Several American venture capital firms have invested in Chinese startup companies in artificial intelligence, semiconductors and defense-linked sectors, including companies blacklisted by the U.S. government, according to a report released this month by the U.S. House Select Committee on Strategic Competition between the United States and the Chinese Communist Party.
The congressional report examined five VC firms—GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital and Walden International—that made investments in Chinese companies, although the report noted that these five represent a “small sample size.”
None of the firms mentioned responded to requests for comment. The total combined investments by the firms to emerging Chinese companies exceeded $3 billion.
“We found that these five VCs alone have made investments worth at least $3 billion into PRC technology companies that facilitate human rights abuses including genocide, contract with the Chinese military, or strengthen the PRC’s semiconductor supply chains and advance China’s national security ambitions,” the report stated. “We also found evidence that VCs provide intangible support, including expertise, to companies, including problematic PRC companies in the targeted sectors.”
After the beginning of the congressional investigation, some of the fund companies split their businesses in China into separate entities. The changes include Sequoia’s spin-off of what is now HangShan 2023 and GGV Capital’s spin-off of its China arm in 2023.
Even before the split, the Chinese arms of these firms raised billions from U.S.-based institutional investors, including the California Public Employees’ Retirement System, which allocated $282 million to Sequoia funds in China in 2022.
“CalPERS is a global investor and believes diversification is a key component to generating the returns needed to meet the retirement security of our 2 million members,” a CalPERS spokesperson told CIO. “We are closely monitoring discussions in Washington and elsewhere and, as always, will comply with any additional government requirements that might be initiated.”
The report alleged that U.S. investors are the largest sources of capital for some of the fund managers’ new China-based spin-off funds. “For example, as of 2023, U.S. investors remained the single largest source of capital for Sequoia Capital China, and the corporate split will not prevent continued investment by U.S. institutional and other investors into HongShan,” the report stated.
According to the committee, the five firms made some of the following investments:
- $189 million to Chinese semiconductor companies that support the People’s Liberation Army;
- $154 million to AI companies supporting the PLA or PLA subcontractors; and
- $32 million to generative AI companies.
One such investment was Sequoia Capital China’s $76 million investment in Chinese AI company 4Paradigm, which provides command decision making software to the PLA. The report stated that Sequoia invested in the company with funds from U.S.-based limited partnerships.
The U.S. has imposed restrictions on several companies that the report stated received funds from these VCs, including within the semiconductor industry, where the U.S. has been trying to stop the rise of Chinese semiconductor manufacturing. It is important for allocators to be aware of where their funds are being deployed, lest a manager end up under regulatory scrutiny. For VCs in the U.S., there are many restrictions on foreign investment within critical industries like defense.
“As a VC, it is important to know and vet your LPs properly,” wrote Stevie Clien, cofounder and managing partner at Vol. 1 Ventures, in a thread on social media platform X, formerly Twitter. “A big reason for this (and probably [the] most overlooked reason) . Good luck investing in any kind of deep tech, biotech, defense tech and having money come in from countries that are at direct odds with the U.S.”
“Your portfolio companies will be unable to secure grants, licenses, security clearances, contracts, approvals, etc. that are necessary to operate if your LP money isn’t clean and easy to trace for the government,” she added.
The report noted that there are no legal limitations on American VC investments into Chinese startups, although the report took the stance that Congress should consider a ban on outbound investments in industries and companies related to the mentioned critical technologies and companies with ties to the PLA.
“In short, U.S. capital and expertise have flowed directly into the hands of our nation’s foremost strategic competitor,” the report stated. “Simply put, robust PRC outbound investment restrictions in key strategic sectors are a national security and human rights imperative.”
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