Chinese investment in US startups peaks

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Xinhua/Wang Lei

SAN FRANCISCO (Reuters) – Chinese investors maneuvered around heightened geopolitical tensions to make record-level investments into US startups in 2018, but increasingly hostile conditions will likely lead to a dropoff in Chinese funding for this year, according to a new report.

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Chinese entities invested $3.6 billion last year in US companies, exceeding the previous record of $2.8 billion in 2015, although the number of deals dipped to about 270 from more than 300, according to the report from New York-based economic research firm Rhodium Group.

The robust investment comes despite policy headwinds from US President Donald Trump’s administration, which has levied tariffs on $250 billion of Chinese goods and penalised telecoms companies Huawei and ZTE, which the United States accuses of spying. The report’s findings show the amplified role China has taken in the US startup industry, even as it confronts a new US law to limit access to bleeding edge technology.

The law “could yet have a chilling effect on future investment,” the report cautioned.

The new law, known as FIRRMA, expanded the powers of an obscure government group called the Committee on Foreign Investment in the United States (CFIUS) to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in US startups.

CFIUS began applying the law in November through a pilot programme, and its effect would not be fully captured by the Rhodium report, which covers all of 2018. The government set a deadline to fully implement FIRRMA and clear up a number of ambiguities early next year.

“I think the immense uncertainty about what the rules mean, the interpretation, how they are going to enforce it, what enforcement looks like, all of that produces a situation where it wouldn’t be surprising if the effect so far seems modest,” said Stephen Heifetz, a former member of CFIUS and now a lawyer advising companies undergoing CFIUS review.

Chinese investors, including big family offices, have walked away from transactions and stopped taking meetings with US startups, Reuters has reported. The opacity of venture capital, a business with few required disclosures and layers of funds to conceal the source of money, makes it difficult to quantify the precise level of Chinese investment.

Rhodium estimates that Chinese entities have poured about $14 billion into US startups since 2000, with 80 percent of the deals occurring since 2014.

But the report cautions “tremendous uncertainty” for Chinese investment this year and points to “notable shifts within investor mix and targeted industries and technologies since FIRRMA’s passage.”

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