Bill worrisome for venture capitalists
Industry mounts a lobbying effort over a measure to boost U.S. oversight of deals with foreign investors.
Venture capitalists are heading to Washington on a mission to save their lucrative relationships with Chinese investors.
Proposed legislation in Congress, which would give the government greater oversight of deals involving foreign investors, is a central issue at an annual summit for venture capitalists that kicked off Wednesday.
The meeting is welltimed. Next week, the Senate Banking Committee will consider the bill, which could make it harder for foreign firms to make investments in U.S. technology companies and slow down or block potential deals, including venture capital funding rounds. Venture capitalists fear that efforts to keep American inventions out of foreign governments’ hands will imperil their businesses.
The new law would expand the purview of an existing government committee, which reviews deals involving foreign companies and technology that could pose national security threats. In March, it threw up a major obstacle to a proposed takeover of U.S. chipmaker Qualcomm Inc. by Singapore’s Broadcom Ltd. before President Trump blocked the transaction.
Lawmakers are on track to increase restrictions on foreign investment and may fast-track the measure by attaching it to the National Defense Authorization Act, a must-pass bill set for a vote in the coming weeks. The plan, backed by Defense Secretary James Mattis, serves as a bargaining chip in Trump’s trade negotiations with China, said Jim Jochum, a lobbyist who previously served on the Committee on Foreign Investment in the U.S.
“It’s likely part of a big, grand bargain,” he said.
While the new bill doesn’t explicitly mention China, it is worded in a way that would have an outsized effect on investments by Chinese entities, mostly because the latest draft allows the government to exempt so many other countries. Potentially off the hook: countries that are members of the North Atlantic Treaty Organization and other allies.
The legislation plays well to populist fears that China is leapfrogging the U.S. in job growth and innovation.
“One of the few areas of bipartisanship this year is lawmakers’ desire to get ‘tough’ with China,” Roman Schweizer and Jaret Seiberg, analysts at Cowen Inc.’s Washington Research Group, wrote in a note Monday.
Proponents of the legislation, known as the Foreign Investment Risk Review Modernization Act, say the government’s jurisdiction over foreign investment needs to be broadened because the current process doesn’t capture deals that pose national security threats. Foreign investors have been able to bypass the review process through joint ventures or minority investments.
Venture capitalists argue that their backers don’t pose a threat to America. Investors in venture funds generally receive information on the financial performance of their private stock holdings, not technology secrets. Venture capitalists say the bill overreaches and will make their case directly to lawmakers this week. Meetings are scheduled Thursday with members of the Senate Banking Committee and the House Financial Services Committee, including Sens. Mike Crapo of Idaho, Brian Schatz of Hawaii and Thom Tillis of North Carolina.
Lobbyists want to make sure indirect investors, particularly foreign shareholders in their funds, don’t trigger government review. They’ve had some success. A new draft of the bill does exactly that.
Serious cash rides on the outcome. Last year, U.S. venture firms raised $32 billion, a 36% increase from five years earlier, according to the National Venture Capital Assn., the trade group that organized this week’s events in Washington. As new investors pile into Silicon Valley, venture funds are achieving record amounts of capital not seen since the dot-com era.
Publicly, venture firms avoid acknowledging the boost they get from China. Scott Kupor, a managing partner at Andreessen Horowitz and outgoing chairman of the venture trade group, said in congressional testimony in January that lawmakers are wrong to scapegoat the country and that China accounts for less than 5% of capital committed to U.S. venture funds.
Investments through venture funds or for a minority stake “are not security risks and therefore should not be prohibited,” Kupor wrote in an email. “If the goal is to prevent foreign governments from stealing IP or compromising our security, they simply can’t do that through a minority investment.”
Chinese money kicks in on the other side too. Acquisitions are the biggest driver of capital returned to VCs, and the number of Chinese acquirers doubled over the last three years, according to research firm CB Insights.
Lobbying efforts by the industry have ramped up since Trump’s election. Venture firms sprang into action to help save the carried interest tax benefit for investors and successfully sued the Department of Homeland Security last year over delaying a visa program designed to welcome foreign entrepreneurs. The venture capital association spent $511,000 on lobbying in the last quarter, a 19% increase from the same period in 2016.
But the foreign investment issue differs in a major way from those other Republican-led initiatives: A leading sponsor of the bill is Sen. Dianne Feinstein, a Democrat from California — home to the richest venture firms and most venturebacked start-ups.