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Venture Capitalists Fret Over U.S. Bill Targeting Chinese Investors

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Venture capitalists are heading to Washington on a mission to save their lucrative relationships with Chinese investors. Proposed legislation in Congress, which would give the government greater oversight of deals involving foreign investors, is a central issue at an annual summit for VCs that kicked off Wednesday.

The meeting is well-timed. Next week, the Senate Banking Committee will consider the bill, which could make it harder for foreign firms to make investments in U.S. technology companies and slow down or block potential deals, including venture capital funding rounds. VCs fear that efforts to keep American inventions out of foreign governments’ hands will imperil their businesses.

The new law would expand the purview of an existing government committee, which reviews deals involving foreign companies and technology that could pose national security threats. In March, it threw up a major obstacle to a proposed takeover of U.S. chipmaker Qualcomm Inc. by Singapore’s Broadcom Ltd. before President Donald Trump blocked the transaction.

Lawmakers are on track to increase restrictions on foreign investment and may fast-track the measure by attaching it to the National Defense Authorization Act, a must-pass bill set for a vote in the coming weeks. The plan, backed by Defense Secretary James Mattis, serves as a bargaining chip in Trump’s trade negotiations with China, said Jim Jochum, a lobbyist who previously served on the Committee on Foreign Investment in the U.S. “It’s likely part of a big, grand bargain,” he said.

While the new bill doesn’t explicitly mention China, it is worded in a way that would have an outsized impact on investments by Chinese entities, mostly because the latest draft allows the government to exempt so many other countries. Potentially off the hook: countries that are members of the North Atlantic Treaty Organization and other allies.

The legislation plays well to populist fears that China is leapfrogging the U.S. in job growth and innovation. “One of the few areas of bipartisanship this year is lawmakers’ desire to get ‘tough’ with China,” Roman Schweizer and Jaret Seiberg, analysts at Cowen Inc.’s Washington Research Group, wrote in a note on Monday.

Proponents of the legislation, known as the Foreign Investment Risk Review Modernization Act, say the government’s jurisdiction over foreign investment needs to be broadened because the current process doesn’t capture deals that pose national security threats. Foreign investors have been able to bypass the review process through joint ventures or minority investments.

Some government officials have said they are particularly concerned with direct investments into startups, often made alongside venture firms. “Insights into the underlying technology can be a condition of participation in venture capital deals,” said Larry Wortzel, a commissioner at the U.S.-China Economic and Security Review Commission. “And participating Chinese firms might well ask to confirm patents, which provides access to underlying technology.”

VCs argue that their backers don’t pose a threat to America. Investors in venture funds generally receive information on the financial performance of their private stock holdings, not technology secrets. VCs say the bill overreaches and will make their case directly to lawmakers this week. Meetings are scheduled Thursday with members of the Senate Banking Committee and the House Financial Services Committee, including Senators Mike Crapo of Idaho, Brian Schatz of Hawaii, and Thom Tillis of North Carolina, as well as Representative Sean Duffy of Wisconsin.

Lobbyists for VCs want to make sure indirect investors, particularly foreign shareholders in their funds, don’t trigger government review. They’ve had some success. A new draft proposal of the bill does exactly that.

Serious cash rides on the outcome. Last year, U.S. venture firms raised $32 billion, a 36 percent increase from five years earlier, according to the National Venture Capital Association, the trade group that organized this week’s events in Washington. As new investors pile into Silicon Valley, particularly those from outside the U.S., VC funds are achieving record amounts of capital not seen since the dot-com era.

Publicly, VCs avoid acknowledging the boost they get from China. Scott Kupor, a managing partner at Andreessen Horowitz and outgoing chairman of the VC trade group, said in Congressional testimony in January that lawmakers are wrong to scapegoat the country and that China accounts for less than 5 percent of capital committed to U.S. venture funds.

Investments through VC funds or for a minority stake “are not security risks and therefore should not be prohibited,” Kupor wrote in an email. “If the goal is to prevent foreign governments from stealing IP or compromising our security, they simply can’t do that through a minority investment.”

Chinese money kicks in on the other side, too. Acquisitions are the biggest driver of capital returned to VCs, and the number of Chinese acquirers doubled over the last three years, according to research firm CB Insights. 

Lobbying efforts by the VC industry have ramped up since Trump’s election. VCs sprang into action to help save the carried interest tax benefit for investors and successfully sued the Department of Homeland Security last year over delaying a visa program designed to welcome foreign entrepreneurs. The NVCA spent $511,000 on lobbying in last quarter, a 19 percent increase from the same period in 2016, when President Barack Obama was in office.

But the foreign investment issue differs in a major way from those other Republican-led initiatives: A leading sponsor of the bill is Senator Dianne Feinstein, a Democrat from California—home to the richest VC firms and most venture-backed startups. 

— With assistance by Jenny Leonard, and Ben Brody

(Updates with quote in the eighth paragraph. )
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