SAN FRANCISCO • New US policies aimed at curbing China's access to American innovation have all but halted Chinese investment in US technology start-ups, as both investors and start-up founders abandon deals amid increased scrutiny from Washington.
Chinese venture funding in US start-ups crested to a record US$3 billion (S$4.1 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, however, Chinese venture funding in US start-ups has slowed to a trickle, Reuters interviews with more than 35 industry players show.
President Donald Trump has signed new legislation expanding the government's ability to block foreign investment in US companies, regardless of the investor's country of origin. But Mr Trump has been vocal about stopping China from getting its hands on strategic US technologies.
The new rules are still being finalised, 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 American tech companies in transactions with foreign buyers.
Lawyers interviewed 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 start-ups.
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, a San Francisco-based company that uses artificial intelligence to build corporate training materials, is playing it safe.
Deals involving Chinese companies and Chinese buyers and Chinese investors have virtually stopped.
ATTORNEY NELL O'DONNELL, who has represented US tech companies in transactions with foreign buyers.
It declined offers from Chinese investors last year after accepting cash from Beijing-based TAL Education Group 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 (intellectual property) tensions," said Volley's CEO Carson Kahn.
A Silicon Valley venture capitalist told Reuters he is aware of at least 10 deals, some involving companies in his own portfolio, that fell apart because they would need approval from the interagency group known as the Committee on Foreign Investment in the United States (Cfius).
Cfius is the government group tasked with reviewing foreign investment for potential national security and competitive risks. The new legislation expands its powers. Among them: the ability to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in US start-ups.
China is in the crosshairs. The Asian giant has been an aggressive investor in technology deemed critical to its global competitiveness and military prowess. Chinese investors have bought stakes in ride-hailing firms Uber Technologies and Lyft, as well as companies with more sensitive technologies including data centre networking firm Barefoot Networks, autonomous driving start-up Zoox and speech recognition start-up AISense.
A dearth of Chinese money is unlikely to spell doomsday for Silicon Valley. Investors worldwide poured more than US$84 billion into US start-ups for the first three quarters of last year, exceeding any prior full-year funding, according to data provider PitchBook.
Still, Chinese funders are critical to helping US companies gain access to the world's second-largest economy. Volley's Mr Kahn acknowledged that rejecting Chinese investment may make his start-up's overseas expansion more difficult.
"Those of us who are operators and entrepreneurs feel the brunt of these tensions," Mr 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.
Mr Reid Whitten, an attorney, 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," he said.
Some security experts applaud what they call long-overdue protections for US start-ups.
"What we are concerned about is a limited number of bad actors who are phenomenally clever about how they can access our intellectual property," said Mr Bob Ackerman, founder of AllegisCyber, a venture capital firm based in San Francisco and Maryland that backs cyber security start-ups.