These are the four things to know before bringing an Israeli startup, or any Western venture, to China
Breaking into the Chinese market for a young startup can feel like climbing over the Great Wall. It looks impenetrable from afar, is heavily guarded by dangerous gatekeepers, and the rewards of making it to the other side are too enticing to pass on.
Israeli startups by their nature are geared towards the international markets. More often than not, they shoot right for Silicon Valley and the hot spots in Europe, ignoring one of the most powerful economies in the world.
A report from the IVC Research Center’s Michal Adam on Chinese investments in Israeli high-tech companies notes that the rate of participation for Chinese investors is fairly low with only around 80 Israeli companies having received funds. However, she points out that the trend is rising as the numbers have begun to elevate since 2011 and 2014 claiming a significantly strong showing, even if it is not where it could be expected by this point in time.
Previous findings from IVC in May counted 115 Israeli companies already operating in China, primarily in the fields of communication, software, semiconductors, and clean tech.
In hopes of shedding some light on why a move to China could be the next best step for a startup – along with tips about how to do it right – the Israel Startup Network along with the PTL Group held a panel with companies who are already doing business there, as well as with a few experts that came to share their extensive experience. The event was held at Microsoft’s R&D offices in Herzliya Pituach on November 23.
Among those who spoke were PTL founder and China veteran Zvi Shalgo, Nevo Alva, CEO and Co-Founder of Visualead, which was the first Israeli startup to receive funding from Alibaba, Adir Zimerman, CEO and Co-Founder of Screemo, Eran Lesser formerly of Matrix, and John Bryce, who now consults for Synergy China Funds.
Heading the panel was Manager of the China Unit at Israel’s Export Institute, Peggy Mizrahi.
Whether or not a startup will be successful in China is in part dependent on whether it has a good fit in the local market. Here are some good points on what is trending there now.
Look to the Five-Year Plan – is your company right for China?
Every five years, the government issues their plan for growth during the following time period. Included in this strategic report is a listing of the technologies that the government is looking to promote there. Local businesses will be setting their sights on those fields since they are backed by government funds.
Zvi Shalgo believes that the core goal of the coming plan due to be released for 2016 will be improving productivity with hopes of building a stronger middle class. He notes that a lot of money is going into Big Data, shipping, robotics, education, and other fields that will improve productivity.
The IVC report indicates that communication, software, and semiconductors are where much of the investment has already gone. Cleantech is also becoming more important as the country faces serious issues of pollution..
Here are some ideas of where the next five years in China might be headed. One company already implementing Chinese goals in the communication / e-commerce sector is Visualead, who we interviewed earlier this year at Microsoft’s Think Next conference.
Everybody copies – get used to it
One of the biggest complaints being voiced about working in China is that they do not respect Intellectual Property rights. The fear of having your ideas and technology stolen and having to compete against yourself can be a scary thought for most entrepreneurs, and is something that keeps many out of entering the Chinese market.
“China’s market is vicious,” Shalgo tells Geektime in a phone interview. “They have a different perspective on IP and other concepts that they feel to be restrictive of people making money. For a country that is developing very fast, they don’t want to put limits on themselves.”
He warns that Israeli companies that are trying legal methods of preserving their IP are failing. “In China, what matters is what is happening on the ground,” he says. Screemo’s Zimmerman disagrees, saying at the panel, ”If your company has deep technological knowledge like ours, then it is worth getting a patent.”
Staying away from China doesn’t always provide protection. Chinese companies (and often the government) are already out trotting the globe for new technologies. “Whoever isn’t already working in China, he is giving up on his potential and losing out on building his brand,” states Shalgo. “The Chinese companies are already copying the technologies that they want and gaining huge valuations. It’s better to learn to play by the rules of the local market and stake it out as a well recognized company and capture that market share. The Chinese are working fast, so it’s up to entrepreneurs to take the upper hand.”
When it comes to copying on the international market, for serious technologies, Shalgo explains that there are significant investments in getting registered and setting up licensing, which are often barriers for these companies to start copying a product and taking it out of China. Moreover, even within China he says that there are different markets for the originals versus the fakes.
That said, Shalgo notes there are signs of change in how the Chinese view IP. Huawei used to copy technologies and distribute them throughout China. Now they have invested seriously in R&D for telecoms, hold patents, and are competing with Cisco. With the rise of big companies that have IP that they want to protect, they are starting to shift gears.
Lay the groundwork
Setting up your business in China can be a long and drawn out process that can put you off from trying in the first place. Many Israeli companies figure that if they go straight to the U.S., they can do much of the work on their own without the hassles that they find in the much bigger and less familiar China.
Learning who the players are and whether or not a company can operate in China can take between one to two years, explains Shalgo. On the flip side, if an Israeli company can set up operations and prove that they can work in China, they will improve their valuation tremendously for investors in America and Europe, showing that your management team is up to the task.
“It’s not the value of your product,” he says, “but the fact that you’re able to operate there successfully, even on a smaller level, which can be scaled up later.”
Shalgo encourages companies to put aside some money to send out a team to China, saying that it’s not as expensive as many would believe and that a success in the gigantic country is well worth the risk.
Alva agrees, whose company took a China Only policy, adding during the panel that, “As a small startup, you need a first investment to be on the ground in China and to start initial operations. As far as we were concerned, it was a stupid and bold move for us to invest all of our resources in China.”
Build the right partnerships
Similar to doing business anywhere else, choosing the right people to hitch your future to takes a fair amount of deliberation. When coming into China, picking who you team up with becomes even more critical, applying both to investors and other partners.
“Companies need to have a team on the ground to stay on top of the goings on,” says Shalgo, suggesting that startups should recruit a person who has held a senior position who knows how to navigate the minefields there to work for you at first. This is a viable option for a lot of companies, costing much less than they would have imagined.
Find the right partners for manufacturing and distribution during your initial investigation when you come visit. The team needs to do this before reaching out to a Chinese partner.
Invest time in researching who they are and if they have other motives for bringing your business that could come in the way of your success down the road. Often local politics or other dealings can rope an outside entrepreneur into a destructive situation that should be avoided.
“I’m very against partners who take any kind of exclusivity for themselves, either in operations or legally. They should make sure that they don’t give the Chinese partner control of what happens on the ground there, since many of them will not grow the business,” explains Shalgo, adding that, “They have their own agendas.”
The same holds true of investors, with Shalgo recommending that Israeli entrepreneurs hold back on diving into bed with the first investor who offers them money.