SAN FRANCISCO (Reuters) – the New Asset administration policies aimed at reducing China’s access to the American innovation have all but stopped Chinese investments in US technology startups, investors and startup founders leave offers in the midst of scrutiny from Washington.
FILE PHOTO: U.S. President Donald Trump and chinese President Xi Jinping shake hands after making joint statements at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Damir Sagolj/File Photo
Chinese venture financing in U.S. startups crested to a record $3 billion last year, according to the New York economic research firm Rhodium Group, spurred by a rush of investors and tech companies scrambling to complete deals for a new statutory scheme was approved in August.
Since then, Chinese venture financing in U.S. startups has slowed to a trickle, Reuters interviews with more than 35 players in the industry.
The AMERICAN President Donald Trump signed new legislation expanding the ability of the government to block foreign investments in U.S. companies, regardless of the investor’s country of origin. But Trump is very outspoken about stopping China from getting its hands on strategic AMERICAN technology.
The new rules are still completed, but the tech-industry veterans said the fall-out is fast.
“Deals involving Chinese companies and Chinese buyers and Chinese investors have virtually stopped,” said lawyer Nell O’donnell, who represented AMERICAN technology companies in transactions with foreign buyers.
Lawyers who spoke to Reuters say that they are feverishly rewriting deal terms and conditions, to help ensure investments get the stamp of approval from Washington. Chinese investors, including the big family offices, walked away from transactions and stopped taking meetings with AMERICAN startups. Some entrepreneurs, meanwhile, are eschewing Chinese money, afraid of the long-term government reviews that could sap their resources and momentum in an arena where speed to market is of crucial importance.
Volley Labs, Inc., a San Francisco-based company that uses artificial intelligence to build corporate training materials, is playing it safe. The declined offers from Chinese investors last year after the adoption of the money of Beijing-based TAL Education Group (TAL.N) as part of a financing round in 2017.
“We have decided to optical reasons it just wouldn’t make sense to expose ourselves further to the investors from a country where there are now so many through the trade tensions and IP-tensions,” said Carson Kahn, Volley’s CEO.
A Silicon Valley venture capitalist told Reuters that he is aware of at least ten offers, some in collaboration with 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 (exhorting cfius). He refused to be named for fear of bringing negative attention for its portfolio companies.
Exhorting cfius, the government of the group charged with the revision of the foreign investments for potential national security and competitive risks. The new law expands its powers. Among them: the ability to probe transactions previously excluded from the scope, including the attempts of foreigners to the purchase of minority interests in the AMERICAN startups.
China is in the crosshairs. The Asian giant has been an aggressive investor in technology deemed critical to its competitive position on the world market and military prowess. Chinese investors have bought stakes in the ride-hailing companies Uber Technologies Inc. [UBER.UL] and Lyft, as well as businesses with more sensitive technologies, including data center networking firm barefoot Networks, autonomous driving startup Zoox and voice recognition startup AISense.
(For a picture of a Chinese company investing in AMERICAN tech, see: tmsnrt.rs/2SBHUVh)
A shortage of Chinese money, it is unlikely that the spell doomsday for Silicon Valley. Investors around the world poured more than $84 billion in U.S. startups for the first three quarters of last year, more than any previous full year financing, according to data provider PitchBook Inc.
Still, Chinese investors are crucial to helping AMERICAN businesses to gain access to the world’s second largest economy. Volley the Kahn recognized that the rejection of Chinese investment in the start-up of the overseas expansion more difficult.
“Those of us who have been operators and entrepreneurs feel the brunt of these tensions,” Kahn said.
It is a radical shift for Silicon Valley. Money is, in the past, flowed in from every corner of the world, including the geopolitical rivals such as China and Russia, largely unhindered by a U.S. government research or regulation.
Reid Whitten, an attorney with Sheppard Mullin, said that of the six companies that he recently advised exhorting cfius approval for their investment offers, but two have chosen to file the paperwork. The others leave their offers or are still considering whether to go further.
“It is a generational change in the way we look at foreign investment in the United States,” Whitten said.
The decrease in the Chinese investment comes amid increasing tensions between Beijing and Washington. Trump has blasted China for its huge trade surplus and for what he claims to be, his underhanded strategies to obtain leading-edge American technology.
The nations have already imposed billions in tariffs on each others goods. And Trump is considering an executive order to bar AMERICAN companies from the use of telecommunications equipment made by chinese Huawei and ZTE, which the U.S. government accused of spying.
Exhorting cfius is emerging as another powerful cudgel. Led by the US ministry of finance, it includes members from eight other government agencies, including the departments of Defense, State and Homeland Security. The secret committee did not reveal much about the deals it reviews. But its most recent annual report said the Chinese investors 74 exhorting cfius filings from 2013 to 2015, the most of any country. The president has the authority to make the final decision, but a thumbs-down from exhorting cfius is usually enough to doom a deal.
Washington showed his tougher attitude even before the new law was adopted, when Trump in March blocked a $117 billion hostile takeover bid by Singapore-based Broadcom Ltd (AVGO.O) to acquire Qualcomm Inc (QCOM.O) of San Diego. Exhorting cfius said the acquisition would be a weakening of the United States in the race to develop the next generation of wireless technology.
A spokeswoman for the White House did not respond to a request for comment.
In November, exhorting cfius rolled out a pilot program require foreign investors the altitude of the committee of any extent of investments in certain ” critical technologies.” The scope of that term yet to be defined, but a working list that includes artificial intelligence, logistics, technology, robotics and data analysis – the bread and butter of Silicon Valley.
Research firm Rhodium predicted that up to three quarters of Chinese venture investment will be subject to the exhorting cfius review under the new rules.
Only the threat of that research has led to some Chinese investors to reconsider.
Peter Kuo, the company’s Silicon Valley Global, connects Chinese investors with AMERICAN start-ups, said his company drops dramatically. In 2018, he said not a single Chinese investor took a stake in the companies that he is looking for them.
“Exhorting cfius does not kill our organization, but it hindered a lot of startups, and most of them are American startups,” Kuo said.
THE SAFE SIDE OF THE FENCE
Some security experts are cheering what they call long-awaited protection for AMERICAN startups.
“What we are concerned about a limited number of bad actors who are phenomenal smart about how they can have access to our intellectual property,” said Bob Ackerman, founder of AllegisCyber, a venture capital firm based in San Francisco and Maryland that backs cyber security startups.
Rhodium calculated that, on average, 21 percent of Chinese venture investment in the United States from 2000 to 2017 came from state-owned funds, which are controlled at least in part, by the Chinese government. In 2018, that percentage increased to 41 percent.
But some tech industry players say Washington is casting too wide a net in its zeal to check Beijing.
“A lot of innocent business people are” caught in the administration of the quarrel with China, said Wei Guo, the chinese-born founding partner of the Silicon Valley firm UpHonest Capital, whose funding comes mostly from foreign investors, with ties to China.
Add to Silicon Valley, the fear, the Federal Bureau of Investigation has a more active role in policing Chinese investment.
Two veterans of the industry, a startup adviser and venture capitalist who declined to be identified because of the sensitivity of the matter, told Reuters that they were recently warned by the FBI not to pursue deals with Chinese investors. The two people who do not have the name of the Chinese entities of interest for the FBI, but said that the deals involved AMERICAN firms, the creation of artificial intelligence and autonomous driving technologies.
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Whether this deters China from reaching the goal of dominating the advanced technologies yet to be seen. China can still invest in AMERICAN technology through the layers of the means that obscure the money of the source. And Chinese investors are diverting funds to promising businesses in Southeast Asia and Latin America.
AMERICAN startups, meanwhile, are rewriting some of the deal terms and conditions to avoid exhorting cfius review. Strategies include adding provisions to prevent foreign investors from obtaining other technical information, and denying them board rights, veto rights or additional equity in future rounds, lawyers told Reuters.
“People are rightfully concerned about making sure they are on the safe side of the fence,” said Jeff Farrah, general counsel of the National Venture Capital Association.
Reporting by Heather Somerville; Editing by Greg Mitchell and Marla Dickerson