VCs back off Silicon Valley deals
▶ US govt scrutiny costs start-ups competitive funding
US technology start-ups in Silicon Valley are losing competitive funding as well as opportunities to monetize the lucrative Chinese market as the US government tightens its grip on reviews of investment in the American innovation sector, Chinese analysts said on Wednesday.
Their comments came after a Reuters report on Monday, which said at least a dozen deals led by Chinese venture capital firms have been terminated as they would have needed approval by the Committee on Foreign Investment in the United States (CFIUS), a US agency that gained more power in 2018 to review proposed deals.
“There is a conspicuous decline in the willingness of Chinese venture capital to invest in Silicon Valley, because of much larger risks from reviews,” said Chris Dong, global research director at technology advisory firm IDC China.
Dong is based in both the San Francisco Bay Area and Beijing.
Dong said that since US President Donald Trump signed the Foreign Investment Risk Review Modernization Act to expand the purview of the CFIUS in August 2018, the agency has been able to weigh in on venture-capital investment in the high technology sector. That has given it wider scope on top of previously existing sectors such as key infrastructure and core technologies.
“This has particularly affected active minority equity investment, which besides the actual investment also seeks to have an influence on companies’ decision-making process,” Dong said.
“But this also affected a great number of American start-ups that are planning to complete technology transfers by tapping the Chinese market or similar forms of cooperation,” noted Dong.
A manager surnamed Wang at a Beijing-based VC firm said on condition of anonymity that there will be a short-term decline in Chinese VC investment in Silicon Valley due to policy headwinds.
The US target firms will express their concern about not being able to get approvals when we communicate. They hope science and technology could have no borders, he told the Global Times.
In 2018, Chinese venture funding in US start-ups was $3 billion, Reuters reported, citing a report by New York firm Rhodium Group.
In comparison, global investors put more than $84 billion into US start-ups in the first three quarters of 2018, said PitchBook Inc, a data provider.
“The situation blocked US start-ups’ access to the Chinese market, which many of them saw as a way to nurture their business, or build up cross-border research and manufacturing ecosystems. They’ve also lost a competitive source of funding,” Dong said.
The situation will also deny them most opportunities to improve their efficiency by working with Chinese partners and reducing operating costs, Dong noted.
Reaction
As trade tensions between China and US simmered, the NASDAQ failed to defend January-to-September gains through the end of 2018. It was only the second time in its history it failed to do so, according to media reports.
Rising US concerns over Chinese technology also cast a shadow on the annual Consumer Electronics Show in Las Vegas this week, where there are 20 percent fewer Chinese exhibitors than in 2018 and no Chinese technology executives will deliver keynote speeches, said media reports.
However, Chinese investors continue to view Silicon Valley as a key place to invest and many are exploring ways to do so passively, Dong said.
“Now people are still flying to Silicon Valley, not for deals, but to exchange views and recruit talent, and negotiate on projects that can be hatched in China,” noted Dong.
An industry insider, who declined to be identified as she was not authorized to speak to the media, told the Global Times on Wednesday that technically, Silicon Valley companies could still circumvent the situation by setting up a joint venture (JV) in China.
“The JV could attract yuan-denominated funds from Chinese venture capital firms on the one hand and develop [the US company’s] products in China’s vast market,” she said.
“This has particularly affected active minority equity investment, which besides the actual investment also seeks to have an influence on companies’ decisionmaking process.” Chris Dong Technology advisory firm IDC China