Chinese tech investors flee Silicon Valley as Trump tightens scrutiny
SAN FRANCISCO: New Trump administration policies aimed at curbing China’s access to American innovation have all but halted Chinese investment in US technology startups, as both investors and startup founders abandon deals amid scrutiny from Washington.
Chinese venture funding in US startups crested to a record US$ 3 billion last year, according to New York economic research firm Rhodium Group, spurred by a rush of investors and tech companies scrambling to complete deals before a new regulatory regime was approved in August.
Since then, Chinese venture funding in US startups has slowed to a trickle, Reuters interviews with more than 35 industry players show.
US President Donald Trump signed new legislation expanding the government’s ability to block foreign investment in US companies, regardless of the investor’s country of origin.
But Trump has been particularly vocal about stopping China from getting its hands on strategic US technologies.
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 US 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 US 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.
Volley Labs, Inc, a San Franciscobased company that uses artificial intelligence to build corporate training materials, is playing it safe.
It declined offers from Chinese investors last year after accepting cash from Beijing- based TAL Education Group as part of a financing round in 2017.
“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 Carson Kahn, Volley’s CEO.
A Silicon Valley venture capitalist told Reuters he is aware of at least ten deals, some involving companies in his own portfolio, that fell apart because they would need approval from the interagency group known as the Committee on Foreign Investment in the United States (CFIUS).
He declined to be named for fear of bringing negative attention to his portfolio companies.
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 US startups.
China is in the crosshairs. The Asian giant has been an aggressive investor in technology deemed critical to its global competitiveness and military prowess.
Chinese investors have bought stakes in ride-hailing firms Uber Technologies Inc and Lyft, as well as companies with more sensitive technologies including data center networking firm Barefoot Networks, autonomous driving startup Zoox and speech recognition startup AISense.
A dearth of Chinese money is unlikely to spell doomsday for Silicon Valley. Investors worldwide poured more than US$ 84 billion into US startups for the first three quarters of last year, exceeding any prior full- year funding, according to data provider Pitch Book Inc.
Still, Chinese funders are critical to helping US companies gain access to the world’s secondlargest economy.
Volley’s Kahn acknowledged that rejecting Chinese investment may make his startup’s overseas expansion more difficult.
“Those of us who are operators and entrepreneurs feel the brunt of these tensions,” Kahn said.
It is a radical shift for Silicon Valley. Money has historically flowed in from every corner of the globe, including from geopolitical rivals such as China and Russia, largely uninhibited by US government scrutiny or regulation.
Reid Whitten, an attorney with Sheppard Mullin, said that of the six companies he recently advised to get CFIUS approval for their investment offers, only two have opted to file the paperwork.
The others abandoned their deals or are still considering whether to proceed.
“It is a generational change in the way we look at foreign investment in the United States,” Whitten said.
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 US companies from using telecommunications equipment made by China’s Huawei and ZTE, which the US government has accused of spying.
CFIUS is emerging as another powerful cudgel. Led by the US Treasury, it includes members from eight other government entities, including the departments of Defense, State and Homeland Security.
The secretive committee does not disclose much about the deals it reviews.
But its most recent annual report said Chinese investors made 74 CFIUS filings from 2013 to 2015, the most of any nation.
The president has the authority to make the final decision, but a thumbs- down from CFIUS is usually enough to doom a deal.
Washington demonstrated its tougher stance even before the new law was passed, when Trump in March blocked a US$117 billion hostile bid by Singaporebased Broadcom Ltd to acquire Qualcomm Inc of San Diego.
CFIUS said the takeover would weaken the United States in the race to develop next- generation wireless technology.
A White House spokeswoman did not respond to a request for comment.
In November, CFIUS rolled out a pilot program mandating that foreign investors notify the committee of any size investment in certain “critical technologies.”
The scope of that term is still being defined, but a working list includes artificial intelligence, logistics technology, robotics and data analytics - the bread and butter of Silicon Valley.
Research firm Rhodium predicted that up to three-quarters of Chinese venture investments would be subject to CFIUS review under the new rules.
Just the threat of that scrutiny has caused some Chinese investors to reconsider.
Peter Kuo, whose firm, Silicon Valley Global, connects Chinese investors with US startups, said his business has slumped dramatically.
In 2018, he said not a single Chinese investor took a stake in the companies he shopped to them.
“CFIUS didn’t kill our organization, but it hampered a lot of startups, and most of them are American startups,” Kuo said.
Some security experts applaud what they call long- overdue protections for US startups.