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American Venture Capital Investment in China

The successes of China’s first- and second-wave tech startups like Alibaba,, and Xiaomi have lured many foreign investors into the Chinese markets. With lucrative opportunities in the country’s burgeoning tech startup ecosystem, the past two decades have seen many U.S. fund managers turn their eyes toward China as an attractive destination for venture capital investment.

Much has been written about the Chinese communist regime’s efforts to acquire American technology. For example, Charles Lieber, a leading American scientist and Harvard professor, was convicted in December 2021 for crimes related to his involvement in China’s Thousand Talents Program, a project that the government of China launched to recruit leading international scientists, innovators, and entrepreneurs. The topic of American tech companies’ proactive transfer of technical expertise to Chinese companies via venture capital (VC) investment, however, is less well-known.

This article outlines a history of venture capital investment in China, touching on challenges posed to U.S. national interest by the CCP’s use of incentives to attract foreign investment and information capital.

Background: Venture Capital Investment

Unlike stocks and bonds, which are listed on public exchanges, venture capital investment is private in nature. The investor comes to an agreement behind closed doors with the company that will receive funds. Venture capitalists typically seek to invest either in small companies that have potential for exponential growth, or in established companies with good prospects for fast expansion.

An example of a well-known company that venture capital backed is Apple Computer. When Apple incorporated in 1977, multimillionaire Mike Markkula provided essential funding of $250,000 ($170,000 as a loan and $80,000 as an equity investment) to founders Steve Jobs and Steve Wozniak. With that funding, Apple was able to develop Apple II, the second-generation Apple desktop computer, which catalyzed exponential growth in the company’s revenue throughout its first five years. When Apple went public at the end of 1980, Mike Markkula’s seven million Apple shares were worth $203 million – a 250-fold return on investment in just four years.

American venture capital investors are mainly private equity fund managers. They rely on capital from passive institutional investment, high-net-worth individuals, and other sources such as life insurers and pension funds. These private equity fund managers have the goal of generating high returns for their clients, who in turn pay asset management and performance fees.

A History of Venture Capital in China

Unlike venture capital investment in the United States, which has a history going back to the Pre-WWII era, the boom of venture capitalism in China is a recent development.

Before 2000, China lacked the policy environment and legal framework to foster meaningful development of a venture capital ecosystem. Also, the country’s restriction on foreign financial investment made it difficult for overseas venture capitalists to invest.

The first ten years of the 21st century saw China’s venture capital market take shape.

China’s venture capital market took off after 2010, growing by leaps and bounds. By 2016 there were more than $60 billion in annual venture capital investments being announce in China each year. This activity peaked in 2018. That year saw over 6,000 venture capital transactions totaling more than $120 billion, with almost 40 percent of global venture capital investment dollars going to startups in China. In 2020, that figure fell to a still-impressive 20 percent. {1}

From its inception, China’s venture capital ecosystem has grown in lockstep with the involvement of foreign investors. Essentially, in the late 1990s and early 2000s, all of China’s big first-wave technology firms, including Alibaba, Tencent, and Baidu, received financing from the U.S. or other foreign venture investors. In the following decades, these foreign investors have continued to play significant roles in the largest venture fundraising rounds for Chinese startups. In 2020, 54 percent of all transactions (measured by total capital invested) included at least one offshore investor. The U.S. participation rate was 29 percent. {2} Between 2010 and 2020, US-based venture investors put a total of nearly $60 billion of private capital into China. This investments began to pick up in 2014 and in 2018. In 2018, U.S.-owned venture investors participated in more than 330 unique Chinese venture funding rounds, investing a record estimated $19 billion. {3}

According to a 2019 cross-border investment report that the the U.S.-China Investment Project, which is led by the Rhodium Group and the National Committee on U.S.-China Relations released, since the early 2000’s “experienced U.S. venture investors have … played key roles in the development of China’s modern technology sector, participating in funding rounds for at least one third of all Chinese venture-backed startups through the end of 2018.” {4}

Over the period of 2010 to 2021, the top sectors for US venture capital investment in China were Financial and Business Services ($7 billion), Health, Pharmaceuticals and Biotechnology ($6.4 billion), and Information and Communications Technology ($5.9billion). {5}

Corporations are another important class of venture capital investors. In acting as venture capitalists, corporations do not just seek financial returns; they also seek commercially and strategically advantageous positions, aiming to benefit their business as a whole through collaboration with the companies in which they invest.

For example, an international corporate venture investor might pour money into a Chinese startup to develop new technologies or business models with the hope of bolstering the investor’s competitive position within China. Examples of active foreign corporate investors in China include Intel Capital and Qualcomm Ventures.

Like passive securities investment, venture capital investment provides Chinese firms with capital. The way this capital is used may be detrimental to US interests or values. Moreover, venture capital investment often comes with active support from the investing company or organization. As such support can help make the investment successful. In other words, international venture investors have an incentive to align actively with the given Chinese companies, including those companies that do the bidding of the Chinese government.

American Venture Capital Investment in China Facilitates Proactive Transfer of Technologies

Foreign venture investors take stakes in Chinese firms hoping that those companies will be commercially successful. These investors have a strong incentive to support the Chinese companies beyond simply providing cash. So as to maximize profitability and positive outcomes for the investment, including development of new technologies, business models, and future revenue streams, the investor may directly cooperate with the investment to enable fast and seamless transfer of its in-house technical expertise.

For example, in November 2017, the Chinese artificial intelligence (AI) startup SenseTime Group announced that it had sealed an investment from American chipmaker Qualcomm Inc. {6} A month before the announcement, SenseTime and Qualcomm made public plans to collaborate on development of AI and machine learning (ML) technology. {7} According to Dr Li Xu, co-founder and chief executive officer of SenseTime, “The strategic collaboration between SenseTime and Qualcomm Technologies will advance on-device intelligence by leveraging our algorithm and Qualcomm Technologies’ chipset. Together we’ll push the envelope and extend AI to places that are currently beyond reach. Our strategic collaboration will become a turning point for the whole AI ecosystem.” Qualcomm’s press release claimed that the collaboration “is expected to drastically improve the speed and efficiency of combining algorithm and chipset, making SenseTime’s AI technology more pervasive.”

SenseTime is now China’s leading facial recognition company. Over the past three years, the US government has sanctioned the company for its role in surveilling Chinese people. A press release published by the U.S. Treasury Department in 2021 said SenseTime “has developed facial recognition programs that can determine a target’s ethnicity, with a particular focus on identifying ethnic Uyghurs,” a persecuted Muslim minority population in China. {8} In 2019 the company was added to the government’s entity list, meaning that US exports to the company are restricted. As of December 2021, US investment in the firm was banned.

Similarly, in 2019 the U.S. Commerce Department imposed sanctions on iFlytek, along with other Chinese artificial intelligence firms, for their role in “human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance.” {9} iFlytek is a Chinese voice recognition technology that received venture capital investment from U.S.-based Intel Corporation as early as 2002. {10} The two companies entered an in-depth collaboration similar to that between Qualcomm and SenseTime. According to Intel’s website, “both parties’ technical experts have been establishing highly effective communication, interchange, and cooperation mechanisms in such areas as code migration and optimization as well as hardware optimization.” {11}

One may wonder how pervasive this type of cooperation between American companies and their Chinese counterparts really is. Unlike the deal between Qualcomm and Intel, which was announced on both companies’ official websites, which lent the arrangement an air of transparency, most venture investments are brokered in a private setting, and many are never publicized.

Not only does cooperation between American companies and Chinese businesses such as SenseTime and iFlytek  make American firms accomplices to the CCP’s suppression of the Chinese people, It also gives Beijing access to advanced technology developed by the American companies in question, posing a risk to US national security.

Chinese Government Policy Directly Impacts the Size and Direction of American Venture Investment in China

In interfacing with the venture capital ecosystem, the Chinese government’s ambitions are twofold. First, it aims to upgrade China’s manufacturing industry, enabling production of tech-intensive and high value-added products. Second, through this upgrade, China hopes to overtake the U.S. as the world’s top power in terms of science and military technology.

Beijing regularly signals its development priorities via industrial policy pronouncements. Prominent examples from recent years include the Guidelines to Promote the National Integrated Circuit Industry (National IC Plan) released in 2014 and the Made in China 2025 manufacturing development plan published in 2015. Such policy announcements, which highlight the Chinese government’s economic and technological ambitions, often include preferential treatment and benefits for private market participants. Both domestic and foreign investors may in turn anticipate brighter outlooks for Chinese startups in covered technology areas, directing capital to related firms. Effectively, the Chinese government can fulfill its ambitions by using these policy announcements and procurement programs to direct American and other foreign venture capital investment.

The Chinese government also organizes vast capital troves to invest in priority technology areas in tandem with these industrial policy pronouncements. These state-directed venture capital investment funds undoubtedly impact the Chinese venture capital ecosystem and the behaviors of its domestic and foreign participants. For example, National IC Industry Investment Fund raised 140 billion yuan ($US 22 billion) in the first round in 2014, and 200 billion yuan ($US 32 billion) in 2019. {12} {13} These funds, drawing capital from Chinese central and local governments as well as from domestic private companies, create a strong pulling effect on foreign venture capital. Since the introduction of The National IC Plan in 2014, annual venture capital investment in Chinese semiconductor firms involving foreign investors grew more than tenfold, from $0.3 billion in 2014 to a peak of $3.2 billion in 2018. {14}

Chinese government entities also direct the flow of capital through procurement spending. For example, by creating a massive end market for surveillance technology products used to monitor Chinese citizens’ behaviors, the government has created lucrative revenue opportunities for related technology startups like SenseTime, iFlytek, and surveillance software and camera provider Hikvision. SenseTime, for instance, counts numerous Chinese government entities as clients. Many of these firms have drawn venture investment from foreign players. For example, in addition to Qualcomm’s investment in SenseTime and Intel’s in iFlytek8, Australia’s Macquarie Group is an investor in facial recognition technology firm Megvii. {15} This means foreign venture investors stand to gain directly from the Chinese government’s creation of an end market for surveillance technology.

Chinese Students Overseas and U.S.-Based Research Centers of Chinese Tech Firms are Important Components Facilitating American Venture Funding of Chinese Startups

An important factor enabling American venture capital investment in Chinese startups is the cohort of Chinese entrepreneurs and engineers who have studied abroad or worked for foreign firms before returning to China.

The overall population of Chinese students and research scholars in the United States rose dramatically in recent years, from around 68,000 in the 2006–2007 school year to about 370,000 in January 2020. Approximately 130,000 of these students and scholars are pursuing graduate degrees in science, technology, engineering, and mathematics (STEM) fields. {16} After finishing their studies, most go on to work for or conduct research at American firms. Such Chinese alumni of foreign schools and businesses account for a significant minority of new technology startup formations in China.

For example, SenseTime’s deep learning research team includes 18 professors and over 120 PhD’s from the world’s most prestigious universities including MIT and Stanford. The company’s Co-Founder and CEO, Xu Li, has worked in computer vision research institutions including Microsoft Research Asia. SenseTime’s founder, Tang Xiao’ou, received a Ph.D. from MIT and worked at Microsoft Research Asia.

Founder Leo Zhu of Yitu Technology, a leading Chinese AI company, received his Ph.D. from UCLA and was once a researcher at the MIT Artificial Intelligence Laboratory. His company recruits technical talents from well-known academic and industrial institutions such as MIT and Google.

Zhou Xi, the founder of Chinese facial recognition software company Cloudwalk, received a Ph.D. from the University of Illinois at Urbana-Champaign and has worked at IBM’s Thomas J. Watson Research Center, Microsoft Research Lab, and NEC Labs America.

Yitu Technology, a leading Chinese AI company, recruits the technically talented from well-known academic and industrial institutions such as MIT and Google. The founder, Leo Zhu, received his PhD from UCLA. Zhu was once a researcher at the MIT Artificial Intelligence Laboratory. The list goes on and on.

A related foreign cohort supporting China’s technology startups consists of research and development centers in the United States. Chinese companies operating on the global frontiers of emerging technology are especially reliant on these overseas operations. For example, as late as 2019, Chinese tech giant Huawei maintained a Silicon Valley research center in Santa Clara, California, where it had hundreds of employees. Due to the US government ban on Huawei, these R&D centers were moved to Canada. {17}

Another example is Baidu, a leading Chinese tech company. Baidu’s Artificial-Intelligence Lab has operated in Silicon Valley since 2013. {18} Similarly, in 2015, Alibaba’s cloud computing business opened the company’s first overseas data center in Silicon Valley.  CloudWalk has research labs in Silicon Valley and at UIUC; {19} and NIO, a Chinese electric car maker, has an advanced research and innovation center located in Silicon Valley. {20} At these U.S.-based research centers, Chinese companies use American scientists and engineers as well as local networks and infrastructure to develop technologies that the Chinese government can easily adopt.

As compared with investment in Chinese companies via public channels, VC investment is an even less regulated area. Because of the private nature and lack of transparency around venture capital investment, it is difficult to give an accurate and complete picture of American venture capital investment in China. Nonetheless, one cannot underestimate the risks and the harm done to the U.S. national interest. Out of short-term benefit, American companies choose to transfer their hard-won tech expertise to Chinese firms while simultaneously funding ventures that support the Chinese government’s ambitions. Via alteration of foreign investors’ incentives, the CCP thus passively acquires technology and intellectual capital. It is important for policymakers to understand the risks of this phenomenon and to craft measures to close the loophole.

{1} Adam Lysenko. (2021, March 19) U.S. Investment in China’s Capital Markets and Military-Industrial Complex. U.S.-China Economic and Security Review Commission Hearing on March 19, 2021
{2} Ibid
{3} Evelyn Cheng. (2019, May 8) Venture capital flows between China and the US surpass direct investment for the first time. CNBC.
{4} Ibid
{5} Thilo Hanemann, Mark Witzke, Charlie Vest, Lauren Dudley, Ryan Featherston. (2022, January) An Outbound Investment Screening Regime for the United States? Rhodium Group & National Committee on U.S.-China Relations
{6} Reuters. (2017, November 14) Qualcomm invests in Chinese AI facial recognition startup SenseTime.
{7} Qualcomm Technologies, Inc. (2017, October 20) SenseTime and Qualcomm to Collaborate to Drive On-Device Artificial Intelligence
{8} U.S. Department of The Treasury. (2021, December 10) Treasury Sanctions Perpetrators of Serious Human Rights Abuse on International Human Rights Day.
{9} Matthew Foldi and Chuck Ross. (2022, January 24) Chinese Company That Surveils Uyghurs Has Major Role in Beijing Olympics. The Washington Free Beacon.
{11} Intel. iFLYTEK: Improving Speech Recognition with AI.
{12} (2019, March 13) Guangfa Securities: Interpretation of first round investment of National IC Industry Investment Fund.
{13} (2019, October 30) Second round of National IC Industry Investment Fund: Over 200 billion yuan “sweeps” the chip industry.
{14} Adam Lysenko. (2021, March 19) U.S. Investment in China’s Capital Markets and Military-Industrial Complex. U.S.-China Economic and Security Review Commission Hearing on March 19, 2021
{15} Ibid
{16} Anastasya Lloyd-Damnjanovic, Alexander Bowe. (2020, October 7) U.S.-China Economic and Security Review Commission Staff Research Report: Overseas Chinese Students and Scholars in China’s Drive for Innovation.
{17} Associated Press. (2019, December 3) Huawei moving US research center to Canada.
{18} The Wired. (2013, April 12) ‘Chinese Google’ Opens Artificial-Intelligence Lab in Silicon Valley.
{19} Meghan Han. (2017, November 20) Computer Vision Startup CloudWalk Collects US$375 Million. Medium.