US tech sector pressures Chinese venture capital to divest

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US venture capital firms are putting pressure on tech start-ups to cut ties with Chinese backers as they anticipate tighter controls on foreign ownership from Washington.

In one example, HeyGen, a generative artificial intelligence start-up 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 US counterparts, according to multiple people familiar with the matter.

The AI video start-up, co-founded by former Snap software engineer Joshua Xu, completed a funding round led by Silicon Valley’s Benchmark in March, during which early-stage Chinese investors dramatically reduced their stakes through sales to US VC firms, these people said.

HongShan and HeyGen declined to comment. Benchmark, IDG Capital, Baidu Ventures and ZhenFund did not respond to requests for comment.

US investors and Xu wanted to “clean up the cap table”, meaning its list of backers, as Washington’s scrutiny of Chinese tech groups and cross-border investment intensifies, the people said.

Washington announced a ban last year on some investment by US funds in China’s artificial intelligence sector, but it has not restricted Chinese minority investments in American tech companies to date.

HeyGen’s US relocation means it can access cutting-edge AI chips, which can no longer be exported to China, and court higher-paying customers than in its home country. The start-up builds customised avatars for videos and counts Salesforce, Nvidia, Volvo and Amazon as customers, according to its website. The product is unavailable in China.

Last November, HeyGen raised $5.6mn at a $75mn valuation in a funding round led by West Coast-based Conviction Partners, with the firm’s founder Sarah Guo taking over HongShan’s seat on HeyGen’s board.

In an interview with Forbes, Guo said the “geopolitical situation has changed dramatically over the past year and a half” and that Xu was “extremely decisive in saying we’re going to be very clear about our investor base, our user base, our data centres and not having government influence”.

HeyGen is the first high-profile example of an increasingly common trend, according to multiple industry insiders, as US investors grow fearful of stricter rules barring Chinese investment in tech.

“There are currently no rules preventing Chinese investors from taking minority stakes in US companies. But in tech and banking, many parties are implementing tighter controls than the rules require,” said Benjamin Kostrzewa, a partner at law firm Hogan Lovells in Hong Kong. He added that Chinese ownership could hamper a company’s ability to sell to the US government.

The trend to push Chinese VC firms to divest or reduce ownership in US tech comes as they are facing difficulties with investments at home as well, with bankruptcies in once-booming sectors such as energy storage and battery technology.

An anaemic IPO market and sluggish economic growth are also helping to push early-stage investors to look to overseas markets for growth.

Many large Chinese VC 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 outside their home country.

Neil Shen, HongShan founding partner, has been behind some of the most successful Chinese tech investments, including Meituan, Alibaba, PDD Holdings, ByteDance and Shein.

Over the past year, Shen has talked about investing in “Chinese founders overseas” who can leverage China’s huge pool of engineering talent and world-class supply chain to build companies internationally, according to multiple people familiar with his thinking. Shen raised $9bn across four funds in 2022, much of which HongShan has yet to deploy. A person close to the company said the HeyGen share sale was an “independent investment decision”.

But HeyGen highlights the challenges that HongShan and other Chinese VC firms face, particularly in the fast-growing field of AI, where talent and resources are concentrated in the San Francisco Bay Area.

“The most exciting companies in artificial intelligence are coming out of the US, but these companies are all rejecting Chinese investment,” said one Chinese venture capitalist.


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