The guerrilla mentality that drives product development and early stage growth in Israeli startups can be their downfall when scaling in China, according to one VC.
“They treat the business as a command or combat unit,” explained Amos Avner, a Founding Partner of Startup East, a Pan-Asian startup accelerator and microfund based in Israel. “It’s less about building a big company, a big structure. It’s very results driven.”
“It’s very, very good when you start a company, to work this way,” he said. “The disadvantage is [Israeli startups] don’t have enough patience. It can create frustration, it can lead to a pivot. In the worst case, it can close the company.”
The relationship between Israeli and Chinese startup communities has grown rapidly over the past two years. In 2011, two Israeli companies, PTL Group and Elan Industries, launched the China Industrial Incubator Initiative in Changzhou to help overseas SMEs establish and develop manufacturing capabilities in China.
Companies like Startup East and Upround Ventures, founded in 2013 and 2014 respectively, have risen to meet the needs of Israeli startups who are seeking to connect with investors in Asia. Ping An Ventures, Alibaba, Baidu, and other Chinese investors have invested millions of dollars into Israeli startups, including Waze, which was acquired by Google for US$1.15 billion in 2013.
“A lot of Israeli companies will think that if they build a good enough product, people will want it,” said Benjamin Peng, the business director at Yafo Capital, a Shanghai-based investment firm and financial services company that focusses exclusively on American and Israeli technology and overseas M&A projects. He believed this is inhibiting their expansion in China.
During an event jointly organised by Startup East and Yafo Capital in Shanghai recently, seven companies from Israel were represented. Each company — from Internet of Things (IoT) hardware startup Gemsense to medical imaging diagnostic startup Collage — had a clear pitch about the quality and technical innovation behind its product. After almost every presentation, a Chinese investor from the audience would ask, “What’s your business model?”
Understanding the business
“Some Israeli startups don’t even think about their business model,” said Peng.
He cited the example of Valtech Cardio, an Israeli startup that specialises in mitral and tricuspid valve repair and replacement. According to Peng, Valtech Cardio focussed almost solely on product development for seven to eight years in Incentive, an Israeli technology incubator owned by Peregrine Ventures.
“Their team was almost all technical people,” he said. “There were hardly any employees dedicated to business development.”
In September, Valtech Cardio was bought by HeartWare International for almost a billion dollars. However, the success of Valtech Cardio’s acquisition might have more to do with HeartWare International’s existing base of consumers and familiarity with the industry, not Valtech Cardio’s business development, said Peng. In fact, before Valtech Cardio was bought by HeartWare International, its product, Valtech Cardioband, did not have CE marking approval — a requirement for placing medical devices on the European Union market.
Most Chinese investors want to know about the startup’s business model, said Peng. Marketing and sales – both very local operations – are a key component of succeeding in China’s market.
In addition, Israeli startups who are not savvy about the cultural differences between Israel and China may find it difficult to form partnerships with Chinese investors.
Also Read: 10 Israeli startups with promising futures
“Israeli startups are more direct, more aggressive. The Chinese are more reserved,” said Peng. “Sometimes [a Chinese investor] will say something positive to save the other party face. For example, they might say, ‘We look forward to working with you in the future.’ This can lead to feelings of disappointment on the other side.”
More Israeli startups are educating themselves about Chinese culture and the dynamics of the Chinese market. Researching the Chinese market, knowing the local players and competition, “makes a lot of difference,” said Avner. Before bringing the Israeli startups to China, Startup East gave them a few weeks of preparatory training on cultural nuances, how to pitch to Chinese venture capitalists and more.
Both Chinese startups and Israeli startups have a lot to learn from each other, said Avner. “When I look at Asian companies, especially Japanese and Korean, some Chinese, they are more focussed on the process,” he said, referring to the business development process. “They understand that it’s a long process and it takes time.”
The article Israeli startups must lose their “guerrilla mentality” to win in China first appeared on TechNode.
Image Credit: Shutterstock