The Danhua Capital has invested in some of the most promising startup areas of Silicon Valley like drones, artificial intelligence and cyber security. The venture capital firm is based just outside Stanford University which is the epicenter of U.S. technology entrepreneurship. It has been funded by the Chinese government.
According to interviews with venture capital sources and available information, there are more than 20 Silicon Valley venture capital firms having close ties to a Chinese government fund or state-owned entity.
However, the U.S. government is taking an increasingly hard line against Chinese acquisitions of U.S. public companies, investments in startups, even by state-backed entities, have been largely untouched.
According to the review of former member and represnting member of CFIUS, Stephen Heifetz, “The perception is that a lot of the tech transfer of worry to the U.S. security establishment is happening in the startup world.”
“The window for some startups to raise money from China may be closing,” said Chris Nicholson, co-founder of AI company Skymind, which has raised money from Chinese Internet group Tencent Holdings Ltd and a Hong Kong family office.
As per sources, the original source of funds for venture investments has not been an issue in Silicon Valley. Venture firms are not obliged to disclose who their investors are and entrepreneurs rarely ask, leading some dealmakers to question how CFIUS could keep tabs on startup investing.
Danhua Capital, which is backed by the Zhongguancun Development Group, a state-owned enterprise funded by the Beijing municipal government, has holdings in some of the most sensitive technology sectors.
Its investments include data management and security company Cohesity, which counts the U.S. Department of Energy and U.S. Air Force among its customers. Drone startup Flirtey, which in May was selected by the U.S. Department of Transportation to participate in projects to help the agency integrate drones safely into U.S. air space.
“We would not knowingly accept money from the Chinese government; we take investment from Delaware-registered, Silicon Valley-based venture capital firms,” the spokeswoman said.
She added that Flirtey would support any new “mandate that investors must disclose if they have any form of backing from government entities, to help ensure there is never a question in the future.”
China-backed funds include Oriza Ventures, which belongs to the investment arm of the Suzhou municipal government, and has backed AI and self-driving car startups. SAIC Capital, the venture arm of state-owned auto company SAIC Motor, has invested in Silicon Valley autonomous driving, mapping and artificial intelligence startups.
Even well-known startup accelerator 500 Startups raised part of its main fund from the Hangzhou government.
Capital controls have slowed the flow of Chinese money into the United States since 2016, but sources say venture investments have been more resilient than sectors like real estate, in part due to the Chinese government’s focus on improving its domestic high-tech industry.
U.S. politicians suspicious of China’s intentions were galvanized by a Department of Defense report released last year that warns that Chinese venture investors are accessing “the crown jewels of U.S. innovation.”
The report helped guide Sen. John Cornyn, a Texas Republican who sponsored the Senate version of the CFIUS reform bill, people with knowledge of the matter said. A spokeswoman said Cornyn “is especially concerned with Chinese state-backed venture capital investments.”
But the report was also panned by many private sector experts as overly simplistic and fear-mongering.