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U.S. venture capital firms are pressuring tech startups to cut ties with Chinese lenders as they anticipate tighter controls on foreign ownership from Washington.
In one example, HeyGen, a generative artificial intelligence startup that was founded in Shenzhen during the pandemic but has since moved to Los Angeles, asked its Chinese investors – IDG Capital, Baidu Ventures, Sequoia Capital’s former Chinese venture capital arm HongShan and ZhenFund — to sell shares to U.S. counterparts, according to multiple people familiar with the matter.
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, in which early-stage Chinese investors dramatically reduced their stakes by selling to U.S. venture capital firms. said.
HongShan and HeyGen declined to comment. Benchmark, IDG Capital, Baidu Ventures and ZhenFund did not respond to requests for comment.
U.S. investors and Xu wanted to “clean out the vanity,” meaning the list of backers, as Washington’s scrutiny of Chinese tech groups and cross-border investments intensifies, the people said.
Washington last year announced a ban on certain investments by US funds in China’s artificial intelligence sector, but has so far not restricted investments by Chinese minorities in US technology companies.
HeyGen’s move to the US means it will have access to cutting-edge AI chips, which can no longer be exported to China, and will be able to reach higher-paying customers than in its home country. The start-up builds custom avatars for videos and counts Salesforce, Nvidia, Volvo and Amazon as customers, according to its website. The product is not available 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 company founder Sarah Guo taking HongShan’s seat on HeyGen’s board.
In an interview with Forbes, Guo said that the “geopolitical situation has changed dramatically in the past year and a half” and that Xu was “extremely decisive in saying that we will be very clear about our investor base, our user base, our data centers and have no government influence” .
HeyGen is the first high-profile example of a trend that is becoming increasingly common, according to several industry insiders, as U.S. investors become wary of stricter regulations banning Chinese investments in technology.
“There are currently no rules preventing Chinese investors from acquiring minority stakes in U.S. companies. But in the technology and banking sectors, many parties are introducing stricter controls than the rules require,” says Benjamin Kostrzewa, partner at law firm Hogan Lovells in Hong Kong. He added that Chinese ownership could hinder a company’s ability to sell to the U.S. government.
The trend toward pushing Chinese venture capital firms to divest or reduce ownership of U.S. technology comes as they also face investment challenges at home, with bankruptcies in once-booming sectors such as energy storage and battery technology.
A bloodless IPO market and sluggish economic growth are also causing novice investors to turn to foreign markets for growth.
Many major Chinese venture capital firms have deep networks in the US, where leading partners may have studied or worked, making it an ideal location for them and their portfolio companies to diversify beyond their home countries.
Neil Shen, founder of HongShan, has been behind some of the most successful Chinese technology investments, including Meituan, Alibaba, PDD Holdings, ByteDance and Shein.
Over the past year, Shen has talked about investing in “Chinese founders abroad” who can leverage China’s vast pool of tech talent and world-class supply chain to build companies internationally, according to multiple people familiar with his thinking. Shen has raised $9 billion through four funds in 2022, much of which HongShan has yet to deploy. A person close to the company said HeyGen’s share sale was an “independent investment decision.”
But HeyGen highlights the challenges HongShan and other Chinese venture capital firms face, especially in the fast-growing field of AI, where talent and resources are concentrated in the San Francisco Bay Area.
“The most exciting artificial intelligence companies are from the US, but these companies are all rejecting Chinese investment,” said a Chinese venture capitalist.