Before the bans, China tech investment turned away from US

It wasn’t so long ago that China tech investment loved US startups. Now, the two tech markets feel like they’re on different planets.

So far, the American offensive specifically targets two companies, but ripple effects are creating uncertainty over just how wide-ranging the ban could be—especially for Wechat’s owner Tencent, which holds a formidable portfolio of US investments.

So how do geopolitical tensions affect Chinese tech’s overseas investments? Pretty significantly, it turns out. In fact, the story of American measures to stifle Chinese influence in its home market starts long before July.

I scraped and analyzed public funding data to pinpoint deals by Chinese tech majors in the US. The numbers highlight a turning point in 2018, when the US sharpened its focus on companies like telecommunications giants Huawei and ZTE. Since then, Chinese investments in US startups have fallen off a cliff. 

Tech giants like Alibaba, Tencent, and Baidu appear to have reversed their US investment strategies amid rising tensions between China and the US, as two superpowers tussle over the future of the companies that dominate the internet. 

Key takeaways:

• Chinese tech giants invested heavily in the US between 2010 and 2018, but quickly scaled back investments in US startups beginning in 2019. 
• The drop-off is partly explained by increased scrutiny in 2018, when the Committee on Foreign Investments in the United States (CFIUS) was given more power to review investments in US companies. 
• Since then, new Chinese investments in American startups have fallen dramatically. Contributions in the first quarter of 2020 dropped to $400 million, down by more than a third compared to the same period in 2019, according to the US-China Investment Project.
• The drop in funding occurred only among Chinese investors—overall investment flows into US startups largely remained the same in 2019.

Investment explosion

It started with a boom. After gaining a solid foothold in their home markets, Chinese tech giants started looking abroad for the next big thing. 

In 2008, Tencent became the first Chinese tech giant to set its sights on the US, investing in big-ticket companies like electric vehicle maker Tesla and social media giant Snap. 

The company has participated in 81 funding rounds for US startups since 2008. Its US investments peaked between 2014 and 2017, a period when it made three-quarters of its deals—62 in all. 

In 2010, the same year that Google bowed out of China over concerns of censorship and cyber threats, e-commerce giant Alibaba made its first move into the US. The e-commerce giant has since taken part in 27 funding rounds for US companies. These rounds totaled more than $5.4 billion. Given how companies guard information about their investments, the data presents only the total value of each funding round rather than Alibaba’s individual contributions.

Meanwhile, Baidu made its first US investment in 2013. Though it has taken part in significantly fewer funding rounds than either Alibaba or Tencent, Baidu’s investment peak came in 2016, when it participated in rounds for lidar-maker Velodyne, as well as fintech companies Circle and Zestfinance. 

Overall, Chinese venture funding in the US amounted to around $14 billion between 2013 and 2018, according to figures from the US-China Investment Project. Total investment spiked in 2018 at $4.7 billion, but otherwise plateaued between 2015 and 2019 at around $2.5 billion. 

The bust

Everything changed after 2018. In 2016, Baidu, Alibaba, and Tencent were involved in 22 deals in the US. In 2019, they took part in a paltry three investments.

The reason was almost certainly politics. As trade tensions between the world’s two largest economies flared, the US and Chinese tech sectors took most of the heat. Hostility grew and investments shrank.

Chinese investors that focused on US startups in previous years have sought distance from the sector. Tightening US regulations drove them away, while the prospect of bigger returns lured them to developing markets. New rules that give CFIUS extra power added another important reason for the decline.

In 2019, Tencent took part in just two funding rounds—one for social media news aggregator Reddit, and another for contacts manager Contacts+—a 90% decrease from its height of 23 deals in 2015, and a 70% year-on-year decline from 2018. 

While Alibaba’s US portfolio isn’t as expansive as Tencent’s, the company participated in 26 deals between 2010 and 2017, including high-profile investments into companies like mobility platform Lyft and Snap. Since 2018, it has taken part in only one US funding round.

Alibaba’s pullback from the US preceded Tencent’s. Business concerns may have also played a role, as the company pivoted to Asia’s lucrative developing markets when growth began to stagnate in its home market of China. Still, US scrutiny of Chinese firms was already intensifying, and rising tensions undoubtedly played a role in Alibaba shifting away. 

Even Baidu, which has far less at stake in the US given its smaller investment footprint, has pulled back from American investments. Just one of its 11 investments took place after 2018. 

As the number of Chinese funding rounds in the US declines, so does the amount of investment coming from China. The US-China Investment Project estimates that Chinese venture funding in the US totaled $400 million in the first quarter, down from $640 million during the same period in 2019 and $1 billion in 2018. Of course, a global pandemic beginning in China also contributed to this fall.

This dropoff was “distinctively Chinese,” according to the US-China Investment Project’s report. Despite the decrease in Chinese investment, overall funding in US startups largely remained the same. 

China’s tech giants have turned their eye to the developing markets. Firms including Alibaba and Tencent have increased their investments in the emerging markets of South and Southeast Asia. The two companies have divided up India’s tech scene without any overlap in their investments, while also making some big bets on promising tech companies in Southeast Asia. 

Tougher reviews

A significant factor contributing to the dropoff in China tech investment is the increasingly strict regulatory environment. In late 2018, the US introduced new measures that increase scrutiny of foreign investments in American companies. 

Dubbed the Foreign Investment Risk Review Modernization Act (FIRRMA), the changes gave CFIUS, an inter-agency body tasked with identifying risks from foreign investments, more power to scrutinize investments into American firms. 

FIRRMA came into effect amid fears that Chinese acquisitions of and investments into US companies were abetting technology transfers from the US to China, and having adverse effects on American companies and internet users.

Before the new rules, CFIUS typically reviewed deals only when a foreign investor took a controlling stake in a US company, focusing on deals involving sensitive technologies.

In early 2018, fintech giant Ant Financial found itself locking horns with CFIUS. The Alibaba-affiliated company had wanted to acquire American money transfer firm Moneygram, but was forced to withdraw from the deal after the regulatory committee rejected it over national security concerns. 

The proposed $1.2 billion deal would have made 2018 an even bigger year for China-US investment flows, increasing total investment that year to nearly $6 billion, based on figures from the US-China Investment Project. That figure would have more than doubled the previous year’s total. 

CFIUS has also blocked Chinese ownership of the LGBTQ dating app Grindr. The committee required Beijing Kunlun Technology, the app’s previous owner, to sell the app, citing national security concerns. Kunlun agreed to sell the app to San Vincente Acquisition in March. 

FIRRMA gave CFIUS a mandate to review non-controlling investments in US companies that produce critical technology, critical infrastructure, or that collect US citizens’ personal data. Critical technologies can include anything from semiconductors to batteries. 

Crucially, it also authorized the committee to target investors based on the country they are from. 

“While specific countries are not singled out, FIRRMA allows CFIUS to potentially discriminate among foreign investors by country of origin in reviewing certain investment transactions,” the Congressional Research Service, a US Congress-affiliated think tank, wrote in a February report.

According to CFIUS’ annual report, only three potential investments in critical technology originated from China in 2019. But even if CFIUS is not rejecting deals, the dramatic drop in Chinese investment shows that Chinese tech companies don’t think it’s worth trying.

“The broad impacts suggest systemic headwinds to Chinese venture activity, reflecting tighter investment screening and a deterioration in investor sentiment as US-China tensions increase,” said the report by the US-China Investment Project. 

Given the Trump administration’s latest move to shed Chinese technology from America’s digital networks, Chinese companies and investors will likely continue to be driven away by US politics.