Warning Bells Over Silicon Valley Connections
Profiteering Ventures in America Exploit Local Capital for Self-Enrichment
The "Clean Capital Certificate" (CCC) pact, a preemptive measure against foreign investments, was made public on TechCrunch on December 18th. All the companies involved are members of Future Union, a coalition from the tech industry, formed to prevent advanced technology from falling into unwanted hands and to prevent foreign investors from affecting American companies' politics. Future Union has been apprehensive about the protection of American technological secrets for approximately three years, focusing their attention mainly on Chinese investors. Foreign companies investing in foreign startups is a legal form of economic espionage; however, there are insufficient formal prohibitions to prevent such activities. The signatories of the CCC, including Moonshots Capital, Marlinspike Partners, Humba Ventures, Space Capital, and Snowpoint Ventures, justify their decision by stating that foreign investors benefit from the achievements of American startups. All these funds are of a relatively small size, none of them appearing in the top 10 by asset value.
The signing of the CCC pact occurred following the September incident when the FBI initiated an investigation into the venture capital firm Hone Capital for allegations of transferring secret technological information to its Chinese shareholders. In February 2024, the U.S. Congress expressed concern about the fact that several companies engaged in military technology (GGV Capital, GSR Ventures, Walden International, etc.) received a cumulative $3 billion from Chinese companies developing AI and semiconductors. At the same time, the Pentagon warned that careless startups would not be able to receive defense government contracts if they continue to collaborate with investors from unfriendly countries to the U.S.
Dodging Parallel Interests
The companies that signed the CCC pact hope that their move will inspire other American companies to welcome foreign capital. However, Future Union's initiative has, thus far, not sparked widespread enthusiasm: many large venture capital companies in the defense sector refuse to affiliate with the initiative. For example, Andreessen Horowitz, A16Z, Founders Fund have opted out, stating that they "won't touch enemy money." Sequoia, another company, emphasized that it had already split off its subsidiary that used Chinese investments into a separate legal entity in 2023.
Critics argue that most signatories of the CCC pact do not, in fact, conduct business with Russian or Chinese investors and are merely jumping on the bandwagon for self-promotion purposes.
The Future Union initiative comes across as an insurance policy with neither objective foundations nor real-world consequences, according to the president of Sistema Venture Capital Fund (part of AFK "Systema"), Alexei Katkov: "Venture funds themselves, without echoing loud declarations, are highly selective about foreign money. It's not about political leanings. There's plenty of free money in the U.S. for venture funding, and there's no urgent need to attract foreign limited partners. However, reputational damage could be devastating if even a single questionable dollar of foreign investments were found. This needn't necessarily be money from unfriendly countries – it could be money associated with drug cartels."
American businesspeople and policymakers' concerns about the use of foreign investments as a means of obtaining technological and commercial secrets are considered excessive by Katkov: "The more complex the investment chains with covering tracks, the more difficult it will be to withdraw money later. It's a game that's not worth the effort."
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Additional Insights:
- National Security Risks: Concerns about transfers of sensitive technologies, exposing U.S. user data to foreign surveillance, and the proximity of Chinese economic activities near critical U.S. infrastructure heighten fears over espionage and strategic positioning.
- Economic Espionage Concerns: Allegations of forced technology transfers, counterfeit product development, and trade secret theft by Chinese entities cost American firms billions annually. China’s expanded counter-espionage regulations add to the risks of intellectual property leakage.
- Regulatory Responses: CFIUS has intensified reviews of Chinese-linked investments in sensitive sectors; stricter export controls aim to limit China’s access to dual-use innovations. China’s retaliatory laws create legal risks for U.S. firms operating in China, complicating cross-border investments.
- Implications for Startups: Overly restrictive measures to safeguard national interests might deter foreign capital, limiting growth opportunities for startups reliant on global funding. Compliance with conflicting U.S. and Chinese regulations increases operational costs and legal exposure. Startups in critical tech sectors may become pawns in broader U.S.-China tensions.
- The companies in Future Union, including Moonshots Capital, Marlinspike Partners, Humba Ventures, Space Capital, and Snowpoint Ventures, are transferring their focus towards redistributing investments away from unfriendly nations like China, following the signing of the "Clean Capital Certificate" (CCC) pact in 2024.
- Critics argue that the initiative taken by Future Union to steer clear of foreign investments, particularly from China, is merely a public relations move to gain self-promotion, as many of the signatories do not actually conduct business with Chinese investors.
- The increasing concern among investors in Silicon Valley about the unfriendly transfer of technology to untrustworthy parties has led to the establishment of the CCC pact, with the aim of preventing American startups from falling into the wrong hands and safeguarding American technological secrets.
