Silk Road 2.0

By Danny Cohen, Guest Author

Globalization. International expansion. China & India. These are the big buzz words of 2007, and it seems that the Asian trend is only growing stronger. As the US market matures, many of the local VCs and entrepreneurs are looking for China as the next big thing, and mostly – the next big market. Needless to say, this trend has an influence on Israel as well.

Earlier this month, Infinity Israel announced the initial closing of a new Israel-China fund (Initial closing was $155M, just above their original target of $150M). This fund has a unique offering, focusing on “Large investments in later-stage Israeli technology companies and established Chinese businesses that license, develop and market Israeli technologies for China.” Infinity is probably the only pure-play Israel/China fund, but they are actually a strong indicator of a bigger trend that is happening in the Israeli high-tech scene. There are more startups that are emerging in Israel and are trying to go to China as an their initial & primary market.

During the 90s, most Israeli companies were built on a single model: Build the R&D in Israel, and go to the US as a primary market. It was clear that without a strong US story, the probability for a good exit was low. The “go west” trend was following the exact thought process of the US VCs that invested only in deals that were in “bike ride distance”. The great Israeli stories: Checkpoint, Amdocs, ICQ, and others, were winners in the local US market.

But all this is changing. This new Israel-China phenomenon is the Silk Road 2.0. The original Silk Road was “an interconnected series of ancient trade routes through various regions of the Asian continent mainly connecting Chang’an (today’s Xi’an) in China, with Asia Minor and the Mediterranean. It extends over 8,000 km (5,000 miles) on land and sea.” This is a direct route from Israel to China, short-circuiting the United States. In fact, many Israelis feel that they have a better chance of competing with the big US companies in China, as opposed to their homeland – USA.

Will these Israeli companies succeed? This is definitely not a slam-dunk. Not many Israelis have experience in China, and that number is an order-of-magnitude lower than the Israeli executives with US experience. In addition, there are the known barriers: language, culture, etc. Having said that, I will not be surprised to see a big Israeli IPO in China by end of 2008.