SAN FRANCISCO (Reuters) – The new Trump management strategies aimed at restricting China's access to American innovation have nearly halted China's investment in US technology startups, as both investors and start-ups have begun their transactions in US Cancel Washington.
According to New York's economic research firm Rhodium Group, venture capital financing in US start-ups reached a record $ 3 billion last year. They were fueled by a rush of investors and technology companies that had reached a deal in August before a new regulatory regime closed.
Since then, Chinese venture capital funding in US startups has slowed to a trickle, Reuters interviews with more than 35 industry players.
US President Donald Trump has signed a new law that extends the government's ability to block foreign investment in US companies, regardless of the country of origin of the investor. However, Trump has been particularly in favor of keeping China from getting strategic US technology into their hands.
The new rules are still pending, but veterans of the tech industry said the effects were fast.
"Business with Chinese companies and Chinese buyers and Chinese investors has been virtually discontinued," said lawyer Nell O'Donnell, who has represented US tech companies in transactions with overseas buyers.
Lawyers who spoke to Reuters say they feverishly rewrite the terms of the contract to make sure Washington's investments are stamped. Chinese investors, including large family offices, have stepped away from the deals and stopped making meetings with US startups. However, some entrepreneurs are forgoing Chinese money and are afraid of protracted government reviews that may weaken their resources and momentum in an arena where market launch is critical.
Volley Labs, Inc., a San Francisco-based company that uses artificial intelligence to create training materials for businesses, is playing it safe. Last year, it rejected offers from Chinese investors after the TAL Education Group of Beijing accepted cash (TAL.N) in the context of a financing round 2017.
"We opted for visual reasons that it would not make sense to expose us to investors from a country where there are so many trading and IP tensions today," said Carson Kahn, CEO of Volley.
A venture capitalist from Silicon Valley told Reuters that he knew of at least ten deals, some of which included companies in his own portfolio, which fell apart because they needed the approval of the group of stakeholders called the Foreign Investment Committee in the United States (CFIUS). is known. , He declined to be named for his portfolio companies for fear of negative attention.
CFIUS is the government group whose mission is to review foreign investment for possible national security and competition risks. The new law extends its powers. Including the ability to review transactions previously excluded from his or her area of activity, including attempts by foreigners to acquire minority stakes in US startups.
China is in the crosshairs. The Asian giant was an aggressive technology investor considered critical of its global competitiveness and military strength. Chinese investors have bought stakes in aerospace companies, Uber Technologies Inc [UBER.UL] and Lyft, as well as companies with more sensitive technologies, including the Barefoot Networks datacenter network, Autostart Zoox, and the voice recognition startup AISense.
(A graph of Chinese venture investment in US technology can be found at: tmsnrt.rs/2SBHUVh)
Lack of Chinese money is unlikely to lead to the end of the world for Silicon Valley. According to data provider PitchBook Inc., investors worldwide invested more than $ 84 billion in US startups in the first three quarters of last year.
Nevertheless, Chinese donors are vital to help US companies gain access to the world's second largest economy. Volley's barge acknowledged that rejecting Chinese investment could make his overseas start-up more difficult to expand.
"Those of us who are operators and entrepreneurs feel the brunt of these tensions," said Kahn.
It is a radical change for Silicon Valley. Money has flowed in from all corners of the world in the past, even from geopolitical rivals like China and Russia, which are largely unimpeded by US control or regulation.
Reid Whitten, a lawyer at Sheppard Mullin, said that of the six companies he has recently recommended to receive CFIUS approval for their investment offerings, only two have opted to submit the documents. The others have given up their business or are considering whether to continue.
"It's a generational change in our view of foreign investment in the United States," said Whitten.
The decline in Chinese investment is due to heightened tensions between Beijing and Washington. Trump has blown up China for its vast trade surplus and its alleged strategies to gain leading American technology.
The nations have already raised billions of dollars on the goods of others. Trump is considering an order designed to deter US companies from using telecommunications equipment produced by China's Huawei and ZTE, which have accused the US government of espionage.
CFIUS is becoming another powerful club. At the head of the US Treasury Department are members of eight other government agencies, including the Department of Defense, State and Homeland Security. The secretariat does not announce much about the offers it checks. However, its latest annual report states that Chinese investors submitted 74 CFIUS applications from 2013 to 2015, most countries. The president has the authority to make the final decision, but a thumbs-down from CFIUS is usually enough to convict a deal.
Washington demonstrated its toughness even before the new law was passed when Trump blocked a $ 117 billion hostile bid from Singapore's Broadcom Ltd in March (AVGO.O) on the acquisition of Qualcomm Inc (QCOM.O) from San Diego. CFIUS said the acquisition would weaken the United States in the race to develop next-generation wireless technology.
A White House spokeswoman did not respond to a request for comment.
In November, CFIUS launched a pilot program that called on foreign investors to communicate investments of a certain size into certain "critical technologies". The scope of this term is still to be determined, but a work list includes artificial intelligence, logistics technology, robotics and technology data analytics – the bread of Silicon Valley.
Research firm Rhodium predicted that up to three-quarters of Chinese venture capital investments would be subject to the new CFIUS review rules.
Just the threat of this test has led some Chinese investors to think twice.
Peter Kuo, whose Silicon Valley Global company connects Chinese investors with US startups, said his business had plummeted dramatically. In 2018, he said no Chinese investor participated in the companies he bought them.
"CFIUS did not kill our organization, but many startups were disabled, and most of them are American startups," Kuo said.
SAFE SIDE OF FENCE
Some security experts welcome what they call overdue protection for US startups.
"We are concerned about a limited number of bad actors who are phenomenally bright about how they can access our intellectual property," said Bob Ackerman, founder of AllegisCyber, a venture capital firm based in San Francisco and Maryland, of cybersecurity. Startups supported.
Rhodium calculates that, on average, 21% of Chinese venture capital spending in the US from 2000 to 2017 came from government funds that are at least partially controlled by the Chinese government. In 2018, this number rose to 41 percent.
But some players in the tech industry say Washington is too diligent in its zeal to review Beijing.
"Many innocent business people are involved in the rage of the government with China," said Wei Guo, the China-born founding partner of Silicon Valley's UpHonest Capital, whose financing comes mainly from foreign investors with links to China.
In addition to the concerns of Silicon Valley, the Federal Bureau of Investigation has taken a more active role in overseeing Chinese investment.
Two industry veterans, a startup consultant and a venture capitalist who refused to be identified for the sensitivity of the matter, told Reuters they were recently asked by the FBI not to do business with Chinese investors. The two individuals did not call the Chinese entities interested in the FBI, but said that the deal was about US companies building artificial intelligence and autonomous driving technologies.
Whether China will prevent it from achieving its goal of mastering advanced technologies remains to be seen. China can continue to invest in US technologies by launching funds that hide the money. Chinese investors are channeling funds to promising companies in Southeast Asia and Latin America.
US startups are now redrafting deal terms to avoid review by CFIUS. Strategies include adding provisions to prevent foreign investors from obtaining proprietary technical information and denying them board rights, veto rights or additional equity in future rounds, lawyers told Reuters.
"People are rightly concerned that they are on the safe side of the fence," said Jeff Farrah, general counsel of the National Venture Capital Association.
Reporting by Heather Somerville; Cut by Greg Mitchell and Marla Dickerson