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WASHINGTON – Nearly half of the most powerful players in venture capital are quietly investing billions in Chinese tech startups rather than their US competitors — taking in massive returns at the expense of American national security.
In an explosive report reviewed exclusively by The Post, San Francisco-based nonprofit Future Union reveals that at least 46 of the top 100 venture capital investors on Forbes’ 2023 Midas List have directly identifiable connections to China, helping Beijing beat Silicon Valley in the race for the next big tech breakthrough.
“For years it’s been the hidden secret that our very best venture capital and private equity investors have been funding the rise of China’s innovation ecosystem for a decade, and making a lot of money doing it,” said Future Union Founder Andrew King.
“Those investors laid the very foundation for our foes’ innovation ecosystem and the technologies against which US companies and democracy now competes,” he added. “In some instances, the sole reason for the investor’s inclusion on the list was their investment successes in China.”
The notorious 46 — many of whom were born or educated in the US – include Scott Shleifer of Tiger Global Management; Anton Levy of General Atlantic; Marc Stad of Dragoneer Investment Group; Neil Shen and Steven Ji of Sequoia China; Richard Liu and Fisher Zhang of 5Y Capital; and Hurst Lin of DCM.
Some have previously made headlines for their deep links with China. For example, The Economist in June described the Hong Kong-based, Yale master’s degree-holding Shen as having “god-like status in the Chinese private-equity industry” after his returns on early investments in startups like food-delivery company Meituan and e-commerce platform Pinduoduo outpaced those of his colleagues.
Other venture capitalists have made big gains bet betting on the same Chinese companies. For example, Lin (who did his undergrad studies at Dartmouth and has a MBA from Stanford) and Liu made impressive returns on early investments in Chinese social media platform, Kuaishou Technology. While Lin turned a $15 million investment into $12.5 billion between 2014 and 2021 – a return more than 2,000 times the initial purchase – Liu brought in a reported $30 billion return.
What’s at stake
“We’re all capitalists here and we’re all about making money,” said King, himself a venture capitalist and attorney in the tech sphere. “That said, that does not obviate the need to make sure we’re not imperiling our future by giving up our next generation of technologies and defense capabilities to make sure that democracy is the leader in the global community.”
The Pentagon first recognized China as the major threat facing the US in the 2018 National Defense Strategy.
“Inter-state strategic competition, not terrorism, is now the primary concern in US national security,” that document said. “… As China continues its economic and military ascendance … it will continue to pursue a military modernization program that seeks … the displacement of the United States to achieve global preeminence in the future.”
While any foreign investment can have consequences for the domestic economy, funding Chinese companies means offering Beijing critical benefits at the opportunity cost of American advancement, which King called unacceptable.
“If we lose against China, we’re toast – it’s done,” he said. “If we lose and China wins, economically we’re at the mercy of China. That’s worrisome.”
“The Chinese Communist Party have explicitly told us – verbally, via their actions and through their Made in China 2025 [economic] doctrine – that they want to write the new world order with them in charge. Do we not believe them?” asked Kristi Rogers, managing partner of DC-based Principal to Principal business consulting practice and a board member of nonpartisan nonprofit Business Executives for National Security.
“The CCP is a direct threat to our national and economic security,” she added. “Why do we continue to help them defeat us by investing in their economy, often at the expense of ours?”
The US economy and innovation sphere suffer when venture capitalists support Chinese startups over their American challengers, due to venture capitalists’ fiduciary duty to ensure success for the startups in which they invest, King said.
For example, when venture capitalists invest in ByteDance – the Chinese company behind TikTok – the chances of them supporting another social media app, like Instagram, dwindle accordingly.
Those on the Forbes list whose main investments include ByteDance are Shen, Shleifer, Levy and Stad.
Cheating to win
Venture capitalists are also required to do non-investment tasks to achieve the best returns possible for their clients, including offering networking opportunities, mentoring, advice and technical expertise, King said. Often, those interactions include technology transfers and sharing industry secrets to help outperform rivals.
But the practice becomes a moral quandary when American venture capitalists direct that assistance to Beijing as US-China tensions simmer, experts told The Post.
“While funding alone is important, often times it is the intangible, relationship elements and knowledge that are far more impactful – and dangerous – if transferred to an adversary like China,” King said. “In return for access to the rigged Chinese market, these investors also offer Chinese startups the nearly priceless value of a lifetime of experience and learnings.”
For one, investing in the adversary’s advancement risks bankrolling the development of technology China will almost assuredly use against the US, a former national security official told The Post.
“If you are providing China with cutting-edge technologies, we already have a reasonable understanding of how they will be applied and used – and it’s in ways that could soon be weaponized to kill Americans,” the person said. “That’s like ‘Sorry, no. The invisible hand of the market has to get nudged in a different direction here.’”
In Chinese President Xi Jinping’s quest to shift the world order in Beijing’s favor and replace the US as global superpower, the ruling Chinese Communist Party routinely ignores international trade norms and standards, handpicks its economic winners and losers and outright rejects competitors’ intellectual property rights, according to experts.
Those unfair tactics violate the principle of honest competition among market economies and stack the deck by creating a system that makes getting ahead increasingly onerous for the US and other rule-abiding nations, King said.
“As our report shows, many US and global investors continue to double down in China, directly imperiling the future of competing US-based startups,” he said. “Even while betting on Chinese startups, these funds achieve their prominence and much of their wealth via the global free market system, yet continue to act in the best interests of themselves.”
A common cheat tactic, King explained, involves the CCP’s notorious disdain for intellectual property rights. When a venture capitalist invests in a Chinese startup, the firm may enter contracts to grant the startup IP rights to US-developed emerging technology for a given amount of time.
The problem is, Beijing is under no obligation to honor the contractual time limits. Instead, they can merely steal the technology without fear of being held responsible by any government agency.
“We’re in a situation right now where there’s two possible outcomes: The US and global democracies forge ahead and clear the field of our antidemocratic competitors in favor of free and fair markets,” King said, “or we continue to pursue self-interested, individual profit maximization, lose American technology superiority and create a secondary market run by autocratic regimes who put their thumbs on the scale to decide who wins and who loses.”
Nonprofits and foundations
Major US nonprofits and foundations – which receive hearty tax benefits – are among the first to provide funding for venture capitalists to invest in China.
From the Mayo Clinic to the Heinz Endowment, Future Union identified 17 US nonprofit and charitable organizations that have been “extensively involved” in Chinese investment while benefitting from federal tax privileges meant to “encourage risk taking and reinvestment” to boost American interests.
“The US tax code offers significant opportunities for wealthy individuals to maintain generous giving preferences and shield wealth from taxes under nonprofit and foundations’ legal tax-status exemptions,” the report said. “As such, the broad nonprofit and US foundation sector can [exemplify] the best of the US system: a benevolent and significantly impactful group contributing to alleviation of admirable inequities.”
But when such entities contribute their funds instead to US adversaries, the same tax relief opportunity created to encourage spending to benefit the domestic economy instead does the opposite.
“As our data illustrates, [the charitable-giving sector] can also betray the interests of the country, opting instead to invest capital that benefits competing, autocratic innovation ecosystems,” the report said. “These actions damage US innovation and deprive it of the risk capital upon which it is reliant.”
In total, Future Union tallied “more than 620 commitments to Chinese and China-related venture capital and private equity funds” made by US nonprofits and foundations in recent years. That total includes 41 investments by the MacArthur Foundation, 38 by the Rockefeller Foundation; 30 by the Carnegie Foundation; 26 by the Andrew W. Mellon Foundation; and 24 by the J. Getty Trust.
While some, such as the Bush Foundation, ceased making new investments in the Chinese market several years ago, “many” others have done so recently, according to the report.
“For example, the Robert Wood Johnson Foundation – the 11th largest nonprofit foundation in America and namesake and founder of Johnson & Johnson healthcare – made investments [in China] as recently as the last few months,” the report said.
RWJF agreed last year to stop making new investments in China. However, with more than 55 total investments in Chinese-based funds, the foundation has “shown a strong proclivity toward investing in China,” according to the report.
Balancing the scale
Congress is split on how – and whether – to address the problem.
The House Foreign Affairs Committee is seeking a bipartisan ban on US investments in certain business sectors, such as the defense and technology industries. Their proposed “Preventing Adversaries from Developing Critical Capabilities Act” would “prohibit or require notification” of investment activities in “countries of concern,” according to the bill.
“It should come as no surprise that China’s military and surveillance state are exploiting loopholes in US policy to access billions of US investment dollars and expertise,” Ranking Member Gregory Meeks ((D-NY) said at a recent hearing on the matter. “We know that US investment has not democratized China, and companies which are controlled by the CCP have no power over the applications of their technology.”
“The CCP can direct it to be used for military or surveillance purposes,” he added.
But a few lawmakers have reservations over such restrictions. For example, House Financial Services Committee Chariman Patrick McHenry (R-NC) in a November letter opposing related legislation claimed “it is a misconception that US investors are fueling China’s economic growth.”
Instead of targeting entire business sectors, he favors sanctioning individual problematic countries.
“If the goal of [the legislation] is simply to target know-how, then US export controls already prohibit
knowledge transfer abroad, often in cooperation with our allies,” he argued. “Anyone who claims there is
a ‘gap’ in government authorities does not understand the authorities that exist, or they find
sanctions and export controls too hawkish on China.”
However, King says that argument overlooks Beijing’s tendency to disregard international trade laws and play by its own rules, under which companies “lose valuable technologies to Chinese competitors’ theft of core intellectual property and forced transfer.”
“One biotech company in particular that started manufacturing in China, 12 months later faced a carbon copy of its treatment drug being mass produced by a Chinese company who ignored all legal and contractual obligations and expropriated the formula, putting the company into bankruptcy and then insolvency without any recourse,” he said.
The House Select Committee on the CCP is also studying the issue, said Chairman Mike Gallagher (R-Wisc.), who said the panel has found “troubling” examples of major US investment firms funding defense-related Chinese companies blacklisted by the US government over national security concerns.
“Do you want your pension paying for China’s aircraft carriers? Would you like your retirement savings powering the CCP’s techno-totalitarian surveillance state?” he told The Post. “Financial giants like MSCI and Blackrock funnel US money to companies that produce the CCP’s military aircraft, its aircraft carriers, its aerospace technology, its artillery shells, and even its advanced nuclear technology.”
At the very least, the government should require sector-wide notification requirements for investments in adversary nations involving critical technology, former Trump administration Deputy National Security adviser Matt Pottinger told The Post this week.
“A reporting requirement so that our government as well as the public at large can be aware of who’s investing in technologies that can be weaponized against Americans is a reasonable starting point,” he said.
Pottinger, who also serves as a program chair at the Foundation for Defense of Democracies think tank in Washington, said regulations on American investments in adversaries’ markets is consistent with conservative values, and is rooted in US history.
“During the Cold War, President Reagan understood we should not be increasing our trade investment and business ties to the Soviet Union. That wasn’t even a terribly controversial idea with conservatives in the ’80s,” he said. “But now, it’s whole sectors of our tech industries — from Microsoft to venture capital firms and funds like IDG Capital.“
“If it was good enough for Reagan to curb financial and business and trade ties with our chief adversary, it’s good enough for me and should be good enough for any conservative.”
