[author: Tal Freilich Hai]
2014 was a good year for the Israeli-Japanese economic relationship. Viber’s USD 900 million acquisition by Japanese giant Rakuten and the R&D cooperation agreement between Japan and Israel marked the beginning of growing interest and a successful relationship between the two distinct countries.
Fast forward to the end of 2019. Japan was the number one foreign investor in the world, with a total of USD 240 billion worth of global transactions. Japanese investments in Israel between 2014 and 2019 amounted to a total of USD 7 billion, with large-scale transactions including the USD 1.1 billion acquisition of Israeli pharmaceutical company NeuroDerm by Japan’s Mitsubishi Tanabe Pharma Corporation. In addition, between 2014 and 2019, Japanese investors have been prone to invest in early-stage financing rounds, taking a leap of faith toward the market of young Israeli startup companies. With over 70 Japanese companies holding offices in Israel (compared to only 26 in 2014) and a record of over 50 Japanese investments in Israeli hi-tech companies in 2019, the economic relationship between the two countries was booming.
Will 2020 bring this rapidly growing relationship to a halt? Not necessarily. Granted, the COVID-19 pandemic and resulting worldwide financial crises pose new challenges to both countries. However, as many challenges do, this one may also present new opportunities. The world as we know it is changing, and current technologies may not be enough to deal with the new distant reality we have been forced into and are likely to face in the coming years. This calls for the innovative, solution-oriented thinking and, frankly, guts of Israeli entrepreneurs. It also calls for stable and grounded investors with readily available funds. As a result of lessons well learned, many Japanese companies have security cushions for such rainy days and are not short of resources. It sounds like a perfect fit.
That said, it is important to note that Japan remains a relatively new player in the Israeli hi-tech market. So, before embarking on a glorious fundraising round in the land of the rising sun, here is our roadmap to help you navigate your journey:
Field of Interest
Japanese investors are looking for innovative solutions and are interested in many different sectors in the Israeli market. However, two prominent and linked sectors are digital health and cybersecurity. Even more so due to the COVID-19 pandemic, Japan is seeking to integrate information and communication technologies (ICTs) in its healthcare system(as well as in remote work, and education), resulting in a need for improved cybersecurity.
Building a business relationship with a Japanese investor may take time and require patience. The Japanese are known for a relatively slow decision-making process, risk avoidance, and digging deep into the small details. In the context of transactions, this may result in a slower due diligence process and may be time consuming for a company. It will probably also clash with Israel’s fast-paced culture. It is also worth noting that the Japanese tend to speak politely and indirectly. Blunt and straightforward, some Israeli entrepreneurs may incorrectly interpret this cultural characteristic as disinterest. Coupled with the current circumstances of social distancing and conducting negotiations via Zoom or email, cultural differences may be enhanced. Taking these cultural differences into account (as well as a deep breath) may help you avoid lost opportunities.
Medium-Size in Japan Can Be XL in Israel
While Japan’s investor pool may be filled with big fish, we suggest not overlooking the medium-sized ones. Medium-sized companies according to Japanese standards can still include some of the world’s largest companies, and may generate a significant source of capital for Israeli hi-tech companies.
If your company receives government funding from the Israel Innovation Authority (formerly, the Office of the Chief Scientist of the Ministry of Economy, and the IIA for short), there are likely certain restrictions on the transfer of its know-how and manufacturing outside of Israel. The need for IIA approval to transfer know-how and manufacturing outside of Israel results in increased royalties to be paid by the company to the IIA, and thus may become a pricing issue upon negotiating an exit with a foreign investor. In this regard, Japanese investors do not tend to require the transfer of know-how or the manufacturing thereof to Japanese soil, thus eliminating one potential obstacle. On the other hand, Israeli hi-tech companies in the medtech field may encounter difficulties acquiring certain regulatory licenses in Japan. Engaging a local partner to help you navigate the tangles of local regulation may prove crucial.
We look forward to seeing how 2020 unfolds, and what the years to come hold for the Japanese-Israeli relationship in the Israeli hi-tech market. We expect it will continue to flourish and develop, notwithstanding the current global turmoil (and maybe even because of it).