On January 2nd, 2019, Think Tank Director Daniella Lang interviewed Itay Gal-Or, Director of Investment and Legal for Techcode Accelerator Israel. Mr. Or received a B.A. in Business and LLP in Corporate Law from the Interdisciplinary Center Herzliya in Israel. He has experience in private equity and corporate legal affairs. Techcode is a China-based global network of startup innovation hubs operating in seven countries. The Tel Aviv branch aims to connect Israeli startups with opportunities in China and around the globe.
This interview has been edited and condensed for clarity.
How did you begin your professional career in Sino-Israel relations?
Many people in Israel focus on U.S. and European business deals. About two years ago, I realized that huge business deals were taking place between China and Israel with lawyers usually handling the technical aspects of the negotiations. But not many people had the full picture from the strategic Chinese side. Israelis have never worked with the Chinese and do not know how to work with them efficiently. I realized there was an opportunity to facilitate these complementary business deals and jumped on the train.
What have you learned about Chinese operations from your time at Techcode?
Chinese companies place tremendous focus on cities within China in order to create innovation outside of China. The goal is to go from being a manufacturer to being an innovator. For example, look at the Cellular industry. We are all familiar with Chinese smartphone brands like Huawei, Lenovo, One Plus, Xiaomi, etc. because the Chinese mobile phone industry succeeded in transforming from just manufacturing to a service on a global level. This is a Chinese macroeconomic goal. China wants to shift from selling steel to Ford to selling cars to the United States. China needs the research and development (R&D) skills found in Israel in order to become the producer of global brands. I believe the U.S. Tariff War could be affected by successful Chinese global branding in recent years.
Additionally, Chinese accelerators process can be broken down into the following categories:
International operations- they help international companies grow in China by bridging the policy and need gaps between the international community and the Chinese population.
Incubation (with reference to location and space)- the real estate industry leads the innovation sector because physical space is critical to policy.
How does it feel to work for a Chinese company in Israel? What are some challenges unique to this non-traditional work environment? What cultural gaps or differences have you noticed between Israel and China, and how does it affect business relations?
Failure: In Chinese culture failure is an embarrassing and best avoided outcome or position.
In Israeli culture entrepreneurs want to fail; it is a necessary part of the business cycle and overall entrepreneurial experience.
Long Term vs. Short Term Thinking: Similarly, Chinese culture places emphasis on the long term. Chinese entrepreneurs or investors seek lifetime projects. In Israel, it is always about the exit. The exit (selling the startup or company) is the ultimate goal.
Extension of the Exit Strategy: The Chinese will only focus on the local market at a late stage and so the early stage is an untapped market, whereas Israelis will go directly to international markets with their early stage product or technology because, again, the Israeli mindset is always focused on the exit strategy.
Point X → Point Y: another key difference I have noticed is something I call spinoffs. The Chinese people tend to start in point x and will stay there for the duration of their professional career. In Israel, people start in point x (i.e. the military, R&D, engineering) and then move to point y (startups). This is a concept that the Chinese find hard to relate to. At the same time it seems to be a strategy with promising results in Israeli society.
The Role of the University: In China, universities are potential investors. In fact, they are a recognized part of innovation cycle. In Israel, universities tend to not be relevant to the main part of the innovation cycle. For example, in other countries most startups start in the University. In Israel, young professionals will begin startups after a few years in the corporate world. Some may try to collaborate with professors on specific items, but will universities will not be involved significantly in the innovation process.
Capital: Israelis are only starting to understand that Chinese market demands are different than U.S. and European markets. Israeli companies look at capital and corporate relationships as part of the innovation cycle. Capital is restricted to limited investments and its agenda may surpass returns on investment. A great example of this plays out when working with Chinese venture capitalist firms (VCs). Israeli companies will oftentimes find themselves dealing with governmental and bureaucratic issues and barriers.
Chinese Delegations: In relation to Israelis seeking capital, another interesting phenomenon occurring in the China Israel tech space is the Chinese Delegation. Israelis view Chinese delegations as possible sources of capital and investment. However, Chinese delegations visiting Israel come with different priorities that reflect Chinese values and traditions: goodwill to study and learn, and to seek different international opportunities. A plethora of Chinese delegations will go to visit the same Israeli companies. As a result, Israeli companies become less welcoming to these delegations because they do not have the physical capital to host these delegations, nor the intellectual and cultural understanding of what the Chinese delegation seeks, nor the patience or ability to transcend beyond their search for capital. With regards to Chinese delegations, I believe that Israeli hosts require more information regarding intentions in order to find ways to collaborate.
Communication: Israelis communicate in a very direct manner (i.e. providing little context about a situation while speaking). On the other hand, Chinese take a more higher context approach. The time of silence in a conversation differs between both countries. This can create tension and essentially leaves the Chinese unable to speak.
And while all these differences may make it more challenging to close a business deal, as an insider to this relationship I would say the general atmosphere is still very much positive.
What is the relationship between Israel and China in the startup world?
The Israeli startup ecosystem is an interesting sector comprised of small to medium sized startups that serve different industries. China views the startup ecosystem and the industries it affects as a sector which can create much needed jobs for young people as well as new and nonexistent industries; this is critical for the rapidly growing China. Within the China Israel Startup world, China plays the role of a service provider for the Israeli ecosystem in order to advance its own future and long term business agenda. Because of the international R&D centers located in Israel, Israel has a concentrated population of highly qualified people who can generate ideas and implement them. China recognizes Israel’s innovation and aims to use Israel to further supports the Chinese agenda to shift from manufacturing powerhouse to innovators.
Israel has a rich investor community, specifically seed, angel, and early round investors. That being said, Israel does not have very many later stage VC firms (round C and D). Many times, this is where China comes in; Chinese investors fill the late stage gap.
Why do you think there is so much opportunity and success right now in the China Israel investment market (specifically VC’s)?
The Chinese perception of Israelis is positive. This not only jumpstarts China’s interest in Israel but also makes business interactions easier.
Does the Israel-Chinese business relationship tend to favor one side over the other? If so, why? How do you see this business relationship changing in 10 years and why?
O: Israel is the Startup Nation and so our industry lies primarily in tech creation and innovation. Israel is constantly and actively seeking VC companies and corporations to invest or buy them so that their tech can live on. The favored side would have to be Chinese investments in Israel.
I think we will see more direct investment by the Chinese into Israel as a result of necessity - right now the Chinese investment sector is focused more on the local market. In China I believe we will see more early stage investments happening. There are three reasons why corporations invest in startups: 1) to create a profit in the sellout 2) the company wants to tackle a new sector or product 3) pure investment or capital. We will see more and more of this in the future.
What do you believe are the most imminent future challenges ahead for Sino-Israel relations?
Israeli companies’ understanding of the different regions in China and how to navigate each one’s individual needs and bureaucracy. We need to approach China the same way we approach the EU because Chengdu and Shanghai are as different in terms of industry, needs, and policy as Germany and Serbia. China’s different regions are rivals and in many ways competing between each other for success.
What is the most important piece of advice for Israelis or Chinese trying to enter the field?
O: Many companies today are going to China either as a secondary option (because couldn't raise money in Silicon Valley so they turn to China) or think that China is a big market and that it should be tackled in the future (as in, in round C or D). I believe Israeli Startups need to have a China strategy from day one. This China strategy should run parallel to the product and the company’s general strategy and growth projection. Additionally, startups tend to focus only on venture and capital opportunities when in fact, looking beyond is critical.
Finally, I think an important lesson I learned within the China Israel tech space is that high level politics are not the real barrier for a fruitful business relationship, rather the challenge is relationships between people.