Chinese tech investors flee Silicon Valley as Trump tightens scrutiny

New Trump administration policies aimed at curbing China’s access to American innovation have all but halted Chinese investment in US technology startups, as both investors and startup founders abandon deals amid scrutiny from Washington.

Chinese venture funding in US startups crested to a record $3 billion last year, according to New York economic research firm Rhodium Group, spurred by a rush of investors and tech companies scrambling to complete deals before a new regulatory regime was approved in August.

Since then, Chinese venture funding in US startups has slowed to a trickle, Reuters interviews with more than 35 industry players show.

US President Donald Trump signed new legislation expanding the government’s ability to block foreign investment in US companies, regardless of the investor’s country of origin. But Trump has been particularly vocal about stopping China from getting its hands on strategic US technologies.

The new rules are still being finalized, but tech industry veterans said the fallout has been swift.

“Deals involving Chinese companies and Chinese buyers and Chinese investors have virtually stopped,” said attorney Nell O’Donnell, who has represented US tech companies in transactions with foreign buyers.

Lawyers who spoke to Reuters say they are feverishly rewriting deal terms to help ensure investments get the stamp of approval from Washington. Chinese investors, including big family offices, have walked away from transactions and stopped taking meetings with US startups. Some entrepreneurs, meanwhile, are eschewing Chinese money, fearful of lengthy government reviews that could sap their resources and momentum in an arena where speed to market is critical.

Volley Labs, Inc, a San Francisco-based company that uses artificial intelligence to build corporate training materials, is playing it safe. It declined offers from Chinese investors last year after accepting cash from Beijing-based TAL Education Group (TAL.N) as part of a financing round in 2017.

“We decided for optical reasons it just wouldn’t make sense to expose ourselves further to investors coming from a country where there is now so much by way of trade tensions and IP tensions,” said Carson Kahn, Volley’s CEO.

Chinese venture investment in US tech

A dearth of Chinese money is unlikely to spell doomsday for Silicon Valley. Investors worldwide poured more than $84 billion into US startups for the first three quarters of last year, exceeding any prior full-year funding, according to data provider PitchBook Inc.

Still, Chinese funders are critical to helping US companies gain access to the world’s second-largest economy. Volley’s Kahn acknowledged that rejecting Chinese investment may make his startup’s overseas expansion more difficult.

“Those of us who are operators and entrepreneurs feel the brunt of these tensions,” Kahn said.

It is a radical shift for Silicon Valley. Money has historically flowed in from every corner of the globe, including from geopolitical rivals such as China and Russia, largely uninhibited by US government scrutiny or regulation.

Reid Whitten, an attorney with Sheppard Mullin, said that of the six companies he recently advised to get CFIUS approval for their investment offers, only two have opted to file the paperwork. The others abandoned their deals or are still considering whether to proceed.

“It is a generational change in the way we look at foreign investment in the United States,” Whitten said.

SS