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Silicon Valley venture capitalists are breaking up China| GuyWhoKnowsThings

DCM Ventures, a Silicon Valley venture capital firm, began investing in Chinese startups in 1999. The move saw such successful returns that in 2021, DCM said it planned to “fold”about his strategy of investing in China, the United States and Japan.

But when DCM set out to raise money last fall for a new fund focused on very young companies and promoted its expertise “across the Pacific,” the company outlined plans to invest in the United States, Japan and South Korea, according to a background. memo that was seen by The New York Times.

China was not mentioned.

DCM's message is an example of an industry-wide shift occurring among Silicon Valley investors and Chinese startups. American venture capital firms that once saw China as the next frontier for innovation and investment returns are backing away, with some separating their Chinese operations from their American businesses and others refusing to make new investments there.

The radical change arises from the strained relationship between the United States and China as they compete for geopolitical, economic and technological primacy. Countries have undertaken a trade war amid a diplomatic rift, enacting tit-for-tat restrictions, including US measures to curb future investments in China and examine past investments in sensitive sectors.

“It was an incredibly fruitful partnership for a long time,” Tomasz Tunguz, an investor at Theory Ventures, said of how American venture firms had invested in China. Now, he said, most investors are “looking for places to invest those dollars because that market is effectively closed.”

A DCM spokeswoman said its strategy had not changed and that investments in China had always been “a smaller component” of its funds focused on very young companies. The firm is monitoring compliance with U.S. regulations that China must follow, she added.

In Washington, actions have been accumulated to limit investment in China. President Biden signed a executive order last year restricted investments by U.S. companies in Chinese startups working on artificial intelligence, quantum computing and semiconductors.

This month, a congressional committee investigation He harshly criticized five American venture firms in a report that described their investments in Chinese companies that helped facilitate human rights abuses and built weapons for the Chinese military. The committee did not accuse the companies of violating the law, but urged lawmakers to pass laws that further restrict such investments.

“We cannot afford to continue funding our own destruction,” said Rep. Mike Gallagher of Wisconsin, Republican chairman of the House Select Committee on the Chinese Communist Party.

Representative Raja Krishnamoorthi of Illinois, the ranking Democrat on the committee, said Congress could examine other areas where American venture capitalists had invested in China, including biotechnology and financial technology.

Increasing scrutiny has led American venture firms to make changes. Last year, Sequoia Capital, one of Silicon Valley's most prominent investment firms, which has invested in China since 2005, separated its Chinese operation in an entity called HongShan. The companies, which shared profits and other administrative operations, now operate independently.

GGV Capital, another venture capital firm with a long history of investing in China, said in September it would separate its operations in the Americas and Asia. He is also trying to sell his stakes in two companies that the congressional committee determined were helping the Chinese military.

Deals for Chinese startups that included U.S. investors declined 88 percent between 2021 and 2023, from $47 billion to $5.6 billion, according to PitchBook, which tracks startups.

The moves are a painful step back for the venture capital industry, which spent the last decade transforming from a cottage industry to a global force. China was a major part of that expansion, with companies such as Lightspeed Venture Partners, Redpoint Ventures and Matrix Partners entering the country.

Silicon Valley venture capitalists “made a lot of bets that the United States and China were converging,” said Matt Turpin, former China director at the National Security Council and visiting fellow at the Hoover Institution.

Some China watchers attribute the shift in sentiment against Chinese tech investments to 2016, when then-US Commerce Secretary Penny Pritzker issued a warning on China's unfair competition in the semiconductor industry.

John Chambers, who was chief executive of networking giant Cisco and had expanded the company's operations in China, said he had seen the Chinese government interfere more aggressively with multinational companies when he resigned in 2015. He has chosen not to invest in Chinese startups and has strongly encouraged its 20 portfolio companies not to do business there.

“You can see the security concerns and a government that has become a win-win situation,” Chambers said.

Difficulties in investing in China increased in 2020 when President Donald J. Trump Tried to ban TikTok, which is owned by a Chinese conglomerate, ByteDance. Two of ByteDance's American investors, Sequoia and General Atlantic, members pressed from the Trump administration to allow the company to reach a deal so TikTok can operate in the United States.

Last year, the congressional committee began investigating investments in China by Sequoia, GGV and three other American venture capital firms: GSR Ventures, Qualcomm Ventures and Walden International. It concluded that they had invested $3 billion in technology that ended up aiding the Chinese military and surveillance state, as well as other human rights violations.

The committee's report said the companies had offered more than just money, helping Chinese companies go global and recruit talent, giving them management experience and mentoring, and giving them credibility.

One of those Chinese companies was Megvii, a facial recognition company backed by GGV. The United States has blacklisted Megvii for its use in surveillance of Uyghurs in China's western Xinjiang region. The United States has also blacklisted Yitu, a chip and facial recognition company backed by the Chinese arm of Sequoia.

The report, which uses an abbreviation for the People's Republic of China, adds that some Silicon Valley venture firms noted in their internal memos Beijing's “strategic priorities and support from the PRC government as a positive factor weighing in its favor.” from the investment”.

In response, Sequoia and GGV pointed to the separation of their businesses in China and divestitures in the region and said they had complied with the law. GGV said it was trying to sell its stake in Megvii, for example. Qualcomm said investments in its venture capital arms represented less than 2 percent of the funds discussed in the report. Walden International and GSR Ventures did not respond to requests for comment.

Any separation of a private equity business is complicated. Companies invest with funds that last 10 years. Some companies, including Sequoia, hold their investments even longer. Selling stakes in young companies can be difficult as the companies are privately held. Some investors have said Beijing has pressured them not to sell their shares in Chinese companies.

Beijing's practice of recruiting companies for its own purposes, such as helping with surveillance and modernizing its military, has created more challenges.

“These are not private sector companies in the traditional sense of the word,” Rep. Krishnamoorthi said. “It's just a completely different type of entity than we've ever seen before.”

Josh Wolfe, an investor at Lux Capital, a New York and Silicon Valley-based venture capital firm, said it was unfair to punish American companies for assumptions made about their investments in China years ago.

“But it would merit scrutiny if, as American investors, they recently ignored the growing moral, technological, economic and military conflicts we face” with China, he said.

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