Chinese investment in U.S. startups has remained resilient in recent months despite new U.S. legislation that some thought could severely hamper deal flow, according to a new report.
The report, from research firm Rhodium Group, showed the number of investment deals in U.S. startups involving Chinese investors declined modestly after August, when a law that aims to stem China’s involvement in strategic technologies passed. That was in part due to a sharp drop-off in venture-capital investments by Chinese state-owned firms.
Yet total dollars invested by Chinese firms in startups has remained stable through February, after a record $3.3 billion in 2018. The amount of capital invested per month in such deals stood around $200 million in August—based on a three-month rolling average—and has remained at that level since, Rhodium estimates. The number of venture-capital deals—calculated using a three-month rolling average—fell to about 17 as of February, after peaking above 27 in August.
“We’re a little surprised by how persistent investment has been the last few months,” said Rhodium senior analyst Adam Lysenko, one of the report’s authors. He cautioned that precise measures of venture-capital investment are difficult since many details of such deals aren’t made public. That could be a sign, Mr. Lysenko added, that U.S. lawmakers successfully crafted the new rules to address national-security concerns without choking off startups’ access to Chinese capital.
U.S. lawmakers, increasingly concerned about China’s rising power, have moved to clamp down on the outflow of strategic technology and intellectual property that could erode America’s economic and military superiority. Their actions have already hit Chinese direct investments, a category that includes deals such as outright acquisitions. Until recently, the value of Chinese direct investment dwarfed that of Chinese venture-capital investments in startups.
Last August, lawmakers passed the National Defense Authorization Act, which strengthened rules designed to stem Chinese acquisitions of strategic technology by requiring more stringent reviews of investments typical of startup funding rounds.
After the new rules began to take effect, Chinese investors shifted some of their venture investments to industries and technologies that aren’t drawing as much scrutiny, Rhodium found. The firm’s research tracking Chinese investment in the U.S. is widely followed.
At the same time, Mr. Lysenko noted the rules have yet to be fully implemented, meaning Chinese venture-capital investment could still weaken.
Others say that they are seeing a significant impact from the law.
“No question, there’s been a slowdown” since the updated rules first went into effect in November, said Rich Matheny, an attorney at Goodwin Procter LLP who specializes in global trade law. “There’s sort of a reflexive recoiling from mandatory declaration requirements.”
Those requirements mean more proposed investments by foreigners in technology companies must be submitted for review to the Committee on Foreign Investment in the U.S., a group of executive-branch agencies led by the Treasury Department that reviews deals for national-security concerns.
Cfius has helped scuttle deals including the proposed acquisition of Lattice Semiconductor Inc. by Chinese government-backed investor Canyon Bridge Capital Partners in 2017 and last year’s proposed purchase of
by Chinese billionaire Jack Ma’s Ant Financial Services Group.
Thanks in part to the stepped-up deal reviews, China’s direct investment into the U.S. plunged 90% to $5 billion last year from $46 billion in 2016, according to Rhodium. It calculates the direct-investment figures by including deals such as acquisitions and construction projects and excluding venture-capital investments in startups.
The report also noted that Chinese state-owned investors were completing a three-month rolling average of over five venture capital deals per month as of June, a figure that fell below one in February.
The new investment-reporting rules require companies that use “critical technologies” in certain industries to seek approval for any investment from a foreigner. More technologies will be covered by the new law later this year after the Commerce Department releases additional rules related to it, which could cause a steeper decline in venture-capital-investment flows.
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