Due to the expected stricter control on foreign ownership by Washington, US venture capital firms have begun pressuring early-stage tech startups to sever ties with Chinese investors.
According to the Financial Times, HeyGen, a generative artificial intelligence startup founded in Shenzhen during the pandemic and later relocated to Los Angeles, California, has been asked by its Chinese investors – IDG Capital, Baidu Ventures, Sequoia Capital’s former Chinese subsidiary HongShan, and ZhenFund – to sell shares to US counterparts.
Insiders revealed that the AI video startup, co-founded by former Snap software engineer Joshua Xu, completed a funding round led by Silicon Valley investment firm Benchmark in March of this year. During the fundraising, early Chinese investors significantly reduced their holdings in the company, selling shares to US venture capital firms.
As Washington intensifies scrutiny on Chinese tech groups and their cross-border investments, both US investors and Xu reportedly aim to “clean up the cap table,” meaning to cleanse the list of investors.
Last year, Washington announced a ban on US funds investing in certain sectors of Chinese artificial intelligence but has yet to restrict minority ownership investments by Chinese in US tech companies.
HeyGen’s move to the US signifies access to cutting-edge AI chips that are no longer exportable to China and the ability to attract higher-paying clients than in China. The startup, which specializes in tailored avatars for videos, counts clients such as Salesforce, Nvidia, Volvo, and Amazon, according to its website. Its products are banned in China.
In a funding round last November, HeyGen raised $5.6 million at a valuation of $75 million led by Conviction Partners on the US West Coast. Sarah Guo, founder of Conviction Partners, took the board seat previously held by Sequoia China.
Ms. Guo mentioned in a Forbes interview that “geo-political dynamics have changed significantly in the past year and a half,” leading Xu to firmly state the need to “be very clear about our investor base, our user base, our data centers, and that we are not influenced by the government.”
Amid growing concerns among US investors about stricter regulations on Chinese tech investments by Washington, HeyGen has become a prominent example of this increasing trend.
Benjamin Kostrzewa, partner at Hogan Lovells in Hong Kong, stated, “There are currently no regulations prohibiting Chinese investors from holding minority stakes in US companies. However, many institutions in the tech and banking industries are implementing stricter controls than required by regulations.” He added that Chinese ownership could hinder companies from selling products to the US government.
The trend of Chinese VC firms divesting or reducing stakes in US tech companies arises as these firms face difficulties with investments within China, where once thriving industries like energy storage and battery technology have faced bankruptcies.
The sluggish Chinese IPO market and weak economic growth have prompted early investors to seek development in overseas markets.
Many major Chinese VC firms have strong networks in the US, with their senior partners having studied or worked there, making the US an ideal location for diversifying their investments beyond China.
Neil Shen, founding and managing partner of Sequoia China, has been a driving force behind some of China’s most successful tech investment projects, such as Meituan, Alibaba, PDD Holdings, ByteDance, and Shein.
Insiders familiar with Shen’s thinking revealed that over the past year, he has been discussing investing in “overseas Chinese founders” who can leverage China’s vast engineering talent pool and world-class supply chain to build companies internationally. In 2022, Shen raised $9 billion through four funds, with the majority yet to be invested by Sequoia China. A source close to the firm stated that selling shares in HeyGen was an “independent investment decision.”
HeyGen’s actions highlight the challenges faced by Sequoia China and other Chinese VC companies, especially in the rapidly growing field of AI, where talent and resources are concentrated in the San Francisco Bay Area.
A Chinese venture capital investor commented, “The most exciting companies in the AI field are coming from the US, yet these companies are rejecting Chinese investments.”
(Adapted from the report by the Financial Times)