China’s venture capitalists are changing their game. Where it’s previously been difficult for foreign startups to get Chinese VC funding, Chinese VCs are beginning to look at foreign-born startups with significant interest. Shanghai-based Wei Zhou, founder and CEO of XNode, has a unique vantage point of China’s embrace of foreign innovation: XNode is a high-profile startup and corporate accelerator with a flagship space in central Shanghai’s Jing’An district, which provides open innovation training for multinationals such as Intel and Philips and a landing pad in this thriving metropolis of 25 million people for Korean and Australian startups that have received support from their respective governments.

“China’s venture capital landscape is undergoing a shuffle,” he told me, “which means that startups are scrutinized more rigorously than in the past and fewer domestic candidates pass the screening. This opens the door like never before to founders of foreign-bred startups with deep tech solutions that are serious about commercializing in the Chinese market.”

As China marches towards technological advancement, the paradox in its quest for disruptive innovation becomes apparent: Planning for innovation is one thing, but creating it is an elusive and often abstract objective. It requires an ecosystem conducive to such activities, and people with particular proficiencies: Engineers and data scientists with hard technological skills in AI and machine learning, for example, and startup founders with soft leadership skills. China is still short on these resources, and it is currently often Chinese returnees from Silicon Valley who bring home the ethos and the talent. In the meantime, many investors are looking to buy what they can’t build.

The shock that triggered the change

Why are Chinese VCs now so interested in foreign-bred startups? You can trace the change back to May 2017. China had a Sputnik moment that month when Google’s DeepMind AlphaGo artificial intelligence (AI) computer defeated the World champion, Ke Jie, in China’s ancient board game, Go. That a software system developed in the United States could beat the Chinese on their own turf was a shock and a national humiliation.

The reaction was quick. In July 2017 China’s State Council issued the New Generation AI Development Plan, a three-step roadmap to becoming a world leader in AI by 2030. That followed the “Made in China 2025” edict issued in 2015 calling for more components produced locally in China in products that are made or designed in China.

In the few months since that plan was issued, China’s state and private sectors have fully mobilized in an attempt to meet the goals set out for them, with titans such as Baidu, Alibaba, Tencent, and many others pouring billions into the tech sector. According to a report by strategic research firm ABI Research, AI startups in China raised nearly $5 billion in venture capital funding in 2017, which PriceWaterhouseCoopers says accounted for 48 percent of the world’s total AI startup funding, compared to America’s 38 percent.

Looking outside of China

Chinese tech investors increasingly seek the next unicorn outside of their home market. Glory Capital sits in a building overlooking the gleaming glass-and-steel high-rises in Shanghai’s northeast district of Yangpu, home to 14 higher education institutions, including top-ranked Fudan University and Tongji University. Founded by Eric Yang and Jerry Bai in 2015, it is one of a growing number of outbound VC firms: The partners launched one fund with RMB 250 million ($36 million) for investing in Chinese startups and a second fund of around $10 million earmarked for Israeli startups that Yang and Bai are betting have a real shot in China’s hypercompetitive tech market.

Cross-border venture investing is fraught with risk, and most Chinese players are inexperienced in running due diligence on a foreign company, yet more of them are attempting to do so. “We add value to our Israeli portfolio companies by connecting them to the likes of Xiaomi and Huawei, two of China’s hardware titans, helping them commercialize their products here in China,” Yang said, but Glory Capital is still the exception among Chinese VCs in its ability to invest overseas directly in foreign startups and then help them develop their China business.

In reality, success stories of startups founded abroad and scaled up in China are still few and far between. For decades the US – and particularly Silicon Valley — has been providing high-growth startups from anywhere in the world access to deep-pocketed venture capitalists and entry into its vast market. Skype, Spotify, Waze, Mobileye, Wix, Zoopla are just a few companies that were hatched in Israel and Europe, grown in the US, and then acquired by a large company or made public on Nasdaq or NYSE.

Foreign startups take notice

That is changing this year. Foreign founders, eager to tap into the sheer number of Chinese consumers voraciously adopting new products and technologies, continue to struggle to analyze the risk-return tradeoff in shifting their efforts to China rather than the US. Granted, risk is compounded in China, with an unfamiliar business culture, low transparency, and a poorly understood regulatory environment, but there are also compelling advantages for startup founders such as accelerated time-to-market and high valuations.

The numbers tell the story: As of October 2018, venture investment in China reached $93.8 billion, $2.2 billion more than the $91.6 posted in the US, according to Crunchbase. The time it takes a startup in China to reach unicorn status is on average four years, nearly half of the seven years it takes in the US, and as a result there are now 109 unicorns with a total valuation of $535 billion in China vs. 127 unicorns in the US with a cumulative valuation of $478 billion.

These figures paint only a partial picture as China still lags significantly behind the US in the quality of its engineers and patents, the maturity of its tech ecosystem, and in its ability to attract the world’s best talent. China’s total tech market value is still only 32 percent of America’s.

However, strong political and economic forces within China are pushing investors to chase deals worldwide. Traditionally, the first stop was Silicon Valley, but with the Trump administration’s pushback, Chinese investors are turning their attention to Israel for its pool of quality startups and to Europe for its manufacturing prowess.

The engineers-turned-venture capitalists at Glory Capital have amassed a portfolio of more than a dozen Israeli companies in sectors such as smartphones, IoT, and autonomous vehicles, which are aligned with their experience and in which China is a clear global leader.

Another fund, Boliu, which has pooled money from high net-worth individuals for both domestic Chinese and cross-border activity, casts its net more widely. Boliu’s Fund-of-Funds arm is a limited partner (LP) in two VC funds in Israel, one in New York and one in California, in the hope that these funds will help scout locally for star startups. Boliu boasts being one of the early investors in iQiyi, a Beijing-based online video streaming platform with 500 million users, but to date it has only co-invested with its general-partner funds in American startups.

Plug and Play, an innovation platform and an early-stage investor from Silicon Valley with a well-established presence in Beijing, Shanghai, and Hangzhou, has invited a handful of startups from the US, Europe, and Southeast Asia to a six-month cross-border acceleration program dedicated to helping them gain market entry into China.

As foreign startups cautiously seize on the immense opportunity in China, much of their success hinges on how proactive Chinese investors will help these trailblazers dig in for the long term.

Rami Blachman is founder of China Israel Innovation Accelerator (CIIA) in Shanghai and Hangzhou. He is also an advisor for international business development at AgriNation VC. He was previously Partner at Giza Venture Capital in Tel Aviv and Shanghai and led international business development for the financial services arm of Zhejiang Zhongda, a Chinese state-owned conglomerate.