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A new, triangular “cold war” among the US, Russia, and China might be good news for defense-tech startups, as I wrote about last week, but it’s a disaster for US VCs who bet big in China.
Already, investors in Chinese companies are suffering from a stock-market meltdown that prompted President Xi this week to sack the top securities regulator amid a search for fresh measures to prop up stocks.
The unraveling of property giant Evergrande has also cast a dark shadow over the Chinese economy after Xi declined to intervene and the company moved into liquidation.
Now, the US Congress is singling out VCs for helping a primary geopolitical rival develop technology that could help it wage military or cyber-warfare against the US or our allies.
A new report from the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party (CCP) highlighted the investments of five US VC funds in Chinese tech companies, particularly in sectors that are significant for national defense: AI, semiconductors, and facial recognition technology.
The report targeted GGV Capital, Sequoia, Walden International, GSR Ventures, and Qualcomm Ventures. Combined the firms have more than $3.1 billion invested in China since 2001, including more than $1 billion in chip companies and more than $1 billion in TikTok parent ByteDance, the report said.
The Committee was harshly critical of the firms, both for allegedly ignoring the way their portfolio companies facilitated repressive domestic policies and for supporting Chinese government initiatives aimed at helping the country’s tech industry catch up to the US in critical areas like chips and AI. The report was also dismissive of moves by Sequoia and GGV to separate their China businesses.
“The United States has invested enormous time, resources, and government effort to prevent the transfer of sensitive U.S. technology to the PRC,” the report states. “But U.S. venture capital flows have undercut those efforts by funding and providing intangible support to the very same companies that export controls and other regulations are intended to isolate.”
The report details how each of the five firms financed China’s cutting-edge facial recognition companies, even as the technologies were widely deployed in the government’s expansive surveillance efforts, including the ongoing, brutal repression of the Uyghur minority.
A spokesperson for GGV Capital told Newcomer in a statement that GGV Capital began splitting up its funds into two distinct entities, GGV Capital US and GGV Capital Asia, in September of 2023, and expects the funds to be fully separated by March 2024. GGV Capital US and GGV Capital Asia “have been in compliance with all applicable laws and regulations and will continue to be in compliance with any future applicable laws and regulations,” the spokesperson said, adding that the firm had notified the committee of some inaccuracies in the portrayal of certain GGV investments.
A spokesperson for Sequoia said in a statement that Sequoia Capital and HongShan, formerly Sequoia Capital China, have been fully independent firms with distinct brands as of December 31, 2023. “We take US national security issues seriously and have always had processes in place to ensure compliance with US law.”
A spokesperson for Qualcomm International told Newcomer in a statement that Qualcomm’s investments are generally small in any given market compared to venture firms and only constitute “less than two percent of the total investments discussed in today’s report.”
Spokespeople for Walden International and GSR Ventures could not be reached for comment.
In fairness, the report highlights investments made before the Biden Administration ramped up restrictions on American investment in Chinese companies. For much of the 2000s and 2010s, the US government was encouraging investment in China.
These five venture funds seemed slow to appreciate the changing political winds.
Hostility to China became bipartisan even while Trump was in power. Gone are the days when global, interconnected capitalism is seen as the best guarantor of peace between superpowers.
Ahead of the moves against US venture firms investing in China, the US government had already marginalized Huawei as a player in global telecom markets through a long-running pressure campaign on U.S. suppliers and overseas customers. It’s also threatened to ban TikTok—parent ByteDance counts Sequoia and HongShan as a major investors—over data-collection and propaganda concerns.
Now, slowing China’s long-running, multi-billion-dollar effort to catch up with the US in chip technology has become a lynchpin of America’s China policy. AI, where the US also has a big lead, has prompted similar concerns: open-source projects like Meta’s Llama already are quietly helping to power Chinese companies working on artificial intelligence.
“If US investment is making China better at chips and AI — chips and AI are going to be really important if there’s ever a military conflict between the US and China,” said Emily Kilcrease, energy, economics, and security director at the Center for a New American Security, a Washington think-tank. “That’s a problem from a national security perspective.”
Founders Fund partner Delian Asparouhov blasted the five named firms on X Thursday, calling it “a tough day to be at these VCs.”
Lux Capital’s Josh Wolfe told Newcomer that it would be unfair to punish investors if these firms invested in non CCP-affiliated companies many years ago under different circumstances. However, “continuing to fund technologies or direct US LP dollars to companies that can or will be used to undermine American interests is a significant and historic mistake,” he said.
It seems that some VCs did their best to turn a blind eye to how their portfolio companies might be aiding China’s military-industrial-surveillance complex.
While these investors might have sincerely believed at one time that the free flow of money would lead to political liberalization, it’s been obvious for at least the last five years that China’s tech companies were anything but independent of an increasingly hostile and repressive government. Back in 2020, Eric’s first story for this newsletter raised the political paradox of Sequoia’s China investment arm.
But it’s not so obvious that blocking further investment will accomplish much in itself. Jim Lewis, a veteran China-watcher and senior vice president at the Center for Strategic and International Studies, noted that a pullback of US money might leave an opening for autocratic Gulf states to fill the gap.
“There’s basically two sources of money right now,” said Lewis. “We’ll cut off funding from the US and it will just be back-filled by other places.”