After flocking to China for more than a decade, American venture capitalists have significantly curtailed their exposure to the country’s technology sector in recent years, in large part due to increasing geopolitical tensions and increasing investment restrictions in both Washington and Beijing.
According to data from research firm PitchBook, U.S. investors participated in deals worth $7.2 billion in China’s tech industry last year, down from its recent peak of $35.6 billion in 2018. The number of deals also fell to its lowest level in five years. Market intelligence firm S&P Global, which published similar figures, blamed a cocktail of China’s strict zero-COVID policy, the resulting supply chain issues, and escalating tensions between Beijing and Washington “causing some investors to proceed with caution.”
A Shanghai-based lawyer who advises both U.S. and Chinese investors and spoke on condition of anonymity said investment on both sides in each tech sector “fell off a cliff” in the second half of the Trump administration, estimating that the pullback is “90 percent political.”
Even with former U.S. President Donald Trump gone, that’s unlikely to change anytime soon. President Joe Biden has continued—and even expanded—parts of his predecessor’s hard line on China, with wide-ranging curbs on the export of advanced semiconductors and a rapidly escalating campaign to ban Chinese-owned social media app TikTok. The Biden administration placed additional guardrails on Chinese tech investment in the United States through an executive order last September and has been gearing up for similar actions on U.S. outbound investments that are likely to be made official in the coming months.
The VCs appear to be ready. Sequoia Capital—one of Silicon Valley’s biggest investment firms whose China portfolio includes TikTok parent company ByteDance and whose Chinese arm raised over $8 billion last year—has reportedly enlisted outside national security experts to screen its Chinese bets. Sequoia did not respond to a request for comment.
Investment between the two countries is “very disconnected right now,” primarily driven by restrictions that make it “much more burdensome for Chinese capital to invest in the U.S., and threat of restrictions that will make it more difficult for U.S. to invest in China,” said Rui Ma, a San Francisco-based tech analyst and investor who founded the website Tech Buzz China.
“Venture capital is all about managing risk—you’re already taking on a lot of business, market, and sometimes technology risk when investing in these companies, so you definitely do not want to add on top of that geopolitical or policy risk as well, especially since those are so far outside of your control,” she added.
Andy Tang, a partner at venture capital firm Draper Associates, moved to China in 2006 to set up the Draper Dragon fund to focus on cross-border investments between the two countries. He returned to the San Francisco Bay Area in 2010, and while Draper Dragon is still active, it’s run by a team in China and now raises money from Chinese investors in Chinese currency.
“For us, the decoupling of investment … actually started in 2015,” he said. “As of today, it’s completely decoupled—the U.S. team works on U.S. investment, the Chinese team works on Chinese investment. We share the same brand and heritage, but it has almost naturally happened.”
U.S. and Chinese investors are increasingly inclined to invest at home, Tang said, in part due to “market forces”—investment opportunities and capital in both countries are now plentiful—but also by a recognition of the geopolitical climate.
On the ground in Silicon Valley, the schism has been widening regardless of whether Washington acts or not. Jeff Fields, the assistant special agent in charge of the FBI’s San Francisco office who focuses on counterintelligence, says he has found an increasingly receptive audience to his warnings about espionage through investment. Much of Fields’s work involves speaking with members of the Silicon Valley community, including startup founders, investors, and academics, about the dangers of adversaries stealing or misusing their technology—often through legitimate methods such as joint ventures and strategic investments.
“Our adversaries, particularly [China], they’re very adept at recognizing each of those pain points in that ecosystem and exploiting it, through traditional espionage means but also exploiting it through some of the easier-to-hide means,” he said. “There’s a reason why they want to force companies into entering a joint venture, so that they can leverage their domestic laws and policy to disadvantage non-Chinese companies.”
Fields said Silicon Valley’s inclination and willingness to engage with his team has seen an “exponential increase” recently, in part because the war in Ukraine has brought home the threat of foreign-actor espionage that before seemed abstract.
Not everybody is running for the exits. In January, after months of effort and mountains of paperwork, Taylor Ogan moved his investment firm, Snow Bull Capital, from Boston to the Chinese tech hub of Shenzhen. He was joined by two employees (a third will move later this year) and recently received approval from the Chinese government to start hiring locals—something he said Shenzhen officials want.
“I feel like a complete idiot for not moving here sooner,” Ogan said in an interview in March, almost two months to the day since he arrived in China. “It’s the most impressive country. The investment opportunities are so, so, so damn ripe,” he said, peppering the conversation with asides about how many electric and autonomous vehicles he could see outside his window. But he acknowledged his decision to go all-in on China makes him something of an outlier among the U.S. investment community.
“It’s tough for [American] VCs to tell their investors that they see a ton of opportunity in China, even when they do,” he said. Large Chinese companies have been “throwing money” at startups, he added, “so the funding has shifted and so they’re not reliant on American VCs. … Three or four years ago, American VCs would have been treated like royalty here.”
Looming U.S. restrictions and the broader adversarial climate are worries, he said. But he also believes that “Chinese companies will find loopholes around it” and said he has faced zero pressure from officials in China. “We have contingency plans for everything,” he said. “But they’re becoming less likely the more we understand China.”
But given the broader trends in tech investment, the big question is whether decoupling is here to stay, or if the recent heyday can make a comeback. Some, like Tang, say they’re “disappointed” with the current situation but remain hopeful. “I do think when you have the two largest economies in the world, long-term decoupling is not good for either party, so eventually something has to come together.”
Others with a view of both camps are less optimistic. “Unless a miracle happens, this is going to be the way for the next 10 or 15 years,” said the Shanghai-based lawyer.
