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November, 2017

China supporters in Silicon Valley push back against proposed CFIUS changes

Original article: Bloomberg

Silicon Valley is nervously eyeing proposed legislation that would tighten scrutiny of Chinese investment in America. Since Chinese investors have become integral to the Valley's funding ecosystem in recent years, reducing their presence could hurt startups, businesspeople say. 


Last week, American lawmakers introduced legislation that would toughen oversight of deals by the Committee on Foreign Investment in the United States (CFIUS) in which foreign investors take minority stakes. The new bill would affect deals like Tencent's 12% stake in Snap Inc. and could slow the flow of foreign investment into artificial intelligence, virtual reality, and robotics. 


“The minority investments rule may cause some heartburn for Silicon Valley,” PricewaterhouseCoopers's executive Steven Klemencic told Bloomberg in an interview. "It’s a review they’ve never had to deal with before," he says, adding that the rule could slow the speed of deals.

Analysis:

Silicon Valley's globalist technocratic vision is increasingly at odds with the Trump administration's "America-first" stance. As Beijing and Washington square off on trade disputes, the Valley's deep ties to China's tech community will come under closer scrutiny. 


To be sure, it makes perfect business sense for the U.S. and China to cooperate in key areas of emerging technology. Technology like AI has global applications and revolutionary potential. Given China's ambitions to become a technology powerhouse, it wants to establish a foothold in Silicon Valley, arguably the world's foremost innovation hub. A good way to do that is by funding Valley-based startups focused on AI, virtual reality and robotics. The startups welcome funding - whether from China or elsewhere. 


There's just one problem: what's good for the Valley may not be good for America. After years of touting "engagement" with China, U.S. policymakers have soured on the Middle Kingdom. China's alleged abuse of American intellectual property is a major sticking point - especially the exchange of precious IP for market access. From Washington's perspective, Beijing hasn't been receptive to U.S. concerns. 


Curbing Chinese investment in American technology firms would signal Washington's commitment to safeguarding its most valuable IP. And it would serve a geopolitical goal - maintaining military supremacy. U.S. officials across government departments have long warned of the national security implications of China's investments in U.S. technology. 


"Left unchecked, I believe that China’s investments have the potential to degrade our nation’s military superiority and to undermine our U.S. defense industrial base," Republican Senator John Corbyn, one of the sponsors of the bill, told the Council of Foreign Relations in June. 


Opponents of the legislation say that it could hurt California-based startups whose technology does not have direct military applications. Over time, that could damage the Silicon Valley startup ecosystem. 


Chris Nicholson, who heads the San Francisco-based AI startup Skymind, told Bloomberg that funding from Tencent and Hong Kong-based Mandra Capital has benefited his company. Those investors did not require technology transfer, he says. 


"If I thought there was a chance that an investor who put money into Skymind could have their deal unrolled by CFIUS, I would not spend a lot of time to solicit their money. That’s the chilling effect," he says. 

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