Thanks to new policies from the Trump administration aimed at cracking down at Beijing’s access to strategic US technologies, China has all but halted investments in US-based tech startups, according to Reuters.
Venture funding out of China peaked last year at a record $3 billion according to the Rhodium Group, a New York economic research firm. The spike in capital is thought to have been spurred by investors and tech companies rushing to complete deals before the new regulatory measures were approved in August.
Following the new policies which have expanded the government’s ability to block foreign investment in US companies, Chinese venture funding has all but collapsed according to Reuters, which interviewed over 35 industry players.
The new rules are still being finalized, but tech industry veterans said the fallout has been swift.
“Deals involving Chinese companies and Chinese buyers and Chinese investors have virtually stopped,” said attorney Nell O’Donnell, who has represented U.S. tech companies in transactions with foreign buyers.
Lawyers who spoke to Reuters say they are feverishly rewriting deal terms to help ensure investments get the stamp of approval from Washington. Chinese investors, including big family offices, have walked away from transactions and stopped taking meetings with U.S. startups. Some entrepreneurs, meanwhile, are eschewing Chinese money, fearful of lengthy government reviews that could sap their resources and momentum in an arena where speed to market is critical. –Reuters
US startups have also become cautious according to the report. San Francisco-based AI-powered training manual company Volley Labs, for example, declined offers from Chinese investors last year after initially accepting money from Beijing-based TAL Education Group amid a 2017 financing round.
“We decided for optical reasons it just wouldn’t make sense to expose ourselves further to investors coming from a country where there is now so much by way of trade tensions and IP tensions,” said Volley CEO Carson Kahn.
Meanwhile a Silicon Valley VC told Reuters that he is aware of at least ten deals – some of which he is exposed to, which fell apart since they would require approval from the Committee on Foreign Investment in the United States (CFIUS) – the regulatory body which rubber-stamped the controversial Uranium One deal.
CFIUS is the government group tasked with reviewing foreign investment for potential national security and competitive risks. The new legislation expands its powers. Among them: the ability to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in U.S. startups. –Reuters
China has been an aggressive investor in technology considered critical to US global competitiveness and military capabilities. Chinese investors have also been heavy investors in ride-hailing forms Uber and Lyft, along with companies that have more sensitive tech such as data center networking firm Barefoot Networks, speech recognition startup AISense and self-driving vehicle startup Zoox.
The withdrawal of Chinese money from Silicon Valley is unlikely to make a dent in the ability of startups to raise capital, as investors worldwide allocated some $84 billion into US startups during the first three quarters of 2017 – exceeding any prior full-year funding, according to data provider PitchBook.
That said, Chinese funding is also a pathway for US tech companies to gain access to the world’s second-largest economy, which will deprive startups of much needed revenue.
“Those of us who are operators and entrepreneurs feel the brunt of these tensions,” said Kahn.
The decline in Chinese investment comes amid heightened tensions between Beijing and Washington. Trump has blasted China for its enormous trade surplus and for what he claims are its underhanded strategies to obtain leading-edge American technology.
The nations have already levied billions in tariffs on each other’s goods. And Trump is considering an executive order to bar U.S. companies from using telecommunications equipment made by China’s Huawei and ZTE, which the U.S. government has accused of spying. –Reuters
The CFIUS, meanwhile, has emerged as a powerful tool for the Trump administration to intervene in foreign deals in the United States. Operated out of the US Treasury, the panel includes members from eight other government entities, including Homeland Security, the State Department and the Department of Defense. In its current annual report, the CFIUS said that Chinese investors had made 74 filings from 2013 through 2015 – the most of any country.
Washington, meanwhile, is also clamping down on Chinese investments. In March President Trump blocked a $117 billion hostible bid by Singapore-based Broadcom to acquire San Diego-based Qualcomm after the CFIUS said the takeover would weaken America’s wireless technology advantage.
And in November the CFIUS introduced a pilot program which requires foreign investors to notify the committee of any investments in “critical technologies” – the scope of which is still being defined. A working list, however, includes logistics technology, artificial intelligence, robotics and data analysis.
“What we are concerned about is a limited number of bad actors who are phenomenally clever about how they can access our intellectual property,” said VC Bob Ackerman, founder of San-Francisco and Maryland-based AllegisCyber.
Research firm Rhodium, meanwhile, said that an average of 21% of Chinese venture in the US from 2000 through 2017 came from state-owned funds, which are at least partially controlled by the Chinese government. In 2018, that figure spiked to 41 percent.
Two industry veterans, a startup adviser and a venture capitalist who declined to be identified because of the sensitivity of the matter, told Reuters they were recently cautioned by the FBI not to pursue deals with Chinese investors. The two people did not name the Chinese entities of interest to the FBI, but said the deals concerned U.S. companies building artificial intelligence and autonomous driving technologies.
Whether any of this deters China from reaching its goal of dominating advanced technologies remains to be seen. China can still invest in U.S. technology through layers of funds that obscure the money source. And Chinese investors are redirecting funds to promising companies in Southeast Asia and Latin America. –Reuters
In response to the clampdown, US startups are now writing deals in a way which would avoid CFIUS reviews – in particular, by adding provisions which would prevent foreign investors from obtaining proprietary technical data, as well as handcuffing their rights when it comes to board seats, veto rights or additional equity for future investment rounds.
According to Jeff Farrah, general counsel of the National Venture Capital Association, “People are rightfully concerned about making sure they are on the safe side of the fence.”