Get your free copy of Editor's Digest
FT editor Roula Khalaf picks her favourite stories in this weekly newsletter.
U.S. venture capital firms are pressuring tech startups to cut ties with Chinese backers, anticipating tighter restrictions on foreign ownership from Washington.
As one example, HeyGen, a generative artificial intelligence startup that was founded in Shenzhen during the pandemic and has since relocated to Los Angeles, has asked Chinese investors including IDG Capital, Baidu Ventures, HongShan, the former China venture capital arm of Sequoia Capital, and ZhenFund to sell stakes to their U.S. counterparts, people familiar with the matter said.
The AI video startup, co-founded by former Snap software engineer Joshua Xu, completed a funding round led by Silicon Valley's Benchmark in March after early-stage Chinese investors significantly reduced their stakes through sales to U.S. venture capital firms, the people said.
HongShan and HeyGen declined to comment. Benchmark, IDG Capital, Baidu Ventures and ZhenFund did not respond to requests for comment.
The U.S. investors and Xu wanted to clean up the company's “cap table,” or list of backers, amid increased scrutiny from Washington of Chinese tech companies and cross-border investment, the people said.
Washington announced last year that it would ban some investments by U.S. funds in China's artificial intelligence sector, but so far has not restricted investments by Chinese minority shareholders in U.S. tech companies.
Heygen's move to the U.S. means it will have access to cutting-edge AI chips that can no longer be exported to China and attract more lucrative customers than it could back home. The startup makes customized avatars for videos, and its website says its customers include Salesforce, Nvidia, Volvo and Amazon. The products are not available in China.
Last November, HeyGen raised $5.6 million in a funding round led by West Coast-based Conviction Partners at a valuation of $75 million, and the company's founder, Sarah Guo, took over from Hong Shan on HeyGen's board of directors.
“The geopolitical situation has changed dramatically over the past year and a half,” Guo said in an interview with Forbes, while Xu “was very adamant about being very clear about our investor base, our user base, our data centers, and that we're not going to be influenced by the government.”
Industry sources said Heygen was the first high-profile example of an increasingly common trend as U.S. investors fear tougher rules banning Chinese investment in the technology sector.
“Currently, there are no rules that prohibit Chinese investors from taking minority stakes in U.S. companies, but in the technology and banking industries, many companies have stricter controls than the rules provide,” said Benjamin Kostzewa, a partner at Hong Kong law firm Hogan Lovells, who added that Chinese ownership could hinder a company's ability to sell to the U.S. government.
The trend pushing Chinese venture capital firms to sell stakes or reduce their ownership in U.S. technology sectors comes as they face difficulties investing at home, including bankruptcies in once-booming sectors such as energy storage and battery technology.
A sluggish initial public offering market and slowing economic growth are also contributing to early-stage investors turning to overseas markets for growth.
Many large Chinese venture capital firms have deep networks in the United States and their key partners may have studied or worked in the U.S., making the U.S. an ideal location for them and their portfolio companies to diversify outside their home country.
HongShan's founding partner, Neil Shen, has been behind some of China's most successful technology investments, including Meituan, Alibaba, PDD Holdings, ByteDance and Shein.
Over the past year, Shen has spoken about investing in “overseas Chinese founders” who can leverage China's vast engineering talent and world-class supply chain to launch companies internationally, people familiar with his thinking said. Shen raised $9 billion across four funds in 2022, much of which Hengshan has yet to manage. A person close to the company said the sale of Heijen's stake was an “independent investment decision.”
But HeyGen highlights the challenges facing HongShan and other Chinese venture capital firms, especially in the burgeoning AI field, where talent and resources are concentrated in the San Francisco Bay Area.
“The most exciting companies in artificial intelligence are coming out of the United States, but they are all refusing investment from China,” said one Chinese venture capitalist.
