The Federal Bureau of Investigation (FBI) is reportedly investigating the U.S. venture capital firm Hone Capital for its involvement in funding hundreds of Silicon Valley startups with Chinese money, allegedly obtaining technology, financial, or customer information of these U.S. startups for the benefit of its Beijing parent company or the Chinese authorities according to a report by the Financial Times on Wednesday, September 25.
Hone Capital was established in 2015, headquartered in California, with initial funding of $115 million from a Chinese private equity group. Within less than three years, it invested in around 360 American tech startups, including acquiring stakes in autonomous vehicle manufacturer Cruise, payment group Stripe, and aerospace engineer Boom.
For years, the venture capital industry in Silicon Valley has welcomed Chinese investment until recently when U.S. authorities warned the industry to beware of foreign espionage activities and the risk of their intellectual property being transferred to China.
In July of this year, the National Counterintelligence and Security Center warned startup tech companies, including those from China, that overseas adversaries were using investments to obtain sensitive information, posing a threat to national security.
The FBI’s investigation has also drawn attention to one of Silicon Valley’s most renowned investment platforms, AngelList. Between 2015 and 2016, AngelList received an $80 million cash injection from Hone. In return, Hone was granted access to all the “syndicate” transactions within its system, enabling them to pool resources for investments.
A former senior executive of a sovereign wealth fund remarked, “Hone went from obscurity to becoming Silicon Valley’s top seed investor, potentially touching every transaction on the AngelList platform. I have never seen a fund like this.”
According to fund documents, Hone’s funding was provided by China Science Merchants Investment Management Group (CSC), established in 2000 with its headquarters in Beijing, as a private equity fund group.
Between 2015 and 2018, CSC transferred $215 million to its U.S. entities, which were then invested in approximately 360 startup companies.
The FBI is concerned that CSC may have access to Hone’s U.S. servers, potentially indicating that they have gained data from the invested companies.