Chinese Money Flees Silicon Valley As Trump Clamps Down On Access To US Tech
Thanks to new policies from the Trump administration aimed at cracking down at Beijing's access to strategic US technologies, China has all but halted investments in US-based tech startups, according to Reuters.
Venture funding out of China peaked last year at a record $3 billion according to the Rhodium Group, a New York economic research firm. The spike in capital is thought to have been spurred by investors and tech companies rushing to complete deals before the new regulatory measures were approved in August.
Following the new policies which have expanded the government's ability to block foreign investment in US companies, Chinese venture funding has all but collapsed according to Reuters, which interviewed over 35 industry players.
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 U.S. 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 U.S. 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. -Reuters
US startups have also become cautious according to the report. San Francisco-based AI-powered training manual company Volley Labs, for example, declined offers from Chinese investors last year after initially accepting money from Beijing-based TAL Education Group amid a 2017 financing round.
"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 Volley CEO Carson Kahn.
Meanwhile a Silicon Valley VC told Reuters that he is aware of at least ten deals - some of which he is exposed to, which fell apart since they would require approval from the Committee on Foreign Investment in the United States (CFIUS) - the regulatory body which rubber-stamped the controversial Uranium One deal.
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 U.S. startups. -Reuters
China has been an aggressive investor in technology considered critical to US global competitiveness and military capabilities. Chinese investors have also been heavy investors in ride-hailing forms Uber and Lyft, along with companies that have more sensitive tech such as data center networking firm Barefoot Networks, speech recognition startup AISense and self-driving vehicle startup Zoox.
The withdrawal of Chinese money from Silicon Valley is unlikely to make a dent in the ability of startups to raise capital, as investors worldwide allocated some $84 billion into US startups during the first three quarters of 2017 - exceeding any prior full-year funding, according to data provider PitchBook.
That said, Chinese funding is also a pathway for US tech companies to gain access to the world's second-largest economy, which will deprive startups of much needed revenue.
"Those of us who are operators and entrepreneurs feel the brunt of these tensions," said Kahn.
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 U.S. companies from using telecommunications equipment made by China’s Huawei and ZTE, which the U.S. government has accused of spying. -Reuters
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