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US venture capital firms are pressuring tech start-ups to cut ties with Chinese backers as they expect tighter controls on foreign ownership from Washington.
In one example, HeyGen, a generative artificial intelligence start-up that was founded in Shenzhen during the pandemic but has since moved to Los Angeles, asked its Chinese investors — IDG Capital, Baidu Ventures, the former Chinese venture arm of Sequoia Capital HongShan and ZhenFund. — sell shares to U.S. counterparts, according to multiple people familiar with the matter.
The artificial intelligence startup, co-founded by former Snap software engineer Joshua Xu, completed a funding round led by the Silicon Valley benchmark in March, in which early-stage Chinese investors dramatically reduced their stakes by selling to U.S. VC 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 “clear the cap table,” meaning the list of backers, as Washington’s scrutiny of Chinese technology groups and cross-border investment intensifies, the people said.
Washington last year announced a ban on some investment by US funds in China’s artificial intelligence sector, but has so far not restricted the Chinese minority’s investment in US technology companies.
HeyGen’s U.S. relocation means it has access to state-of-the-art AI chips that can no longer be exported to China, and it appeals to customers with higher salaries than in its home country. The start-up creates customized avatars for videos and counts Salesforce, Nvidia, Volvo and Amazon among its customers, according to its website. The product is unavailable in China.
Last November, HeyGen raised $5.6 million at a $75 million valuation in a funding round led by West Coast-based Conviction Partners, with the firm’s founder Sarah Guo taking over HongShan’s seat on HeyGen’s board.
In an interview with Forbes, Guo said that “the geopolitical situation has changed dramatically over the past year and a half” and that Xu was “extremely firm in saying that we will be very clear about our investor base, our user base, our data centers and they don’t have government influence”.
HeyGen is the first known example of an increasingly common trend, according to several industry insiders, as US investors fear tighter rules banning Chinese technology investments.
“There are currently no rules preventing Chinese investors from taking minority stakes in American companies. However, in technology and banking, many parties are implementing stricter controls than the rules require,” said Benjamin Kostrzewa, a partner at law firm Hogan Lovells in Hong Kong. He added that Chinese ownership could hamper the company’s ability to sell to the US government.
The trend to push Chinese venture capital firms to divest or limit ownership of American technology comes as they face investment problems at home, with bankruptcies in once-thriving sectors such as energy storage and battery technology.
An anemic IPO market and sluggish economic growth are also helping to push early-stage investors to look to overseas markets for growth.
Many large Chinese venture capital firms have deep networks in the US, where top partners may have studied or worked, making it an ideal place for them and their portfolio companies to diversify outside their home country.
Neil Shen, founding partner of HongShan, is behind some of China’s most successful technology investments, including Meituan, Alibaba, PDD Holdings, ByteDance and Shein.
Over the past year, Shen has talked about investing in “overseas Chinese founders” who, according to many people familiar with his thinking, can tap China’s vast engineering talent and world-class supply chain to build companies internationally. Shen has raised $9 billion in four funds in 2022, much of which HongShan has yet to deploy. A person close to the company said the sale of HeyGen shares was an “independent investment decision”.
But HeyGen highlights the challenges facing HongShan and other Chinese VC firms, particularly in the fast-growing field of artificial intelligence, where talent and resources are concentrated in the San Francisco Bay Area.
“The most interesting AI companies are coming from the US, but all these companies are rejecting Chinese investment,” said one Chinese venture capitalist.