Amir GalOr has been avoiding crashes his whole working life — either in the cockpit of a plane or making investment decisions in his office.
The 56yearold former Israeli Air Force pilot won the first business license to run a foreign venture capital company in China in 2004 after 10 years working in the same field in Israel.
“Both of my choices were strongly opposed by my par ents at first, to become a fighter pilot or to start my business in China, which in their opinion were too risky,” GalOr said. “But my achievements in two careers, on the other hand, proves that I’m good at controlling risks.”
He said the 24 years he spent as a pilot taught him how to control and reduce risks in a chaotic situation and how to accomplish a goal with only limited infor mation.
In 1993, while still serving in the air force, GalOr start ed a new adventure, launch ing a venture capital company in Israel. Because the local market was small, he said venture capital and innovation in Israel was nev er about the country itself, but instead going out. Until 2003, he focused on the Unit ed States.
Meanwhile, China was a rising world power whose rapid development required science and technology. Gal Or spotted the trend, real ized the value of melding Israel’s research and devel opment skills with China’s manufacturing prowess, and set up shop in China in 2004.
“Our strategy contrasts with the reluctance of many foreign investors to share advanced technology with China for competitive rea sons. And some wouldbe investors in China have steered clear over concerns about intellectual property theft,” he said.
His company invested in a Chinese firm in 2004 and helped it acquire technology for packaging semiconduc tor chips. He said the know how came from an Israeli manufacturer that was una ble to make money from its invention because there was no supply chain it could join there.
The Chinese buyer, China
Amir GalOr, Israeli venture capitalist based in Beijing Wafer Level CSP, boosted yields, reduced production costs and found a niche in packaging the sensors used in cellphone cameras — a market valued at more than $7 billion a year.
“With the huge market and friendly investment environment in China, it provides so many opportuni ties for foreigners like me or even our next generation to fulfill one’s potential and realize their dreams,” GalOr said.
GalOr’s wife and four chil dren moved to Hong Kong in 2007 and then Beijing in 2012. His son, Raz, who stud ied at Peking University, has attracted more than 2.1 mil lion followers on Sina Weibo, with videos about foreigners sharing their experiences and opinions of living in Chi na. He now runs his own vid eo production workshop with more than 20 employees.
“That’s the magical part about China,” GalOr said. “It’s identifying and embrac ing individual values no mat ter where you come from. Everyone could find a way to take root and thrive. People used to talk a lot about the American dream, but I think now it’s the Chinese Dream.”
On Sept 30, he received China’s Friendship Award, the highest honor granted by the central government to foreign experts who make outstanding contributions to the country’s modernization, and met Premier Li Keqiang at the Great Hall of the People.
“There is something in the Jewish mentality to a certain level that communicates well with the Chinese,” he said. “You can see it more as synagogue style: You shake hands, you meet.”
GalOr predicted he and his family will see a different, more advanced China in 10 years time.
Jan. 05. 2013
Source：China Entrepreneur Magazine
Quite often I am asked, due to my pilot background, if there is a connection between flying and venture capital. Well, yes there is and I will share my thoughts about this in the near future. In the meantime, I will start with an easier comparison. Do venture capitalists who invest in and guide portfolio companies have anything in common with soccer club owners, coaches and sports managers who identify, groom and support soccer players and their teams? Yes – firstly and at the core of it, we want our interest – company, player or team - to score.
Imagine that you are the venture capital equivalent of a sports talent agent for a legendary athlete like Ronaldo or Messi. You’d make goal after goal – securing advertising endorsements from name brands, club contracts, and all that goes with the popularity that success brings. As the agent, you take pride in these wins because you know that none of this success could have happened without you – your guidance, your support, and your wisdom based on years of experience. You take pride because you know you had the good sense and good fortune to identify a winner AND early on at the ‘rookie’ stage.
You managed to convince this rookie and those who support him, that in addition to the great chemistry you have, that he should go with you because you will share your valuable contacts, relationships and available resources to his great benefit. To quote from the movie Jerry Maguire, you will “show him the money”.
This same sports agent-star athlete courtship exists in the world of finance and investment. There was a time when Intel, CheckPoint and Google would have been considered promising ‘new’ start-ups, the business equivalent of the sports rookie. Imagine the first interaction between these companies and their first investors, the courtship that followed and the eventual agreement to partner up. The first investors identified talent and clearly understood the vision and the ideas of their “rookies” and had the correct intuition and foresight to know that introducing them to the right players in the market while concurrently helping them to finance their first steps would ultimately lead to thriving businesses and successful IPOs.
Whether you are a team coach, a talent scout or a venture capitalist, part of your job requires the innate ability to find the needle in the haystack and know, as soon as you see it, that a great talent with enormous potential value stands before you. These soft skills coupled with a "good eye” can make all the difference between winning and losing.
Like talent agents, coaches too engage in a courtship and dance with their players. The difference is they need to worry about their chemistry with not just one but ALL of the players on the team as well as the chemistry ‘between’ the teammates. It’s the coach’s job to maximize the potential of these relationships and the various talents that their players bring to the club in order to create an atmosphere of teamwork that plays well practically on the field as well as during the ‘after game’ with the media. Reputation is everything and a much more difficult element to shape and control.
Amongst venture capital companies, some apply a teamwork strategy, others don’t. Some VCs are opportunistic. They invest and promote companies that have nothing to do with each other. Here, strategies for portfolio companies are designed independently and are unique to each company. Because there isn’t any common denominator in terms of ‘sector’, synergy is neither needed nor a criteria. Benefits are without limit and quick response is normal practice. Conversely, there are venture capitalists who look for ‘more’ when building their portfolios. They invest in clusters and strive to create an ecosystem where the companies within the portfolio help each other by sharing expertise as well as leveraging channels and relationships. Which way is better? This remains an open question.
At Infinity, we adopted a cluster strategy around companies that focus on the China market and with the type of value that only know-how can bring. Our cluster plan assumes that it creates synergy and mutual learning. It helps us to design better quality deals, sustain our impeccable reputation and maintain and bolster our access to industry players and experts. What’s the down side? It's a more difficult way to operate. It limits choice and mandates longer term play and higher risk.
In soccer, though the agent makes more money than those on the team and the club owners, the team and the club owners hold the power and reign famous. Allow me to elaborate. Talent agents are for the most part ‘unknown’. They keep a low profile and focus on the industry network. The spotlight is set squarely on their players. Owners of soccer teams, conversely, are very well known. For them it’s much more about ego and fame rather than the profit. This same structure applies to venture capital – the style is just different. There are venture capital firms that prioritize more like soccer team owners rather than talent agents. Why? They want the famous deals, the "hot deals" and are willing to over pay to get these. Assuming it’s a momentum play, the ‘add’ will stimulate the eco system.
Most funds, however, function more like talent agents, and only sometimes like a club owner. Money is the primary driver, but fame is always welcomed. Deals are done based on how “hot” they are and the level of fame of the participants – the hotter the better and the more famous the bigger the draw.
What can we learn from it? It’s all about people, egos and keeping the eye on the ball. Determine what is really important to you and score!
You have just opened a new start-up company. You want to attract skilled employees, who are both loyal and dedicated. It is easy to verify if someone is skilled. But how can you measure in advance the probability of loyalty and dedication? What motivates a team to do their best and give their all - even in the face of adversity - money, status, the opportunity to learn and grow? Yes to all of these things. But are these the only factors of consideration? The short answer is no.
From decades of experience I have observed that in addition to the aforementioned motivators, there are circumstances where arguably stronger motivational forces exist and which guide the interests and actions of employees to great performance and company loyalty. For example: the pursuit of adventure, one’s cultural predisposition, the desire to follow a charismatic leader, room for self- expression and freedom of action knowing you have the trust of the management, and being part of something greater than oneself – such as the legacy of a stable brand. These motivational factors can sometimes go a long way in helping a start-up to achieve success, but then again, sometimes not.
Let’s take two Infinity portfolio companies as examples: Revolver and Proactivity. In both cases, when Infinity arrived on the scene, the companies were in trouble and quickly spiraling south. It looked like they were doomed to failure. But every dark cloud has a silver lining. In the wake of dismal circumstances, much to our surprise, the employees were willing to stay with the company, without a salary and in the midst of negative momentum. Why? There was a small glimmer of hope that maybe, just maybe, with continued hard work and dedication the company could be saved and put back on the right track. In the case of Proactivity, the effort paid off, ‘big time’. Proactivity racked up US$23M in sales in 6 months. Revolver wasn’t as fortunate. The company closed within a year.
When building a team, it is best to choose professionals motivated by different drivers - meaning the key motivation is not the same for each person. Building a team this way helps the company to secure a better balanced and flexible organization that will not fall apart if a key factor cannot be produced or honored. Say money is the motivating factor for some employees and there is a year where cash is short due to rising product development and R&D expenses, should the company worry about a mass exodus of its employees? The short answer is no if there are those on the team who can be motivated by drivers other than money, such as adventure, love of change, or the promise of the possibilities that could materialize from seeing an effort through.
There is an interesting statistic that Infinity calculated regarding portfolio companies backed by pure venture capital. Seventy percent of these companies start off with one product and end up with a totally different product or model somewhere along the way. It is exactly for this reason that the human resources department of any given start-up must remain flexible and adaptable to change. When hiring they must consider motivational factors knowing that the situation could change at any moment. This is key to the long term survival of a company.
Think for a moment about the different styles headhunters and HR use to hire professionals for multi- national companies, be they manufacturing or larger organizations. Clearly their process and screening criteria are different from that of a startup or a growth company. But ask yourself, should it be?
China has the largest pool of entrepreneurs in the world. The good news: the basic line of thinking and the various motivational drivers for these entrepreneurs are a great fit for start-up and growth companies. The bad news: the education system and some parts of the norms of the society contradict this basic line of thinking as well as these various motivational drivers. Therefore, the challenge lies in the need to not only create and identify key team members with the ability and skill set to lead the company but to also be clear on what motivates them to come to work each day.
Is there a connection between the laws of physics and the rules that govern business? Yes? No? I say yes. I believe there is a common denominator that links the two worlds. What they share is a wider way of thinking which applies to both nature as well as to human behavior.
Take the balance of power as an example. In physics we are all familiar with the laws of balance: what goes up must come down; E = mc2, the equation of mass-energy equivalence; and the modern physics concept that there is no such thing as "nothing." Even in a perfect vacuum, pairs of virtual particles are constantly being created and destroyed. Now, let’s apply this to business. If the laws of balance are broken, for example, a company grows too fast, or securing a major deal leads the higher ups to believe that some sort of magic or special powers were in play, one should anticipate a correction of sorts, or at least the attempt at one. Extraordinary behavior or activity attracts the attention of forces which will thereafter seek to restore the state of balance, for better or for worse.
If your goal is to start or accelerate your business on a powerful and promising path, it is highly recommended to connect with an external driving force. This is true of nature and business. If you are on the path of market growth or a seeing a shift in regulation, then indeed it is a good idea to take advantage and ride that wave as far as possible. However, if you are not on this path, then you risk the possibility of ‘drying up’. For example, take the smart phone trend. It killed so many businesses while simultaneously lifting others. Those who survived or flourished were successful because they successfully identified a shift, took it seriously and rode the wave.
Back to the laws of physics - what happens when a solid is transformed into gas? The answer: energy is released. Now let’s apply this concept to business. A great example of ‘energy release’ is the social networking pandemonium, which created a huge energy path. There was always a hidden need for this, but until recently very few leaders knew how to strategically and successfully unlock this energy source and ride the wave created to a new reality, buzzing with energy and potential.
In early 2006 I was sitting in a discussion with the CEOs of some of the largest companies - HP, Microsoft, Yahoo, etc. The topic was "What is the next wave"? In retrospect, it is interesting that social networking was not even mentioned. Well hindsight is 20/20. And, we all know very well now just how the social media wave has changed and continues to change industries, some even on a daily basis. The e-commerce world was dramatically impacted and so too was the gaming industry, where some companies went up and others went down. It was an unexpected ride.
Satellites circle the earth just like the earth circles the sun. Again, this same concept applies to business. If you do not want to fall into the grasp of the larger players then you must move quickly around them. This is exactly why smaller companies need to move faster than the larger ones while maintaining their space – not too close but also not too far. If you act exactly like them then you’ll crash straight into them. If you are trying to move too far away in an effort to be completely unique, then you may find yourself without a market and simply disappear into "space". This is why so many affiliate partners of companies like Microsoft, Apple and CheckPoint are able to successfully use the platform provided by the larger companies and make money while at the same time keeping their distance – maintaining proximity, but never getting too close.
A final thought: small particles roam freely in empty places. However, in crowded spaces, the movement of small particles is retarded. They lose energy and can hardly move. Think of it this way, there’s not much going on under the surface of the Dead Sea, dense with a high concentration of salt. However, there’s a lively and colorful world in full bloom underneath the great blue sea. Once again, the laws of physics may be applied to business. It is best to avoid areas that are overcrowded and stifling and to instead seek out market environments where you’ll be able to glide, at least with some degree of freedom, through a colorful world rich with opportunity.
Every day and every night, entrepreneurs share at least one common thought: how can I attract more support for my innovation? Support is defined as management teams, employees, investors, government, media, experts, analysts, and world opinion leaders.
We’ve seen it many times and have all heard the stories. Two different entrepreneurs with similar ideas can approach the market and yet achieve totally different results. One would experience great success, whereas the other would inevitably meet with failure. What makes the difference? Does this have to do with timing? Does it have to do with luck? I would actually argue that it doesn’t have to do with either. Success verses failure often times has to do with the leadership abilities and the charisma of the entrepreneur. Let’s, for the purpose of discussion, accept this statement as an accepted truth. So here we have the source of the success, now let’s look a little deeper to understand how leadership abilities and charisma are used to gain success.
From my own experience, I would say that much of it has to do with a clear understanding of the full "eco system" and the entrepreneur’s ability to communicate with those in this eco system in such a way that inspires, motivates and results in a proactive endorsement in one form or another. The eco system is comprised of the upstream and downstream of your business as well as relevant public opinion, such as those in the government, your costumers, and so on.
When we communicate with the "eco system" we need to walk on a delicate tightrope and strike a steady balance between selling unproven dreams along with conservative realistic goals. On the one hand, communicating dreams without foundation is risky. On the other hand, venturing to the other extreme and communicating ideas with a “dark cloud” attitude and regularly citing potential risks and all that could go wrong can also be counterproductive. So, how to strike this balance to achieve a committed and enthusiastic response from those in the ecosystem?
Author Simon Sinek suggests that we "Start with Why", which also happens to be the title of his book. It’s a good read and I would encourage all entrepreneurs to read it. His advice is thoughtful and I happen to agree with him. In his book and in his various lectures, Sinek explains that it’s not what you have, or how you do it that attracts attention and inspires proactive and demonstrative support, but WHY you do it. And, this brings us to the “kicker”: very few entrepreneurs are successful in explaining the “why”. Very few entrepreneurs begin explaining their value added with their story of “why”. Instead most start with the “how”s and the “what”s, and in turn they find that they’ve lost the ear, attention and interest of their potential customer or partner.
Let’s look at this a little closer. Why is not about the money or profit, which fall into the category of results. So then, what is it? The answer can only be found by asking yourself the following: WHY does your organization exist? WHY does it do the things it does? WHY do customers really buy from one company rather than another? WHY are people loyal to some leaders, but not others? Those who start with WHY are not perceived as manipulators, but as those who inspire. And those who successfully inspire garner a following of people willing to buy into their why, enough to purchase the product and benefit from how it works. The support is not for the product per se, but for the vision. They too want to be full participants.
Apple once again offers a brilliant example to illustrate this point. They designed an entire Eco system to support the company’s strategy. It included fans, talent, subcontractors, media and most interestingly, content owners and private developers. What enabled such cross industry support was the unprecedented combination of vision, determination and leadership. They managed this successfully due to an impressive delivery of communication explaining the reason why they were doing what they were doing. Apple sells amazing experiences for the user that will take them to a new place and a fresh sense of reality. How? Users are able to implement the latest in technology and the creative advancements developed at Apple. It just so happens that this experience is enabled by computers. As Sinek notes in one of his famous presentations, “after hearing this, of course you are now ready to buy one of their computers.” And you know what, he is right. Apple’s well-known branding, impressive market leadership position and soaring sales prove it.
In reality it's a personality issue. We are who we are and we can't pretend to be someone else and expect to succeed. We also need to accept the fact that building an innovative dream requires a sense of true belief in oneself and vision. A risk analysis mentality just gets in the way. True belief in one’s vision inspires support, as such confidence is attractively contagious and ignites a fire of creativity not only in the mind of the entrepreneur but also in those around them.
Looking a little closer to home, when I took Infinity to China, I didn't do it because I thought it was the best way to make money. It also wasn’t because of who I knew. It was based on a firm belief that connecting the innovative Israeli/ Jewish community with the growing culture and economy of China would create a better world balance as well as value to all.
There are times when a high level of experience can make the difference between success and failure. However, in today’s fast changing world, some of the skills we have accumulated and the habits we have adopted over the years that have served us so well, have become less valid and practically speaking, less useful. Why is this? It boils down to one word: technology. The evolution of technology and its increase in sophistication and efficiency have made a direct impact on the process of decision making. The pace is faster, MUCH faster. As a result, the decision making tools we have traditionally relied on with full confidence have now become outdated and irrelevant. Time and time again, we find ourselves surprised by who is achieving success these days, including the types of businesses and those leading them. History is once again experiencing a change in global power in terms of industry and leadership. It is an ongoing process – one that does not rest.
Not too long ago, powerful companies such as Alibaba, Google, Baidu, Huawei, Facebook, Sina and of course Apple, were not yet part of our consciousness. Today, they rule - in terms of business but especially in terms culture. The domination of the smart phone coupled with the popularity of Weibo and Twitter have created a new culture of communication. Ask yourself, when is the last time you received a written letter in the mail? Bills don’t count – and even they arrive online these days. Global communication today is instant and immediate, both written and spoken. These same communications are also short and concise – and this is by design. Ever notice that these said systems only allow for so much space for your message? It gets things going quicker. And with Skype, communication has advanced even further, as it makes it possible to have visual contact as well as verbal. This reminds me of an American telephone company advertisement from years ago, when telephone technology was “it”. This particular telephone company argued that their service was “the next best thing to being there”. Today, that slogan applies to skype, as it is accessible to just about everyone and provides an opportunity to enjoy a visit, without actually physically visiting.
My family and I recently moved from Hong Kong to Mainland China. My son is to attend a prestigious university here and plans to study engineering. We were looking through some of the documentation and found that many of the terms students learn in the first two years are no longer relevant in the fourth year of study. Odd? Perhaps. But the point is, it is very difficult to predict the immediate future and foresee events that even though far away, will nevertheless directly impact your life and your future analysis, estimations and ultimately life choices. Take the earthquake, tsunamiand the nuclear power plant meltdown in Japan – this coupled with the collapse of the banking system and various governments in Europe – who could predict? But look now at how these events have changed decision making.
From my venture capital experience and to some level also from private equity, it became clear to me a long ago that star status is often fleeting when it comes to the portfolio companies. We have many investments and many portfolio companies. And, every year we produce a summary which includes a team rating defining which companies are the shining stars. And, every year, this seems to change. One year a company looks like it is at its end, ready to shut down. The next year, it is cited as the golden child of the lot and deemed the most promising. The bottom line: it isn’t over until it’s over. And there is always potential for a “dark horse” to sprint to the front of the pack in time to win the race.
A brilliant example of this is ProActivity, which developed a management software tool. Proactivity was a company whose sales were flat, even decreasing. The key employees started leaving the company, which was also increasingly losing money. Moreover, the company couldn’t secure additional funding. Fortunately the employees that left believed in the potential of the company and worked for free for six months. We, on the Board of the Directors, supported them during this time through active business development. We introduced ProActivity to the famous EMC CEO during a visit to Israel. It was a surprisingly great fit for the CEO’s new strategic plan and offering. Within two months ProActivity was sold to EMC for 23 million USD.
We must ask ourselves, how can we best quickly adjust to change and ‘potential’ change? I would argue that it is key to understand and remain open to some of the assumptions you may have had yesterday, but not to allow them to load you down, like a heavy weight. Understand that with each new day comes a new challenge, a potentially new environment, a new trend and sometimes even a completely new reality. Flexibility and open-mindedness are essential. Build your company in a way where it is possible to make quick decisions and implement in the same rapid pace. If this philosophy is built into the fabric of the company and is exercised even on a small scale on a routine basis, then when the big changes come along, quick decisions and rapid mobilization will not feel so foreign.
Let’s explore this point a bit further. On the global front IBM implemented an amazing change. They switched their business model from focusing on hardware, where the margins were getting lower, to a sophisticated, multi-disciplinary software/hardware service. They also sold their PC unit to Lenovo. Their timing in doing all of this was equally amazing. Had they waited longer to implement, quite frankly, it is very likely they would have gone out of business.
A concluding thought: they say that meaningful change first comes from within. If we need to be ready to implement fast change that will impact external events, then we must be willing to first look into ourselves, and make the changes necessary to building the power and the confidence to effect positive change around us.
We all manage energy every day of our lives. We understand this intuitively. We do this while negotiating, communicating, and actually in all of the facets of our business interactions. The energy exerted between two colleagues, or during the interaction between any two participants is sometimes positive, and in some cases negative. Energy is dynamic and can be classified in many different ways. It can be powerful or weak, and can change course as quickly as does the direction of the wind.
Considering the volatility of energy, there are a series of questions that beg to be answered: when it comes to business, how important is it to manage energy? And, can it be managed to positively impact business dealings? And if the answer is yes to both questions, then the next big question is “how” can we best manage energy to achieve business success?
I can honestly say, that based on decades of experience with daily and literally back to back business meetings as well as brainstorming and briefing sessions, that no matter the topic - fundraising, investment, company board meeting, etc. – energy ALWAYS plays a role. From the moment you walk into the room, the nature of the energy sets the mood, positive or negative, and serves as a barometer to let you know how much and what type of energy is required of you to achieve your goals.
I have found that the likelihood of success is 10 times greater if the energy in the room is positive than when it is negative. I have also found that the driver for the creation of negative energy, in any given interaction, is fear. More often than not, this fear often stems from a dynamic whereby one side is worried about the unknown or about the ability to protect its interests.
Examples of this can be found in the venture and equity fund business. Looking at the big picture: when due to financial loss change becomes inevitable in terms of ownership and management and positions are at risk, uncertainty and the unknown spawn negative energy into the communication between those seeking change and those in the existing apparatus, the latter naturally doing their best to defend their interests and, in the process, rely on fear as a driver.
Years ago, during a PowerPaper board meeting, it was clear that change was not only required but also quickly approaching. Though both operation and product development were both well under control, it was also understood that new investment crucial to the survival of the company and which would increase its value, would ultimately take the company in a new direction.
This new direction meant change of ownership and management. Both considerations were met with apprehension by those in the existing apparatus. And, as can be assumed, all subsequent meetings where conducted under a thick air of negative spirit, which, admittedly, I too also contributed. In retrospect, the management of that energy could have been exercised in a better way to create a long term alignment of interests and with less of the fear factor. This would have supported an easier transition period, now currently underway in the form of a kind of rebirth of the company in China, but a much healthy version of it.
Western companies actually suffer from such situations more so than Chinese companies. This is because western entities have at their disposal many legal tools that can be used to significantly sway and alter the balance of power. Chinese culture, conversely, has developed over the years a more balanced communication and favor exchange method which creates more possibilities and better balances the outcome of change.
There’s an expression in English: what goes around, comes around. This means, the spirit of a deed done now, positive or negative, will revisit you again in the future. This is true of the management of energy as well. Looking back at twenty-five years of business communication experience brings to mind assorted considerations that further prove the importance of the proper management of energy in the short term, for the benefit of future interaction. I would like to argue that both the positive and negative energy created in a business interaction is certain to follow you and for years to come. There is no time limit. You just never know when you may encounter these same situations or people again in a future transaction of information or money. All this considered, one must ask themselves at every intersection, will the result achieved by creating negative energy be worth the implications and the almost certain impact on future and unrelated cases? Again, let's keep in mind that energy, positive and negative will follow you wherever you go.
Due to this universal truth, many choose the passive aggressive approach of non-response. They maintain a neutral face, thinking this is the safest way. However, in reality, they are just avoiding a conflict. Perhaps this is a good strategy. After all, from the energy point of view it may serve to avoid negativity. However, it also stunts the flow of energy and retards any hope of creating momentum necessary to achieving progress. As some may agree sometimes the calculated use of negative energy can create momentum that can ultimately be transformed into positive energy. A little finesse goes a long way to resolving a conflict amicably and in such a way that leads to progress.
It's all physics in a way. As Einstein wrote, “Energy cannot be created or destroyed, it can only be changed from one form to another.” The victorious, therefore in my opinion, are those with the talent to effectively manage positive and negative energy as required.
Some tips on how to create positive energy in an interaction: first, smile, even if the discussion is by telephone. Imagine the good side of each person you meet, understand that each one has an option to become a personal friend in a certain situation. Exude confidence and project the same in the one with whom you are speaking by sharing an optimistic point of view. Other secrets to success will be shared in future columns.
It is estimated that there are around 20,000 private equity/venture capital, RMB funds currently active in China. It’s actually quite interesting how large this number is considering that only five years ago there were only just a few. The rapid growth in the industry begs reflection and some analysis. On the one hand it is truly an amazing phenomenon that an industry can go from practically non-existent to a major one in what some would consider a blink of an eye. On the other hand, this same rapid growth is also a bit worrying as it follows a well-known and habitual pattern in China – growth to the point of market saturation and over capacity.
That is not to say that there isn’t any room for the private equity/venture capital industry to continue growing, just that it’s better when growth is based on a proper balance between existing professionals and the newcomers who will inevitably experience a learning curve.
In late 2004, when Infinity received the first license ever given in China to establish an RMB fund in the structure of a GP/LP, few in China understood what the private equity/venture capital industry is about - its intricacies and its value. A new system needed to be developed to manage this new industry. This included for example the drafting and adoption of new regulations. A new language also needed to be learned in a manner of speaking: terms like LP, GP, Carry, etc., were totally unfamiliar. Fast forward five years, and regulations are now well established and equity capital/venture capital “lingo” is now well- known by most and commonly used in discussions just about everywhere. Private equity/venture capital leaders have become celebrities in a certain way, and role models.
So, what can we learn from this? First, when something seems to have value in
China and is supported by the government, it scales up lightning fast. We all know that the Chinese are great students and act quickly. This is the good news and the not so good news, as this scale up almost always leads to over capacity, saturation and as a result a dismal situation that more times than not leads to a stream of failures.
Why? An introduction of many new comers to the industry in such a short amount of time usually indicates that more than just “professionals” are trying to get in on the action. Many of these new comers have come to the party prematurely. Their interests are more focused on a sense of capitalizing on an opportunity rather than a drive to contribute professionalism and expertise to a promising, emerging industry. Right? Wrong? In the dynamics of the Chinese economy, this may be the right way to go. However, the net result, in my opinion, will inevitably be a high rate of failure.
Against this background, let’s continue the discussion with a review of the ongoing, popular and a most interesting debate: in the private equity/venture capital world, is investing an art or a science? Which school of thought or activity is more important to generating success and sustainability? Do acquired skill sets guarantee success? Or is success more in reach for those who have a strong “inner voice”, a “gut feeling” they can rely on, or if you will, good common sense and a general understanding of people and the interpersonal skills and relationships that result in strong bonds of trust and friendship?
At the risk of dating myself, I’d like to share a story that summarizes how I view the answer to this question. When I took my first steps into the venture industry in the late 1980s, early 1990s, in New York City, l had two mentors. One was Mr. Marshall Butler. He was and continues to be a “people person”. For Mr. Butler, it was mostly about feeling-out the capability of people and estimating personal relationships alongside the facts. My other mentor was Professor Ken Rind. He was all about market research, track records, numbers, forecasts and analysis. I used to say I have the best of both worlds: an art teacher and a science teacher. Who better to learn from? In retrospect and in the overall analysis of which school of thought will more likely lead to success, I would have to say that I believe it’s best to have a little bit of both. Twenty some years of experience later, from my prospective today, I can say having one without the other is like having a half-baked cake. One needs to find a balance between the two, their ying and yang of skill sets and people skills, and exercise both as you approach each turning point and sharp corner.
An example: all three of us, Mr. Butler, Professor Rind and myself, were faced with an Internet deal in the competitive price shopping arena. Professor Rind immediately focused on the technology and numbers related to performance. Mr. Butler immediately focused on the CEO’s background, his team’s motivation and his vision. For me, as an observer, I learned earlier on that the best deals result from when those who exercise these two approaches, though vastly different, manage to somehow arrive at the same conclusion – and thus we have a harmonious marriage of science and art, not to mention a really successful business deal.
When it comes to China these days I believe that only a short list of the existing private equity or venture capital funds have a real ability to exercise the scientific approach. Most of the funds do not have the full skill set to balance all of the aspects. This does not mean that they will not be successful, only that in the long run, they will be unlikely to sustain this success.
There is a tendency to confuse creativity with innovation. Let’s try to be clear. Creativity represents the ideas and innovation represents the process whereby creative ideas evolve into reality. Creativity is an innate, personal quality – you either have it or you don’t. Innovativeness, conversely, can be learned, developed and fine-tuned within an organization.
Here’s the problem though. If not focused, the process of innovation can end up being a real mess. In fact, most organizations struggle with the innovation process as it is not clear whose responsibility it is to lead the effort. Is it the marketing department? Perhaps the products department? No, it must be in the research and development department. It can be awfully confusing.
Another reason for the potential mess is the lack of coordination between the departments of any given organization. Smooth transitions from department to department in terms of information flow and task assignment are at best challenging.
At Infinity, we have had a few cases where the strong ideas of one company eventually materialized into innovative success, however mainly due to the innovative talent of another company. For example, we were working with a gaming company that had this great, creative and original idea for the PC casual gaming industry. It had access to all the various possible resources. However, due to the lack of a comprehensive process, this same company missed the social gaming opportunity and never quite made it into the Apple games industry. They had the makings of all of the right stuff, but no one in the company had the vision to do a proper numbers analysis and work with a diversified management team. Instead they relied on intuition and habits. As a result they lost the opportunity to lead a market and are now trying once again to identify the next hot trend. And, they may in all likelihood still be able to experience success, as all of the organization’s various departments are now well coordinated and focused on one clear target - profit from the existing PC market, while preparing and coordinating efforts for the next big thing.
As innovation can be learned, it also stands to reason that a company actually has the ability to nurture and grow a “culture” of innovation by creating an open door policy for employees to challenge the ideas upon which existing products are built as well as the process that built them. These challenges breed creative thinking and ultimately have the possibility to result in a better, perhaps even more advanced model. If companies are welcoming, give incentive and perhaps even reward those who dare to challenge the status quo of product invention, then others within the company will follow suit, inspired by the fresh air of innovation.
This is easy to say but difficult to implement. Breeding an innovative culture within its companies remains a challenge in China, given the importance placed in traditional culture on keeping harmony and respecting those senior and/or older. As a result, Chinese companies with a fresh view, a creative outlook and an innovative spirit, constantly and inevitably hit a proverbial glass ceiling without hope of breaking through to reach the light. There is fear that the vast majority of breakthrough innovations will cause damage to the existing power structure.
Culture is often referred to as the "mother of all institutions". Considering, we should not presume that such a strong entity will change readily or overnight. Rather we should focus on dividing the process into stages: to begin, encourage the creation of a defined structure where team members may exercise creativity and innovation and even be rewarded by those senior or older for certain "out-of-line thinking”.
A successful innovation is one that has gained support from all origins of the organization and from the Eco system around the company. These include media, government and services providers. Internally, the most effective support for process comes from the confidence placed in leadership of the innovation initiative, which must start from the top management and be led by highly respected individuals or teams.
Two others critical segments of innovation which need to be defined and communicated with are the developers (mostly in R&D department) and the executers (operation and marketing). The leaders of the developers are the ones who take the initial idea and challenge it in terms of technology, production, market and financial implication. From there, they need to communicate with the executers, again the operations and marketing departments. And aside from the usual functions, the the executers may also need to periodically alert human resources to the need for new talent and systems required as the organization continues to grow and its developments advance.
At one of our material companies, we decided to take their high purity powders and create a new product - an electronic high end capacitor. The point of this innovative initiative was to create a situation whereby we could enjoy the high margin afforded by a “product” in place of the limited and low margin potentially gained by a ‘material’. The result of such a planned process was a new organization, new hires, new training and new market channels. It took a long while before success was realized. Nevertheless, in retrospect, it proved to be the right move for the long term.
There is a famous expression about the weather in Boston, MA, which I remember fondly from my days at Harvard University, which is situated just across the Charles River from this fine city. It goes like this: If you don't like the weather, wait a second. Then, the sky would likely go from cloudy to sunny, or the opposite. The weather changed regularly and sometimes instantly, for the better and then again for the worse - but one thing was for sure, it was always changing. This too seems to be the case with current economic and geo political current events. Blink for a moment, and reality as you knew it, has changed.
For those on top of their game, such changes should effect business decisions. Economic and political changes are sometimes for the better, sometimes for the worse and sometimes birth a totally new trend. Technology and the internet, for example, have introduced many opportunities, transparencies and changes.
Whichever the course, however, one thing you can be certain of is that there has been change and, just like with the weather in Boston, you will need to roll with it if you want to keep up, or better yet, lead the way and benefit from it.
In the future, when we look back at the coming year of 2012, it will likely be remembered as a year of many as well as major changes with regard to political leadership, policy and the continual shifting of power, mainly from west to east.
In addition, the political landscape is changing worldwide. In the Middle East, this can be summed up in two words, what the press is calling the "Arab Spring". Europe is also undergoing transition; leadership in Italy and Greece just changed hands. And, the United States is soon to potentially follow suit with a pending national election in 2012. As for China, we are all well aware that new leadership is soon to assume the reins of power.
Along with the change in leadership, world economies are nearing a turning point. Europe is currently experiencing a banking crisis, the future of the Euro is in question, the economies of Greece and Italy are at near collapse and in the words of President Obama, the United States is not quite over the recession. In addition, we are witnessing major decisions being made regarding the waving of nation debts, the changing of currency policy and on the shorting of manufacturing. The ability of the leadership in power to make decisions that will bring about positive change in all of these areas will certainly be tested in 2012.
Business and market environments have also been swept away in this frenzy of change and are daily affected by current events. In fact, now more than ever, new business models are regularly emerging to deal with these changes. Entirely new industries are being formed; there is also a clear shift in power both on the geo political level as well as that on the industry level. The mode of operation is constantly changing; however, this change is key, even essential, for any long term business leadership or value creation.
Naturally, every business will handle changes differently. Businesses in their own right are diverse -each one has a unique management team, a level of available resources, and a defined strength of brand. One common denominator that all businesses share with their competitors, however, is that they all operate in the same eco system. As a result, I would argue that many of factors that are crucial to a company's success are actually external rather than internal. This said, the challenge for most management teams and owners is how and when to change according to these external factors - present and future. In my opinion, the ones who will do the best are the ones, who, to borrow from an English language slang expression, know how and are able to roll with it.
What exactly do companies need to understand and do in order to successfully roll with it? First, companies need to evaluate their business model and determine if any modifications are required due to changes brought on by external factors.
Ask yourself, what is your value proposition? Who are your real customers? And, how is your relationship with those customers? What are your present activities? And, what is the associated cost structure? Who are your partners? And, why? What is the base cost of your product/supply chain? What channels are your available channels? What is your status in terms of finances and cash flow? What are the trends within your revenue stream?
Once you have the answers to these questions, the next step is to begin thinking about the future and devising a 3-5 year plan. Fast forward to tomorrow and try to predict your situation a few years down the road. This exercise should be done with people within the company's eco system and should include board members and managers, as well as trusted customers and suppliers. Gain feedback from each separately and independently as well as in a group environment in order to benefit from collective brainstorming.
Those with a firm grip on the reality of their situation, a fine sense for future trends and the open mindedness and agility to make adjustments complementary to changing external factors will be more likely to ultimately prevail and weather the various seas of change. Some won't.
An example of the won'ts - We all know how powerful social networking has become. Social networking has changed the way we receive news and share information. From the online gaming perspective, it represented a huge growing niche that required a model other than the traditional. Infinity had a leading online gaming company that unfortunately missed two huge chances to change their business model and win big. The company is called Zinga. As a result of their inability to identify the window and change their model in a timely manner, they are now in an IPO process at a 14B USD market value.
I find culturally savvy Chinese companies are indeed able and willing to change their businesses models quickly as they have an interest in cross industry play. The problem, however, is that Chinese companies are not culturally wired to lead change, but prefer to wait and see how others fare with such activity first and learn if the effort generated success. This creates a reality where the leading updated models originate from places other than China.
Examples of business leaders of change include well-known names such as Apple and Amazon. Apple, which I tend to cite regularly as an example, consistently reads the market and does not limit itself to one industry, or become preoccupied with online verses off line thinking. Apple always focuses on the evolving need that is emerging and leads the pack. Amazon, which originally sold books on line, shifted to selling a wide variety of products. They added cloud computing services and hardware devices to contain users and built the world's top logistics platform as well as a content hub. A side note: Netflix, which started so well like Amazon but in the on line and off line movie distribution industry, failed to leverage new opportunities and to change its model due to a deep misunderstanding of its customers.
Nokia, however, is a wonderful example of a company that beautifully changes its business model according to predicted market demand and has a keen understanding of its customers. From boots to cables to computers to cell phones to Internet, Nokia is always able to read the blueprint before it is clear to the rest of the world. And then, these days, there is also google, which soars past competitors, leading the way, redefining the rules and chartering new ways of thinking. They don't bother worrying about making mistakes; they smell the aroma of change in the air and just roll with it.
"I don’t understand.” “Why do they think like this?” “Why are they doing this?”. "Why don’t they respond to us?” “Is it a trick?” “Are they trying to take advantage of us?” These are questions and concerns I have heard many times during my work related to China the last eight years, some on a daily basis, some repeatedly through the same day. These resurfacing doubts are mostly the product of a cultural gap and are genuinely felt on all sides of the cultural spectrum. Such doubts frustrate all parties involved. And, when this happens it snowballs -miscommunication followed by misunderstanding and eventually, most unfortunately, mistrust.
One of the welcomed adventures of the last 8 years, for me and my colleagues born in countries other than China, has been learning the intricacies of the Chinese culture. What and what not to do. What and what not to say. My goal was to understand the local culture well enough to function effectively and successfully. The good news was that I had guidance early on from my brother, who was already an established businessman in China as well as the support of several kind, patient and trustworthy Chinese friends. These relationships helped to smooth the learning process and it didn’t take long to adapt and operate in a local manner. The ability today to clearly understand and operate accordingly with local Chinese etiquette as well as that of Western countries enables me and my colleagues to successfully guide our Chinese and Western partners towards their goals of symbiotic cooperation.
Such gaps have a growing effect, given the fact that more and more Chinese entrepreneurs and companies are exploring ways to bridge the cultural gaps between East and West.
I have the good fortune to be one who lives in both worlds – East and West. To my Chinese brothers and sisters, please allow me to share some additional thoughts that will help you to better understand the “foreigners” a bit more.
1) Messaging “between the lines”: most people in countries other than China do not easily understand the “unspoken”. They may need to be told more directly, in clear language as evaluating subtle messaging is not a strong point. Feel free to be direct, and not to worry, your colleague from outside of China will not only NOT be offended, but may also actually appreciate your candor.
2) Foreigners are very worried about operating in China since they hear repeatedly that their instincts may not apply well here. As a result they will sometimes appear to be very suspicious or slow reacting, when what they are really doing is resolving various fears. As an example, last year, like always, we were structuring an IP deal where a Western company was licensing its technology to a Chinese partner who was planning to further develop the line of products for the Chinese market. Both sides had agreed to all but two of the accord details: giving all of the source code before full payment and transparency regarding future development. Cultural misunderstanding got in the way and the differences could not be bridged.
3) Technology know-how: Foreigners value technology know-how even before it has a brand or strong references. They feel that technology know-how is not just a tool, but truly an asset. Most Asians, however, see technology know-how more as a tool with questionable value, especially if there hasn’t been any branding. We have experienced this difference in philosophy, every single time, with every case, without exception. It boils down to the value placed by each side on the “essence” of what is being licensed. This gap is traditionally very wide. The Nanomotion deal is a good case study of how to bridge this gap. We did so by arranging for the down payment to be made at the signing ceremony. This showed appreciation and understanding of value. The second half of the payment was based on results in the market with a downside protection.
For companies and entrepreneurs thinking to venture “outside of China” in terms of investments, acquisitions, etc, there is a growing need for these same people to make an effort to understand the culture of the country in which they are doing business. Cultural gaps have the potential to create a high level of emotion, high enough for one to lose one’s objective business sense. I’ve seen it happen. For this reason as well as for the others noted earlier, closing cultural gaps are essential to avoiding misunderstanding and generating good communication, better focus and ultimately a higher chance at success.
So, let’s ask ourselves, what else do we need to understand about those who we wish to do business with outside of China in order to communicate well, understand one another clearly and develop trust?
Let’s review some simple but important categories: eating, drinking and traveling. Something as simple as dining can actually be a very complicated situation. First, not only is the food different in China than in the West, so too is the approach to food. In China it is much more about the cultural experience and the social significance; for foreigners it's more about enjoying the actual food itself. And, in some cases, food is merely seen as a means of sustenance to keep the proverbial engine going. As the saying goes, they eat to live rather than live to eat. Two years ago a large pharma company hosted a high level delegation of SOEs from a Chinese company. For the sake of sticking to the time table, rather than organizing formal dining, sandwiches were ordered for lunch. Needless to say, the visiting delegation was insulted. They understood this to be a demonstration of the value the host placed on the potential cooperation.
In China, restaurant diners sit at a round table. Larger plates of food are set in the middle for everyone to share and enjoy. Diners use chopsticks. In the West, generally speaking, tables are of all shapes. Diners use forks and knives. Restaurant diners enjoy meals prepared for each at the table based on the individual order of each patron. No one shares. Personally, I am a fan of sharing and of the art of eating with chopsticks. After 8 years or so, I am proud to share, that I have actually become quite proficient.
Drinking: in China, heavy drinking is a part of the business culture; in the West however, not so much. Westerners enjoy a glass of wine or a cocktail at lunch or dinner. But that’s about it.
Travel courtesies: hospitality, from the first to the last moment of a guest’s visit, is extremely important. An example of hospitality gone wrong taken from the early days - seven years ago a delegation from one of our city partners landed in Tel Aviv.
Our office sent a driver to greet our partner and to take care of him- the traditional way in Israel. What was a “usual” in Israel was considered bad taste by our Chinese guest, who from his cultural stance, and rightfully so, expected to be welcomed personally by a senior company representative. To make things worse, the driver misplaced our partner’s belongings and did not understand a word of what our partner was trying to convey throughout their time together. Though of course no ill will was ever intended, reality did not meet expectation due to a cultural gap and as a result there were bad feelings, luckily though, only for a short time. Well, live and learn. Since then we have been very careful with every detail when planning and hosting guests from China on a business trip to Israel. From the moment our guest arrives in the country to the moment of departure, we have Chinese speaking people with our guest at every point to ensure smooth communication as well as a senior level member of our team. But, keep in mind that this is how Infinity works. So a small suggestion: when you are visiting a location outside of China, if you are collected at the airport by someone other than a senior level company official, best not to take it personally, as 1), this may be normal practice for that part of the world and 2) the company may not be in tune with Chinese practice and your corresponding expectations, no matter how legitimate they may be.
In my travels I have noticed that many Chinese companies are experiencing an internal conflict: on the one hand, there is pressure to have an innovative capability
which can support long lasting sustainable growth and brand building; on the other hand, there is a natural tendency and culture to implement a cost effective program that will produce a short term gain as well as a high P/E performance for the stock market and for listing purposes. Hence: the conflict.
At the core of it, I believe that true innovation requires a longer term vision, along with associated risks and costs. But, is there a way to compromise and benefit from the best of both worlds?
Most Chinese companies and products are based on current strong market pull and do not “need” or “want” to take the risk of developing fresh market segments. In short: they do not want to "rock the boat". For these companies, one compromise we are seeing in the market is the exercise of low cost innovation. This entails maintaining the basic product and process, while concurrently improving both or “adding” to them. Certainly, this is the more practical choice for the short term and fits nicely with the culture of lower risks and short term profit. But, is this good for China? Is this really the way to go?
Let’s briefly further review the choices. The low cost option has been referred to in several different ways. GE’s Jeff Immelt and Vijay Govindarajan, of the Tuck Business School, call it “reverse innovation”. S.D. Shibulal, chief operating officer of Infosys Technologies calls it “frugal” innovation. My preference, however, is the popular term “incremental innovation”. No matter what you call it, though, the definitions are congruent. As described by the Economist: companies from emerging countries like China and India, for example, are redesigning products to reduce costs not just by 10%, but by up to 90%. They are redesigning entire business processes to do things better and faster than their rivals in the West. The net result is a sturdy product that can be offered for a substantially lower price and therefore affordable by the middle market.
Most industries worldwide have been touched by this approach from cars to computers and everything in between, and the list of products developed under this umbrella continues to grow rapidly. There are many examples: Tata Motors has produced a $2,200 car, the Nano. Godrej & Boyce Manufacturing has developed a $70 refrigerator that runs on batteries, known as “the little cool”. Start-up First Energy has invented a wood-burning stove that consumes less energy and produces less smoke than regular stoves. And, telecoms entrepreneur Anurag Gupta has reduced a bank branch to a smart-phone and a fingerprint scanner that enables ATM machines to be taken to rural customers.
In China, the list is equally impressive. Haier, a multinational consumer electronics and home appliances company headquartered in Qingdao, Shandong, took wine-cooler refrigerators, a high-end consumer good, and redesigned it into a much cheaper middle-market one. In doing so, Haier secured 60% of the market in the process (Peter Williamson, former INSEAD professor).
All of these case studies demonstrate that incremental innovation has value. Now let’s ask ourselves a fundamental strategy question that many companies face, in and outside of China. Is this enough? Or, is it savvier to follow the “dramatic innovation” track, which provides fertile ground and the open space for the entrepreneurial spirited to freely “break” the rules, challenge assumptions, take risks with an open mind, try to develop something totally fresh and in doing so “create” an entirely new market?
In my opinion, it is more advantageous for companies that want to be market leaders and to build a real brand, to ride both tracks simultaneously, keeping mind that different teams with different skill sets should be set up to support the initiatives taken under the umbrella of these respective approaches. Bear in mind though, that if successful, dramatic innovation has the potential to produce returns that far surpass that of incremental innovation.
A classic example of proven, pure, unadulterated “dramatic innovation” that has reached the highest level of success is Apple, developer of the iPod and iTunes, Mac laptop and desktop computers, the OS X operating system, and the revolutionary iPhone and iPad. Apple is a household name, which means that their branding has been enormously successful. They are well-known not only as industry “leaders” but also industry “creators”. Each year, the world anticipates what Apple will come up with next. This company introduces products that we didn’t even know we needed but discover we can’t live without once we have them. As is the case with dramatic innovation, old assumptions are cast away and replaced by the designs of a totally new concept. The way Apple founder and current chairman of the board Steve Jobs lured John Sculley away from Pepsi-Cola in 1983 to serve as Apple's CEO, sums up very nicely the philosophy of dramatic innovation. Jobs asked Sculley: "Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?" In 2010, Apple surpassed Microsoft in market capitalization; it also became the most valuable consumer-facing brand in the world with an 84 percent increase to $153.3 billion.
A company that has adopted both strategies and has prospered nicely as a result is Chinese telecom giant Huawei. As reported by the press, Huawei absorbed foreign technology and business expertise, and adapted both to create products for the Chinese market before taking the same strategy into global markets. Here we have “incremental innovation”. In April 2011, Huawei announced a net profit in 2010 of US$3.64 billion.
Notably, Hauwei, which reportedly was the world’s fourth largest patent applicant in 2010, has also adopted the dramatic innovation approach, having established many R&D centers worldwide, including one in Israel. The Center in Israel is managed by strong visionary leaders with a long term outlook and a product pipeline in development for market launch not in the near future, but rather in another 5-10 years from now.
In fact, most Israeli innovations would be classified as “dramatic” innovations. One of my favorite examples comes from our company Given Imaging - capsule endoscopy pioneers anddevelopers of the “PillCam”, the gold standard for small bowel visualization. Given Imaging’s PillCam is an edible capsule with a camera inside. The camera photographs its journey down the gastrointestinal tract and then passes naturally with a bowel movement usually within twenty-four hours. The pictures are saved on a data recorder and later downloaded. This offers a beautifully non-invasive and quick way to assess a situation. An anecdote: I gave a “model” of the Pillcam as a “fun” gift to various esteemed colleagues at the 2010 World Economic Forum’s Annual Meeting of New Champions. It was my way of sharing the joy of Israeli dramatic innovation. The enthusiasm spread rapidly. I remember being told by a third party that our friends were sharing with pride the PillCam story with other friends, some who also pulled out “their” PillCam with equal excitement.
Infinity Group’s Israeli portfolio company PowerPaper offers another excellent example of a pure attempt at dramatic innovation, currently in the making. This relatively small company has invented a thin, flexible, environmentally friendly “printable” battery that can be applied to enhance products in just about any industry- medical devices, apparel, shoes, greeting cards, to name a few – the list is as infinite as the imagination but with the classic challenge of price. This “out of the box” thinking led to a product with cosmetic giant Este Lauder to develop, produce and market cosmetic patches to reduce wrinkles. The paper thin battery serves as a conduit to transmit the active wrinkle removal agent in the patch. The same technology has also led to the development of security password patches and RFID battery assisted tags, among other novel and useful products. Founded in Israel, most of Power Paper’s activities today are based in China, where the technology has been fine tuned for application to products for the local market. The challenge now is to build from “scratch” a new market that understands, appreciates and enthusiastically embraces this golden concept. Dramatic innovation projects need market lift and once found, the next step is simply to “go for it”.
What separates those companies who do well from those that do great and are long lasting? What can make the difference, in the long term, for businesses aiming to be the best and with an interest in maintaining that status? The short answer: at first glance, perhaps proper branding; however, a more thorough look at the issue reveals, unequivocally, strong R&D centers.
It is widely agreed, including by the top leadership in China, that strong R&D centers are central to the substantive and sustained growth of a company. Critics argue, however, that R&D centers create a cost that hurts a company’s financial performance and reduces its private equity rate. They say that it works just as well to take existing ideas and products and simply improve them. Moreover, they contend, that if a company is publicly traded or wants to be, every RMB spent from the bottom line would cost 40 RMB on the valuation. And, as many companies have a natural tendency to operate on an as needed basis, R&D centers generally do not fall on their top ten lists of necessary initiatives.
In my opinion, if a company has a sincere interest to be long lasing, this is a mistake and the wrong way to approach long term and sustained growth, and especially from the point of view of branding. A strong R&D Center not only affords a company the ability to stay updated, fresh and to regularly introduce new products to the market, it also provides for “protection” in the event of a down turn. For example: imagine your competitor comes up with a new product that changes regulation and opens or shuts down the market. A strong R&D center would help drive the spirit of your team and strengthen confidence both internally as well as externally by securing favorable opinions from the analysts.
From a macro perspective, it is clear that the opening or acquisition of R&D Centers is actually an ongoing and growing trend, both in and outside of China and in a variety of sectors. For one, Chinese companies are buying or establishing R&D centers in the U.S., Europe and of course at home in China.
Take for example Chongqing headquartered Changan Automobile Group, which announced in January 2011 its plans to open a research and development (R&D) center in the US city of Detroit. This made Changan the first Chinese automaker to have a research base in the U.S. The Detroit center reportedly will specialize in automotive chassis technology, including performance development, computer-aided engineering and manufacturing process research. Chassis technology, seen as one of the core and most difficult automotive technologies, is, according to Changan Chairman Xu Liuping, the key to the success of its future high-end auto projects. Changan currently has overseas R&D centers in Italy's Turin, Japan's Yokohama and Britain's Nottingham.
As reported by China Daily, Xu said, "The US R&D center will play an important role in improving our global product development system and in capturing global auto technology trends."
Another prime example, of a company that has made R&D a high priority and has grown to become a long lasting world leader because of it, is the privately held Chinese company Huawei, a leading global provider of commercial telecom networks. According to its website, as part of its worldwide integrated product development processes, Huawei operates a global network of 20 R&D facilities. 46% of Huawei's employees are engaged in R&D activities and Huawei invests an average of 10% of annual revenues into R&D. Today, Huawei currently serves 45 of the world's top 50 telecom operators. Huawei's products and solutions are deployed in over 140 countries and support the communication needs of one-third of the world's population.
Chinese companies are also establishing R&D Centers in their own back yard in the western part of China, which, by the way, is an area of the country on which many have set their sights. Establishment of R&D Centers, and in the western part of China, not only furthers the develop of product pipelines but also supports the further development of that part of the country, a trend in its own right.
On May 10, 2011, TCL Communication Technology Holdings Limited, headquartered in Shenzhen and the world’s seventh largest mobile phone manufacturer, opened its first R&D center in central and western China in Chengdu’s Tainfu Software Park.
TCL Communications CEO Dr. Guo Aiping said in a press release that "The establishment of TCL Communication Chengdu R&D Center is an important step to further enhance the product and technology R&D capability of TCL Communication and perfect its R&D strategic layout in West China. The Chengdu R&D center will focus on the development of Android-based mobile intelligent terminals. This will greatly enhance the company's core competence in the area of medium and high-end products."
U.S. companies are right there alongside the Chinese companies with their interest of establishing R&D Centers, not only in China, but also in the western part of the country. In April 2011, U.S. cloud computing technology company EMC Corporation (NYSE: EMC) opened not its first, not its second, but its third R&D Center in China, also in Chengdu Tainfu Software Park, following those opened in Shanghai and Beijing.
Dr. Ying Li, EMC Vice President and General Manager of EMC China COE was reported to say, "The new China COE site in Chengdu adds strength to the already highly talented R&D team in China, and it underscores the importance of innovation for EMC's longer term growth in China."
Allow me now to cite some examples from my own repertoire of anecdotes and share some additional insight regarding why strong R&D centers are central to the future success of a company and can make the difference between good and great and staying at the top of the game for a long time.
Intel opened its R&D center in Israel in the 1980's and attracted strong talent which developed the best chip Intel had for years. IBM opened labs and R&D centers which gave IBM a long lasting stream of ideas and products. HP's R&D center created relationships which resulted in access to two important acquisitions in the printing arena.
In 2005 the Chinese company Johnson Electric bought 51% of our company Nanomotion. It enabled the company to have a high end R&D center alongside its unique products in the small motor arena.
These days, we are in the final stages of a deal in the software sector where a Chinese company is buying a team and product in a market sector in which they would like to enter.
Such a move gives them, in one shot, an advanced R&D team, a global product and a strong differentiation via its competitors in China.
In summary, top people can become part of your family if you respect R&D and act to give it both high importance and priority. It could make the difference between winning and losing.
The Search for Value “Outside” of China
Aug. 01. 2011
Source：China Entrepreneur Magazine
A large part of the talk with regard to Chinese companies in the PE industry is usually about how to compete and “win” foreign companies which have entered into the Chinese market or the various ways which Chinese companies can upgrade to become leaders at home and compete well internationally. In the last year, however, Infinity Group has witnessed a growing
trend. It is a theme which we have dealt with in previous years, but not as the growing “trend” we are experiencing this year. Chinese companies are now not only looking for innovative technology outside of China, but also for the right model to acquire such technology, the appropriate business channels to do so and the possibilities of opening corresponding R&D centers, also outside of China. More and more companies are coming to me and my team for advice on such matters, as we are we known for our access to technological innovation, our know-how and of course, our global network.
From our understanding, the reasons for reaching “outward” vary. Companies are looking to create a differentiation in the global market; they are also responding to encouragement by the Chinese government documented in the 12th five year plan; these certain companies have a drive to position their “product” as global technology; technology innovation from outside of China is viewed as a source for new thinking and ideas; by reaching outside of China, these companies believe they may reduce the “China risk”; most of the companies are attracted to the concept of a new market and taking advantage of the low prices now available in western markets and finally – quite simply, they are curious about the possibilities of venturing outside of China. Of course, “outside” could mean any hub of technological innovation, be it the U.S., Israel, Europe or elsewhere.
All of the aforementioned reasons for searching for value “outside of China” make good sense. But like the saying goes, timing is everything. The reasoning may be sound, but the timing must be right for the initiative to be successful. So, the next question is, not only “how” to embark on such an initiative but also “when” to do so in order to increase your chances of success.
Several recent experiences come to mind to illustrate these points. On January 9, 2011, China National Chemical Corporation (ChemChina ) bought Makteshim Agam Industries (Israel), one of the world’s leading generic agrochemical companies, for US$3.4 billion, one of the largest transactions in the agrochemicals sector, and one of the largest cross‑border acquisitions by a Chinese State‑Owned Enterprise since 2006. In this deal ChemChina has gained both R&D centers and business channels. We built this deal in a way that would align interests. As such technology transfer is anticipated to go smoothly, taking place over a period of time, as is needed in such cases. The seller in this case maintains 40 percent ownership alongside a “put option” to the buyer, in this case ChemChina, which controls the company and its operation. This means that if the company will have an independent, good future, the value of the 40 precent will be higher through a new IPO process. Such a structure keeps the motivation of all sides high, while also protecting both sides.
Another example: In 2010 Infinity completed a deal it started in 2005 – the acquisition of an Israeli R&D company named Nanomotion by Chinese motion company Johnson Electric(JE). The first step of the deal was to sell 51 percent of Nanomotion to JE, while the remaining 49 percent was sold five years later based on a formula related to sales performance. During these five years the Israeli and Chinese teams worked very well together based on a joint HR program. The technology of Nanomotion also supported other areas within JE, such as learning how to exercise the technology transfer process. The Board of the company worked very well together; everyone helped each other out and because of this, it was able to overcome most of the culture gaps between the Israeli and Chinese partners.
Another interesting story that is currently playing out is in the area of one of my greatest loves- aviation. (As you may recall, I served as a pilot and was a member of the acrobatic team in the Israeli Air Force for many years.) On March 2011 a unit of China Aviation Industry Corp. announced plans to acquire Minnesota-based private-aircraft maker Cirrus Industries Inc.—a small deal, but which according to the Wall Street Journal, highlights the expanding ambition of China's aerospace industry. The WSJ went on to note: “even though the use of such aircraft is limited in China and most of its airports lack facilities to handle small, privately owned planes, the country is considered one of the world's most promising markets for growth. China's Civil Aviation Administration recently proposed relaxing restrictions for low-altitude airspace in five to 10 years to open up flight lanes for small planes.”
A couple of interesting points: first the deal needs to be approved, by among others, the Committee on Foreign Investment in the U.S. (CFIUS); secondly, this same committee recently denied the May 2010, $2 million acquisition of Bay Area start-up 3Leaf Systemsby the well known telecommunications company Huawei Technologies Co. In short: Huawei was recently told by the U.S. Security Review panel that it has to sell 3Leaf Systems or they will recommend to the Obama Administration to cancel the deal.
Why is all of this important? It goes to the point that timing could be everything. As suggested in the WSJ, the fate of the Huawei deal could work in the favor of the China Aviation deal. For one, CFIUS has approved the transfer of aerospace technology in the past. Secondly, in the words of James Lewis, of the Center for Strategic and International Studies, “The U.S. might want to give this one to balance previous cases .” So, all in all, the China Aviation Industry and Cirrus deal may well be in good shape, in the short and long term, as among other elements, the timing seems to be in China’s favor.
It should also be considered, however, that although pitfalls do exist from time to time, most Chinese companies would not bear witness to the same experience as that of Huawei Technologies. In the words of China-U.S. Trade Law.com blogger John J. Burke, “the reality is that the United States remains one of the world’s economies most open to foreign investment, including from China.” Moreover, I believe that Israel too falls into this category and is well positioned alongside the U.S. in this respect – Israel is a hot spot for technological innovation and R&D centers and is very much open to foreign investment, especially from China.
In general, I believe that Chinese companies are well tuned into the realities of the existing environment and their ambition to venture out of China is yet the latest evidence of the increasing confidence of Chinese businesses. The next step is to combine this confidence with the right channels and the proper timing to achieve the desired success.
In the course of a usual day in the land of equity capital, I regularly meet with start up and growth stage companies looking to raise funding. There is no end to the possibility of choices in our various sectors of focus- medical devices and services, IT, materials, agricultural, clean tech, to name a few. We listen, we look, we investigate and we decide. Is this a good fit?
The question for the companies, however, is how to approach a fundraising effort in the most timely, productive way that will generate not only success in securing the money, but also a stream of successes resulting from the associated terms of the investment agreement.
If you look on the internet, there are many articles about what to do, how to do it and with whom in order to achieve such success. Rather than cite one or more, I would like to share my perspective, gained from 20 years of experience as a venture capitalist.
In my opinion there are five basic concepts to keep in mind: 1) raise money when you can; 2) remember that venture capital firms/angels/equity firms like to invest in a “dream” – the promise of something wonderful that will solve an existing issue or create a better tomorrow; 3) potential investors need to see evidence of potential success, in terms of the product, the leadership and of course the ROI; 4) best not to put your proverbial “eggs” in one basket - meaning when seeking investment, approach more than one source and start with those with whom you have an existing relationship and then be flexible about the structure of the arrangement; 5) remember that when you secure an investor you are not only gaining money but also a “partner”, so before signing on the dotted line, it is best to consider future scenarios with your new partner and determine if this is in your best interest and that of your company.
Easy to say, hard to implement- I know. But, at the core of it, this is what it takes to fit the round peg in the round hole. A couple of stories that come to mind that illustrate this nicely are those of Shopping.com and Chiral Quest. How did we meet? What dream were they offering? And what made the difference that led to our decision to invest - to become partners?
I remember when I first met Shopping.com. It was 1999. We were in the middle of a search for an internet company which had a business model we could understand. The company offered us a huge dream - to lead the world price comparison system. They had an algorithm which could find almost any deal offered on the net. As for execution, they had a great demo and impressive net coverage.We also felt that Shopping.com was a good match for us because of its clear value proposition and its strong management.
We felt closely connected with the management since we shared the same vision. We also shared the same culture; we were all Jewish Israelis. The management was also very active, ambitious and extremely driven. They had their eye on the ball at all times and had a reputation for getting the job done. At no point did they ever lose faith. The dream was always possible, always within reach.
As for Shopping.com, their management was looking for investment from a global player. We met, we talked, we reviewed and after the appropriate due diligence, Infinity Group decided to take a risk and invested 5 million USD for preferred shares.
Shopping.com was also savvy in terms of planning for the future. Interestingly, Shopping.com had the vision to raise more money than they actually needed and orchestrated an additional round of 100 million USD. What was the reasoning behind this? Well, they felt that you just never know what’s coming around the corner or what the future holds, so better to raise more money than necessary, just in case. This decision ended up being rather prophetic and actually saved the company. Years later, when the high tech bubble burst and internet investment was out of favor, the extra money they had raised when they had had the chance, helped them tremendously. Rather than spending a concerted amount of time on raising more capital, they were able to focus their attention on business and growth.
Yes, there was competition in the market. There were several start ups trying their luck. One start up in particular however is relevant to this story. It was called “r u sure?” This company was backed by the well known founder of ICQ Mr. Yossi Vardi. For all sorts of reasons it was challenging to directly compete with him. At the end of the day though, “r u sure” eventually closed.
Conversely, Shopping.com was red hot. In 2004, Shopping.com made $99 million USD in revenue and had a net income of $12.2 million. Then in 2005, ebay, which was looking to boost its business and expand into new areas, bought Shopping.com for 620 million USD in cash. According to research company ComScore Media Metrix: Shopping.com had been adding customers at a faster clip than eBay. It attracted 22.6 million unique visitors in April, up 15% from the same month a year earlier, compared with eBay, which had 63.8 million unique visitors, an increase of 6% over the same period.
Indeed, Infinity’s risk had paid off.
Chiral Quest is another company that comes to mind when thinking about what it takes to attract the attention of venture capital, to secure funding and from the same investor more than once. It is also a good example of a key component of Infinity Group’s core strategy: the successful implementation of technology cooperation.
Chiral Quest is a technology-based company creating chiral solutions for the pharmaceutical industry, assisting pharmaceutical and biotechnology companies to develop processes for the manufacture of their candidate drugs.
During the review process of Chiral Quest, we learned more about the need in China for high end, pharma raw materials. Concurrently, our partner from Suzhou Industrial Park had initiated and commenced a plan to support such companies. What really attracted us to Chiral Quest, however, was the fact that they had a mature management team that really wanted to bring full scale IP and know-how as well as people from the US to China. There was also the option for a large Israeli customer. We decided to invest.
The structure of the deal was as follows: to invest with money from the local Chinese fund, receive major support from the Suzhou Industrial Park and in turn, Chiral Quest would ‘rebuild” itself as a new entity in Jiashan, China. As always, there were challenges, mainly stemming from cultural issues. And, let’s face it technology transfer is always more challenging then it seems. But a little bit of goodwill goes a long way. There is great support from the local government in China and the team is both dedicated and hard working. We have maintained an open communication from the start and this has enabled us to operate nicely together. Well enough that Infinity has invested twice in Chiral Quest, most recently in January 2009, when it led a 16 million USD B round of financing that included participation by Kleiner Perkins Caufield & Byers China, China Spring Fund and JAIC.
In the evolution of any company, fundraising is perhaps the most important event, mainly because the decisions made during this process will ultimately have a tremendously large and direct impact both on your daily operations as well as your long term progress. Allow me to restate this point again, strategic and savvy fundraising not only secures money to build your business, but also the wisdom of experienced partners who can help you to reach mutual goals.
What does it take to be a successful entrepreneur? And, whatever it takes, are these skills ones that we can learn? Or do we, quite simply, need to be born with them?
As a background, it is important to remember, that entrepreneurialism in China is a relatively new concept, born from the economic reforms introduced in the country over the past 33 years. Until the late 1970’s, there were a small number of entrepreneurs in China. And, as we all know, the economic reforms introduced in 1978 changed all of this. In the late 1970s and early 1980s, the government introduced de-collectivization of agriculture, the opening up of the country to foreign investment, and gave permission to would be entrepreneurs to open start up businesses. Then, in the late 1980s and 1990s, the Government took even greater steps including privatization, the contracting out of state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. At the end of the 1980’s, China established special economic zones, including the famous Shanghai Pudong zone. According to the literature, the private sector grew remarkably, accounting for as much as 70 percent of China’s GDP by 2005.
As reported by Xinhua, the 11th Five-Year Plan period (2006-2010), saw China’s economy expand at an annual average of 11.2 percent despite global economic turmoil. And, on April 20, 2011, Chinese Premier Wen Jiabao detailed key areas for deepening reforms in the country's economic system, all part of the 12th Five-Year Plan (2011-2015). These reforms include balancing government with market, economic growth with social progress, deepening reforms while maintaining stability, and addressing current challenges in improving systems and mechanisms. More specifically, the government plans to turn state-owned enterprises into stockholding corporations, and formulate open and transparent market access criteria and supporting policies for non-government investment.
In addition to the economic reforms over the years that have made entrepreneurialism possible in China, it is also necessary to consider that there are different types of entrepreneurs. And that perhaps these different types require different types of skills sets –some that can be learned, others that are innate. Naturally, categories differ from country to country, depending on political, economic and social structure and of course are defined differently depending on the source. Literature pertaining to entrepreneurs in China is no different.
Take for example the following: in a lecture called “The Chinese Economic Reform and Chinese Entrepreneurship” delivered at a Jornada d’Economia symposium in 2005, Vicky Hu, then president of HD Biosciences in Shanghai and CEO of China Capital Investment Groups (CCIG), argued that Chinese entrepreneurs come from four types of companies: state-owned companies, former state-owned companies turned into stock companies, private companies and foreign fund companies or joint ventures.
Yasheng Huang, professor of international management, who holds an international program professorship in Chinese economy and business at MIT’s Sloan School of Management, approaches the issue differently. In an article in the World Economic Review, he writes that there are two types of entrepreneurship in China, catch-up entrepreneurship and frontier entrepreneurship. The former copies that invented by others and recreates at a competitive cost. Huang argues that the majority of Chinese entrepreneurs fall under this category, which is all about job creation.
Frontier entrepreneurship, he defines not as replicative, but innovative and inventive, and explains is more about creating breakthroughs in science and technology. “Frontier entrepreneurs….need a multi-tiered financing structure (early stage venture capital to late stage public market financing); they constantly need fertile ideas from multiple sources; they need the freedom of expression to state their views and make their cases.”
I tend to agree with Professor Huang. I also believe that these categories can be applied not only to China, but universally. I also think that the skills associated with catch up entrepreneurs, or what I would classify as those working in a “structured” environment, can be learned. This type of entrepreneur has generally worked in an industry for a decade or more and has the experience and the relationships to reinvent an existing product for an existing market. Other contributory factors to potential success include the nature of the market, the level of innovation needed and how much one needs to rely on others. However, the stronger the entrepreneur’s network and experience, the greater the chances are to succeed.
In comparison, frontier entrepreneurs, or those who work in what I would call an “unstructured” environment, push the limits. They are the risk takers who ride the wave of new regulations to create new technology that creates new markets. It’s about character. They thrive in operating in a less structured or completely unstructured market. They have an abundance of confidence, make assumptions and exercise a high level of creativity and a high degree of flexibility in order to achieve. In my opinion, these are traits that one either has or does not have. These you are born with.
The story of Israeli company ICQ is an excellent example of entrepreneurialism originating from an “unstructured” environment.
ICQ is an Internet chat program founded by Yair Goldfinger, Sefi Vigiser, Amnon Amir, Arik Vardi, and Arik's father Yossi Vardi. As described in Start-Up Nation: The Story of Israel’s Economic Miracle by Dan Senor and Saul Singer, Vardi is synonymous with the world of Israeli Internet start-ups and is credited with helping to rebuild Israel’s Internet sector from the ashes of the global technology market crash of 2000. The book also describes ICQ, a play on the words “I seek you”, as one of a handful of companies that transformed technology forever, just like Netscape, Google, Apple, Microsoft and Intel.
ICQ was introduced in November 1996 and backed with seed funding by the senior Vardi. What the “guys”, all in their early 20’s realized, was that although everyone was logging onto the Internet, there wasn’t any way for everyone to instantly connect with each other. ICQ was the first program to allow Windows users to communicate with one another live. As Senor and Singer detail in their book, America Online had also invented its own chat program, but this was only available to their subscribers. ICQ, which was available to just about all users and free of charge, spread much faster. By the end of 1999, ICQ had a total of 50 million registered users, making it the largest international online service and the most downloaded program in the history of CNET.com, with 230 million downloads. AOL bought the company on June 8, 1998 for $407 million in cash. According to present day owners Time Warner, today, ICQ has over 100 million accounts registered.
The founders of ICQ were young men when they started, and didn’t have much, if any, experience in their chosen industry. They were adventurers willing to take a risk. They worked in an unstructured environment, sailed unchartered waters, and in doing so created a brand new space and a brand new market that revolutionized communication. These gentlemen were clever, ambitious, fiercely dedicated to their work and focused, all innate qualities- you either have them or you don’t.
Vicky Hu said in her symposium address that “Chinese entrepreneurs are courageous and resolute and they adore their work. Most of them see entrepreneurship as a life-long responsibility and a pleasure….Chinese entrepreneurs are … eager to learn. They learn from experience and they apply management innovation and technological innovations.”
I think she is right. I also think these are universal traits of entrepreneurs that if given the proper financial backing and the environment to explore, be the environment structured or unstructured, have the potential to achieve greatness, assuming the entrepreneur is highly creative, persistent, and has the ability to except fast change- all essential qualities.
In words we all know and which were well articulated by the great Chinese statesman Deng Xiaoping, one of the architects of China’s economic reforms in the 1970’s, “be the cat white or be the cat black, it is the clever cat that will catch the mouse.”
Innovation: it is a vital part of evolution and a term we all see on just about every industry conference program and hear in almost every discussion of the latest and greatest in any given sector. When Infinity Group set up its first RMB fund in 2004, innovation was not a clear target in most of the government and business entities of China. However, in recent years, innovation has become a constant focus more and more in China. This is reflected, among other things, by the growing number of innovation investment vehicles established in China.
Let’s explore the definition of innovation, and ask ourselves, why is being innovative so very crucial to long term success?
Businessdictionary.com states that innovation involves deliberate application of information, imagination, and initiativein deriving greater or different valuefrom resources, and encompasses all processes by which new ideas are generated and converted into useful products. It goes on to state thatinnovation is synonymous with risk-taking and organizations that introduce revolutionary products or technologies take on the greatest risk because they have to create new markets.
From my point of view, this definition of innovation is too broad. There are different levels of innovation as well as various definitions. When we use the term innovation, we may not all understand the meaning the same way - different people, different understandings. However, I prefer to refer to The Four Levels of Innovation as introduced by Mr. Kris Minerand published in 2010 by Pepperdine University’s Peer-Reviewed Journal of Relevant Information and Analysis, Graziadio Business Review:
The first level emphasizes minimal changes to existing products, a low amount of new investment, and very low risk. But to keep up, these minimal changes must be made often.
The second level requires a higher level of changes. Level Two changes include integrating new features into existing products on the market or creating differentiated versions of the same new product to sell to various demographic groups. These new features require what can be considered a medium level of investment and risk.
The third level is where large financial and product risk begins, but it is also where the rewards are potentially larger. At the third level changes are introduced that create a new product line without a proven demand.
And, the fourth and highest level of innovation is where companies are able to create innovations that change how people live. The inventions of print, electricity, telephone, air travel and the internet are prime examples of level four.
Most of the innovation cases I have seen in China are at the first and second levels and have a very practical approach, while the innovations in Israel are at the third and fourth levels and are, in many cases, less practical but with an inspiring vision. One of my favorite stories and one that I believe illustrates the true art of innovation quite well is that of the creation of Israeli company Better Place, a present day pioneer of the electric car.
Though other companies may have tried in the past, it appears that Better Place CEO Shai Agassi and his team, have successfully created the technology and the appropriate system to realize this vision and in doing so, a new global market is emerging.
How did he do it? The innovation lay in creating an “affordable” electronic car with a “safe” power source. Agassi solution: an entirely new technology and infrastructure - wire thousands of parking spots, build battery swap stations and coordinate it all over a new smart grid. The key: customers own the car, but Better Place owns the batteries, which can be charged well enough at home for short drives and can be safely switched with fully charged batteries in around one minute at swapping stations for longer rides. By doing it this way, the company is able to spread the cost of the battery and the car over four or more years. As Agassi stated in the book Start Up Nation: The Story of Israel’s Economic Miracle, “you get to go completely green for less than it costs to buy and run a gas car.”
Better Place is already marketing in Israel and Denmark, where it will begin selling its services to customers in the fourth quarter of 2011 and the first quarter of 2012, respectively. The company has plans to roll out a network in China and Australia as well.
Just recently, on April 27th, Better Place signed an agreement in Tel Aviv with officials from China Southern Power Grid Co. to open a battery switch station and joint education center in Guangzhou, China, by the end of 2011.
This is in line with China’s existing plans to spend as much as 200 billion yuan ($30.8 billion) over the next decade to deploy a fleet of five million new energy vehicles, In fact, as part of the newest five year plan, new-energy vehicles have been named by China as one of the strategic emerging industries that the nation’s economy will be geared to support. Currently, China has pilot programs in 25 cities to promote and subsidize electric vehicles.
China can debate whether it should have the same type of “level four” innovative thinking that led to Better Place’s electric car and infrastructure, and which could be implemented in any given industry.
However, it is clear that China is on a present path to build an economy supported by innovation rather than manufacturing the innovative products designed by others. And, the government is doing its great part to encourage this. One example of a supportive decision is the State Intellectual Property Office of China’s “National Patent Development Strategy (2011-2020)” published in November 2010. This document states China’s goal is to have an annual patent filing of two million by 2015. This number includes both “invention patents” and “utility-model patents”; the latter typically covers items like engineering features in a product. Toencourage “innovative thinking” China has introduced an array of incentives. They include cash bonuses, better housing for individual filers and tax breaks for companies that are prolific patent producers.
I am sincerely appreciative of the Chinese culture and applaud the government’s introduction of incentives to inspire innovation. At the same time, I believe that more than mechanisms need to be put in place, mostly in the education field, to encourage the type of innovation that will produce world class companies that can compete well internationally. Innovation of this nature is born from not accepting the status quo, but in developing a healthy habit of asking questions and exploring the unknown.
High innovation changes our basic assumptions and produces a new generation of thought. The idea that man could fly was once considered absurd. This thought was questioned, and practically challenged. Today, not only is air travel common place, but so too is space travel. The practice of asking questions and the art of thinking “out of the box” could be taught at an early age, introduced into the school system and laced throughout higher education. In turn, over time, corporate culture would evolve in parallel to a point where innovative thinking would become a natural process.
Let’s ask ourselves, how did such a big idea like that produced by Better Place originate from such a small country like Israel? Israel is a country famous for its creative energy and innovative spirit which has produced many truly novel products that have fundamentally changed the way we do things and the way things are done -from medical devices, to clean water technology and of course, the electric car. In fact, Israel is one of the leading “innovation” patent producers in the world. What is the source of Israel’s innovative spirit? The answer: the natural drive, built into the fabric of Israeli society from a young age, to repeatedly ask the questions “why” and “how”?
For many companies in China, however, there is neither an urgency nor a need for a high level of innovation in the near term. Many companies feel their activities are good enough for the existing situation: the Chinese market is huge and it continues to grow. The focus is on market share not on ways to reinvent themselves.
Companies aim to improve efficiency and focus on how to better market their product offerings. All of this is totally understandbale, but conceivably detrimental in the long term. This approach will less support sustainable growth when the market becomes more competitve, which it will, and when it does, the situation will become extremely challenging. Those who refused to accept this enevitable change will go under.