish as to take this kind of risk to their own innovation capabilities.” (SCMP)