DCM Ventures, a Silicon Valley venture capital firm, began investing in Chinese startups in 1999. The move was so profitable that DCM said in 2021 it plans to “double down” on its investment strategy in China, the US and Japan.
But when DCM began raising money last fall for a new fund focused on very young companies and promoting its “trans-Pacific” expertise, the firm outlined plans to invest in the U.S., Japan and South Korea. says the fund. A memo viewed by The New York Times.
China was not mentioned.
DCM's message is an example of an industry-wide shift occurring between Silicon Valley investors and Chinese startups. U.S. venture capital firms that once saw China as the next frontier for innovation and investment returns are retreating, with some separating their China operations from their U.S. operations and others declining new investments.
This shift stems from tensions between the United States and China, which compete for geopolitical, economic, and technological dominance. The two countries have entered a trade war amid a diplomatic rift, imposing retaliatory restrictions, including a U.S. move to curb future investment in China and scrutinize past investments in sensitive areas.
“It's been an incredibly fruitful partnership for a long time,” Tomasz Tunguz, an investor at Theory Ventures, said of how U.S. venture firms have invested in China. Currently, most investors are “looking for somewhere to put their money because the market is effectively closed,” he said.
A DCM spokesperson said the company's strategy had not changed and that investments in China had always been a “smaller component” of the fund focused on very young companies. The company added that it is monitoring compliance with U.S. regulations on China.
There are a number of moves in Washington to restrict investment in China. President Biden last year signed an executive order restricting U.S. companies from investing in Chinese startups working on artificial intelligence, quantum computing and semiconductors.
A congressional committee this month harshly criticized five U.S. venture companies in a report outlining investments in Chinese companies that facilitated human rights abuses and helped produce weapons for China's military. . The committee did not accuse the companies of violating the law, but urged lawmakers to pass legislation that would further restrict such investments.
“We cannot afford to continue funding our own destruction,” said Rep. Mike Gallagher (Wis.), Republican chairman of the House Select Committee on the Chinese Communist Party.
Rep. Raja Krishnamoorthi of Illinois, the committee's top Democrat, said Congress could look to other areas where U.S. venture capitalists have invested in China, such as biotechnology and financial technology. said.
U.S. venture companies are being forced to change in the face of increased scrutiny. Sequoia Capital, one of Silicon Valley's most prominent investment firms that has invested in China since 2005, spun off its China operations into an entity called Hongshan last year. The companies, which previously shared profits and other management duties, now operate independently.
GGV Capital, another venture capital firm with a long history of investing in China, announced in September that it would separate its U.S. and Asian operations. It is also trying to sell its holdings in two companies that a parliamentary committee has determined support the Chinese military.
According to PitchBook, which tracks startups, deal value for Chinese startups that include U.S. investors fell 88% from 2021 to 2023, from $47 billion to $5.6 billion.
The move is a painful setback for the venture capital industry, which has spent the past decade transforming from a cottage industry to a global force. China has played a key role in that expansion, with companies such as Lightspeed Venture Partners, Redpoint Ventures, and Matrix Partners entering the country.
Matt Turpin, former director of China affairs on the National Security Council and visiting fellow at the Hoover Institution, said Silicon Valley venture capitalists “made a big bet that the United States and China were converging.”
Some China watchers trace the shift in sentiment toward Chinese tech investment back to 2016, when then-Secretary of Commerce Penny Pritzker warned about unfair competition with China in the semiconductor industry.
By the time he resigned in 2015, John Chambers, the CEO of networking giant Cisco that had been expanding the company's China operations, was faced with the prospect of more aggressive interference from the Chinese government in multinational companies. He said he had seen it happen. He is currently an investor in start-up companies. He has chosen not to invest in Chinese startups and has strongly advised 20 portfolio companies not to do business in China.
“You see the security concerns and the government winning and losing,” Chambers said.
Investing in China became even more difficult in 2020 when President Donald J. Trump tried to ban TikTok, which is owned by Chinese conglomerate ByteDance. Two of ByteDance's U.S. investors, Sequoia and General Atlantic, have lobbied Trump administration officials to strike a deal that would allow the company to operate TikTok in the United States.
Last year, a Congressional committee began investigating investments in China by Sequoia, GGV, and three other U.S. venture capital firms: GSR Ventures, Qualcomm Ventures, and Walden International. The report concluded that they invested $3 billion in technology that, in turn, supported China's military and surveillance state and other human rights abuses.
According to the committee's report, the two companies have provided more than money, helping Chinese companies expand globally and recruit talent, providing managerial expertise and guidance, and lending credibility.
One such Chinese company is GGV-backed facial recognition company Megvii. The United States blacklisted Meghvi for its use in surveillance of Uyghurs in western China's Xinjiang Uighur Autonomous Region. The US also blacklisted Yitu, a chip and facial recognition company backed by Sequoia's Chinese arm.
The report, using the abbreviation for the People's Republic of China, notes that some Silicon Valley venture companies have stated in an internal memo that the Chinese government's “strategic priorities and support from the Chinese government are positive factors favoring investment.” He added that he pointed out that there is.
In response, Sequoia and GGV pointed to the separation of their Chinese operations and sales in the region and said they complied with the law. GGV, for example, said it was looking to sell its Megvii stake. Qualcomm said its venture capital arm's investments account for less than 2% of the funds discussed in the report. Walden International and GSR Ventures did not respond to requests for comment.
Separating a venture capital business is complex. Companies invest from funds that last for 10 years. Some companies, including Sequoia, hold their investments for longer periods of time. Because young companies are privately held, it can be difficult to sell stock. Some investors say the Chinese government is putting pressure on them not to sell stakes in Chinese companies.
The Chinese government's practice of cooperating with companies for its own purposes, such as surveillance support and military modernization, creates further challenges.
“These are not private companies in the traditional sense,” said Congressman Krishnamoorthy. “It's a completely different kind of being than anything we've seen before.”
Josh Wolf, an investor at New York and Silicon Valley-based venture capital firm Lux Capital, said it's unfair to punish U.S. companies for assumptions they made about investing in China years ago. Ta.
“But if U.S. investors have recently ignored the growing moral, technological, economic, and military conflict we face with China, it deserves scrutiny. '' he said.