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A report released this month by the U.S. House of Representatives Select Committee on Strategic Competition found that several U.S. venture capital firms, including companies on the U.S. government’s blacklist, of Chinese startups. and the Communist Party of China.
The Congressional report examines five venture capital firms (GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital, and Walden International) that have invested in Chinese companies; He points out that the sample size is small.
None of the companies mentioned responded to requests for comment. The total investment by both companies in Chinese startups exceeds $3 billion.
“These five VCs alone are worth at least $3 billion to Chinese technology companies that commit human rights violations, including genocide, contract with the Chinese military, or strengthen China’s semiconductor supply chain or advance China’s national security ambitions.” It turned out that the company had invested in stated in the report. “We also found evidence that VCs provide intangible support, including expertise, to companies, including Chinese companies, with subject matter issues.”
After Congress began investigating, some fund companies spun off their China operations into separate entities. The changes include the spin-off of the current HangShan 2023 by Sequoia and the spin-off of GGV Capital’s China arm in 2023.
Even before the split, the Chinese units of these companies had raised billions of dollars from U.S.-based institutional investors, including California Public Employees’ Retirement System, which allocated $282 million to China’s Sequoia Fund in 2022. Was.
“CalPERS is a global investor and believes that diversification is a key element in generating the returns needed to meet the retirement security of our 2 million members.” a spokesperson told CIO. “We are closely monitoring discussions in Washington and elsewhere, and as always, we will comply with any additional government requests.”
The report claims that some fund managers claim that US investors are the biggest source of funding for new spin-off funds based in China. “For example, as of 2023, U.S. investors will still be Sequoia Capital China’s single largest source of funding, and the company separation will encourage continued investment in Hongshan by U.S. institutional and other investors. “This is not a hindrance,” the report says.
According to the committee, the five companies made some of the following investments:
- $189 million to Chinese semiconductor companies supporting the People’s Liberation Army.
- $154 million to AI companies supporting the People’s Liberation Army or subcontractors of the People’s Liberation Army.and
- $32 million to a generative AI company.
One such investment was Sequoia Capital China’s $76 million investment in 4Paradigm, a Chinese AI company that provides command decision-making software to the People’s Liberation Army. The report states that Sequoia invested in the company with funds from a U.S.-based limited partnership.
The United States has imposed restrictions on several companies that the report said were receiving funding from these venture capital firms, including in the semiconductor industry seeking to stem the rise of Chinese semiconductor manufacturing. It is important for allocators to be aware of where their funds are being spent so that managers are not subject to regulatory scrutiny. For American VCs, there are many restrictions on overseas investment in critical industries such as defense.
“As a VC, it’s important to know and vet your LPs properly,” writes Stevie Clien, co-founder and managing partner of Vol.1. 1 Ventures, in a thread on social media platform X (formerly Twitter). “The big reason for this (and probably) is [the] The most overlooked reason). Invest in all kinds of deep tech, biotech, defense tech, and good luck with money coming in from countries that are in direct conflict with the United States. ”
“If your LP funding is not clean and easy for the government to track, your portfolio companies will not be able to secure the grants, licenses, security clearances, contracts, approvals, etc. they need to operate,” she added. .
The report states that while there are no legal restrictions on U.S. venture capital investments in Chinese startups, Congress is requiring foreign investment in industries and companies related to the critical technologies mentioned, as well as companies with ties to the People’s Liberation Army. He pointed out that his position is that a ban on investment should be considered.
“In short, American capital and expertise flowed directly into the hands of our nation’s largest strategic competitor,” the report states. “Simply put, strong restrictions on China’s foreign investment in key strategic areas are a national security and human rights imperative.”
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