Chinese investors are increasingly turning away from U.S. tech startups and diverting money towards companies in Southeast Asia and India in the face of bilateral tensions, according to Edith Yeung, partner at Proof of Capital and advisor to 500 Startups.
Yeung points to heightened scrutiny by the Committee on Foreign Investment in the United States (CFIUS) as a big reason for the investment pullback. The government group tasked with reviewing foreign investments in U.S. companies has blocked multiple acquisition overtures by Chinese companies, including Ant Financial’s attempt to buy MoneyGram and Broadcom’s pursuit of chipmaker Qualcomm, though Broadcom was a Singapore-based company, on national security grounds.
“During the Obama years, 90% of these deals would get passed,” Yeung said. “During the Trump years, only 60%. That includes deals by Baidu, Alibaba, and Tencent. They are all becoming a lot more careful.”
Last year, the Trump administration expanded CFIUS’s powers, allowing the group to not only review takeover deals by foreign companies but also non-controlling investments in U.S. companies in critical and emerging technologies. Just last month CFIUS demanded the Chinese owner of gay dating app Grindr give up control of the company, citing national security concerns.
Shifting focus
Chinese firms invested $3.6 billion in U.S. companies last year, according to research firm Rhodium Group. While that number marked a record for total investment, the number of deals dropped from 300 in 2015 to 270 in 2018. The study reports state-owned Chinese investors had all but disappeared by February of this year.
“In the past, Chinese investors have been very excited about investing in blockchain, AI, and autonomous car related technology,” Yeung said. “But CFIUS is literally naming venture capital (VC) firms that have backing from the Chinese government and blocking them.”
That pushback has forced investors to shift their focus away from sensitive technology areas. Rhodium reports roughly 40% of Chinese VC deals in the U.S. went to biotechnology and pharmaceutical companies. Tech heavyweight Tencent recently announced a $150 million investment in Reddit, though that sparked fears of censorship on the platform.
Chinese investors have also doubled down on Southeast Asian startups and tech companies in India, Yeung says. China’s VC investment in Indian startups increased to $5.6 billion last year, according to data compiled by research and analytics platform Tracxn, a five-fold increase in just 2 years. Those investments have been fueled by the big Chinese tech names Baidu, Alibaba, and Tencent, known as BAT. Last month, Alibaba-backed Ant Financial raised $100 million for its venture fund BAce Capital, targeting early-stage startups in India and Southeast Asia.
“Tencent, Alibaba, Baidu, none of them really took off in the U.S. with their products,” Yeung said. “I’m not saying they’re giving up in the U.S., but they’re definitely not growing their own product.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter at @AkikoFujita
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