China Targets U.S. Tech Startups in Investment Loophole – The Wall Street Journal

Tighter national security reviews have curbed Chinese deal-making in the U.S., but a new study shows China is pouring money into cutting-edge American technologies at a record pace this year through loosely regulated venture capital investments.

Chinese foreign-direct investment into the U.S., made through deals such as acquisitions, fell into negative territory during the first five months of the year, according to data that takes asset sales into account from the Rhodium Group, a New York consulting firm.

Yet the figures belie China’s sustained interest in U.S. technology, which it is continuing to target through relatively unrestricted investments in startups in Silicon Valley and elsewhere, Rhodium said in a new report reviewed by The Wall Street Journal.

The report’s findings could give fresh momentum to national security hawks who have singled out Chinese investment as posing disproportionate risks to the U.S. because the entities may be directed and subsidized by the government of China, an economic and military rival.

Over the period from January to May 2018, Chinese venture capital investment in the U.S. had already reached nearly $2.4 billion, which was its previous full-year record set in 2015, according to Rhodium’s analysis.

From 2000 through May 2018, Rhodium found more than 1,300 funding rounds of U.S. startups with at least one Chinese-controlled investor, representing an estimated $11 billion in Chinese investment. Around three-quarters of those transactions have occurred since 2014, the report by Thilo Hanemann, Adam Lysenko and Daniel Rosen, says.

The estimates reflect some larger deals recently, as the total number of deals involving Chinese investors is down slightly from 2016 and 2017.

Venture capital is defined by investments targeting startups with big potential that require large amounts of money in early days. It typically involves groups of investors that each take small stakes and gradually put in more money as the company grows.

Chinese investors targeting startups have historically focused their investments in the information and communications technology sectors as well as the health, pharmaceuticals and biotechnology sectors, Rhodium found. They are also targeting technologies such as 3-D printing, robotics and artificial intelligence, and recently have plowed money into companies such as Grail, a Silicon Valley cancer detection startup, the report said.

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The new data on venture investing, which is notoriously hard to track given complex legal structures and limited disclosure requirements, comes amid an array of potential actions by the U.S. government to further regulate foreign tech investing.

The White House in June was close to imposing a set of tough new restrictions on Chinese investments in the U.S., including through venture capital funds, but backed away at the last minute, saying it would instead throw its weight behind proposed Congressional legislation with similar objectives.

Lawmakers are putting the finishing touches on that legislation to curb a range of Chinese investment by strengthening the Committee on Foreign Investment in the U.S.

The interagency committee, known as CFIUS, advises the president on when to block foreign deals on national-security grounds.

While CFIUS has traditionally focused on foreign takeovers, the new legislation would strengthen the committee’s authority to review minority investments from foreign entities, including venture capital funds, in “critical technology.”

“The Chinese are aggressive, well-coordinated, and creative in finding ways to exploit our system,” said Rep. Robert Pittenger (R., N.C.), who introduced the bill alongside Senate Majority Whip JohnCornyn of Texas.

“Whether it be through cyberattacks, espionage, or by obfuscating government involvement in investment structures—they will continue their attempts to vacuum up our military and intelligence technological capabilities,” he said in a Sunday statement urging the U.S. to “remain vigilant and flexible as we confront these asymmetrical threats.”

U.S. venture capital investors worry that could lead to slower deals, or could spur startups to avoid some foreign investors.

“A lot of behavior is going to shift in this new world,” said Jeff Farrah, general counsel at the National Venture Capital Association, a venture capital trade group.

The stakes are high for Chinese startup investors because “there’s really no substitute for Silicon Valley globally,” said Mr. Hanemann in an interview.

For example, as tensions have increased between the U.S. and China, Chinese investors have instead targeted Europe for deals, with newly announced Chinese mergers and acquisitions in Europe reaching $22 billion in the first six months of 2018 versus just $2.5 billion in North America, according to another new report by Rhodium and law firm Baker McKenzie. But Chinese investors don’t have the same alternative for investments in foreign high-tech startups.

Some of the most active Chinese investors in the U.S. have been tech giants

Alibaba Group Holding


Tencent Holdings

, which in recent years have showered the startup sector with dozens of investments, including video game makers, a cellphone developer and multiple autonomous car companies. An Alibaba spokesman declined to comment, as did a spokesman for Tencent.

Major questions remain regarding which types of startups would be affected by the proposed CFIUS legislation, as well as which type of investors. The bill is leaving the process of defining what constitutes a “critical technology” to a lengthy regulation-writing process that would take place after the legislation became law.

Interpreting the definition of critical technology as narrowly as possible, Rhodium estimates it’s possible that as few as 15% of Chinese venture deals could come under CFIUS review under the new law. But, if a wider approach is taken, around three quarters of such deals could fall under CFIUS’s expanded purview, the report says.

A 2017 research paper by a division of the Department of Defense may provide some clues. The report, which has been influential in Washington, identified numerous areas hot in Silicon Valley including artificial intelligence, autonomous driving and virtual and augmented reality.

Many prominent, highly-valued companies in those areas have taken Chinese money, the report noted. Among them are Magic Leap Inc., a Florida-based “augmented reality” company that has for years been developing a headset intended to mix digital images with the physical world. The company, valued at about $6 billion, has raised more than $2 billion, including more than $400 million from Alibaba. Magic Leap declined to comment.

Another, Zoox, is working to build its own self-driving car and self-driving software out of its offices in Silicon Valley. The company, which has multiple Chinese investors and has raised about $360 million, declined to comment.

Write to Kate O’Keeffe at and Eliot Brown at


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