Venture capitalists backing away from China
SAN FRANCISCO — DCM Ventures, a Silicon Valley venture capital firm, began investing in China’s startups in 1999. The move reaped such blockbuster returns that in 2021, DCM said it
planned to “double down” on its strategy of investing in China, the United States and Japan.
Yet when DCM set out to raise money last fall for a new fund focused on very young companies and promoted its “cross-Pacific” expertise, the firm described plans to invest in the United States, Japan and South Korea, accord- ing to a fundraising memo that was viewed by The New York Times.
China was not mentioned. DCM’s messaging is one example of an industrywide shift happening between Sili- con Valley investors and Chinese startups. U.S. venture capital firms that once saw China as the next frontier for innovation and investment returns are backing away, with some separating their Chinese operations from their American business and others declining to make new investments there.
The about-face stems from the tense relationship between the United States and China as they jockey for geopolitical, economic and technological primacy. The countries have engaged in a trade war amid a diplo- matic rift, enacting tit-for- tat restrictions including U.S. moves to curb future investments in China and to scrutinize past investments in sensitive sectors.
“It was an incredibly fruit- ful partnership for a long time,” Tomasz Tunguz, an investor at Theory Ventures, said of how U.S. venture firms had invested in China. Now, he said, most investors are “looking for places to invest those dollars because that market is effectively closed.”
A spokesperson for DCM said that its strategy had not changed and that invest- ments in China had always been “a smaller component” of its funds focused on very young companies. The firm is monitoring U.S. regula- tions on China to comply, she added.
In Washington, actions to limit investing in China have piled up. President Joe Biden signed an executive order last year restricting investments from U.S. firms in Chinese startups working on artificial intelligence, quantum com- puting and semiconductors.
In February, a congres- sional committee investiga- tion sharply criticized five U.S. venture firms in a report that outlined their investments in Chinese companies that helped facilitate human rights abuses and built weap- ons for the Chinese military. The committee did not accuse the firms of breaking the law, but urged lawmakers to pass legislation further restricting such investments.
“We can’t afford to keep funding our own destruc- tion,” said Rep. Mike Gallagher, R-Wis., chair of the House Select Committee on the Chinese Communist Party.
Rep. Raja Krishnamoor- thi of Illinois, the top Dem- ocrat on the committee, said Congress might look at other areas where U.S. venture cap- italists had invested in China, including biotech and finan- cial technology.
The intensifying scrutiny has prompted U.S. venture firms to make changes. Last year, Sequoia Capital, one of Silicon Valley’s most prom- inent investment firms, which has invested in China since 2005, separated its Chinese operation into an entity called HongShan. The firms, which shared profits and other administrative operations, now run independently.
GGV Capital, another venture capital firm with a long history of investing in China, said in September that it would separate its American and Asian operations. It is also trying to sell its holdings in two companies that the congressional committee determined were helping the Chinese military.
Deals for Chinese startups that included U.S. investors declined 88% between 2021 and 2023, from $47 billion to $5.6 billion, according to PitchBook, which tracks startups.
The moves are a painful step backward for the venture capital industry, which spent the last decade transforming from a cottage industry into a global force.