American VCs Want US Startups To Sever Ties With Chinese Investors Amid Anticipated Regulatory Clampdown

In a significant shift in the venture capital landscape, U.S. startups are increasingly distancing themselves from Chinese investors. This move comes as firms anticipate a tightening of foreign ownership regulations by U.S. authorities.

What Happened: U.S. venture capital firms are urging tech startups to distance themselves from Chinese investors in light of expected stringent foreign ownership regulations from Washington, the Financial Times reported on Friday.

One such case is HeyGen, an AI startup initially established in Shenzhen, which has relocated to Los Angeles. The company has requested its Chinese investors, including IDG Capital, Baidu Ventures, Sequoia Capital’s former Chinese venture capital arm HongShan, and ZhenFund, to divest their shares to American entities.

In March, HeyGen finalized a funding round led by Silicon Valley’s Benchmark, where early Chinese investors significantly reduced their holdings by selling to U.S. venture capital firms. The move was part of an effort to “clean up the cap table” in response to growing scrutiny from Washington over Chinese technology groups and cross-border investments.

Despite the U.S. imposing a ban on some investments by American funds in China’s AI sector last year, there has been no prohibition on Chinese minority investments in U.S. tech companies so far.

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This trend of distancing from Chinese VC investments is becoming more prevalent, with industry insiders noting a shift towards stricter informal controls, despite the absence of formal rules against such minority stakes.

Chinese VC firms are also facing challenges domestically, with a sluggish IPO market and economic downturn, prompting them to seek opportunities abroad.

Why It Matters: The strategic distancing from Chinese investors by U.S. startups is part of a broader pattern of escalating tensions between the U.S. and China. Recent reports indicate that Chinese firms, blacklisted in the U.S., are rebranding as American entities to sidestep sanctions imposed by the Biden Administration.

Furthermore, billionaire investor Ray Dalio has warned of the potential for U.S.-China economic sanctions and underscored the importance of diversification amidst growing global risks. This sentiment is echoed by the proactive measures taken by US startups to mitigate risks associated with Chinese investments.

Additionally, China’s leading chip manufacturer, SMIC, has been actively reducing its reliance on American technology by incorporating domestic semiconductor-production equipment. This move is a direct response to U.S. export restrictions and represents China’s push to become more self-sufficient in critical technology sectors.

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari