Intelligence Agencies Warn Over Chinese Investment Threats in US Tech Startups

‘These actions threaten U.S. economic and national security and can directly lead to the failure of these companies.’ NCSC Director said.

A silicon wafer is displayed during a technology event in San Jose, Calif, on March 23, 2011. Justin Sullivan/Getty Images

The U.S. National Counterintelligence and Security Center (NCSC) has warned U.S. technology startups that foreign adversaries such as China can use investments to steal their sensitive data and intellectual property, undermining U.S. economic and national security.

In a joint bulletin released on July 24, the NCSC expressed great concerns about potential threats from these investments by “foreign threat actors” and provided guidelines to address these risks.

“U.S. emerging tech startups are at the forefront of American innovation, but they face risks when seeking potential foreign investment to expand their firms,” NCSC Director Michael Casey said in a statement. “Unfortunately, our adversaries continue to exploit early-stage investments in U.S. startups to take their sensitive data. These actions threaten U.S. economic and national security and can directly lead to the failure of these companies.

“U.S. startups can lose market share and fail if foreign threat actors obtain their proprietary data in the investment process and then use it to compete against them in global markets.”

The bulletin warned that foreign actors might use tactics to conceal their complex ownership structures or the origins of their funds by making investments through intermediaries, funds, or partners in the United States or a third country. This can help them “avoid or complicate outside scrutiny through degrees of separation,” such as evading scrutiny from the Committee on Foreign Investment in the United States, an interagency body that reviews investment deals for national security risks.

The United States has stepped up measures to contain the Chinese communist regime’s tech ambition that might threaten U.S. technology dominance. In October 2022, for example, the Biden administration imposed sweeping export controls on chip-making equipment to China to weaken its ability to develop advanced semiconductors to strengthen its military.

The NCSC also sounded the alarm that foreign threat actors might prey on struggling U.S. startup firms, exploiting their need for capital in exchange for intellectual property transfer.

These hostile investors could also get access to sensitive and proprietary data and technology from startup firms “under the guise of due diligence, before investing,” the bulletin said. Foreign adversaries can use these data and technology to advance their “economic and military capabilities at the expense of the U.S,” it said.

The bulletin cited a UK company that went bankrupt after transferring its technology to a Chinese investor, which later abandoned the deal after securing the intellectual property. The NCSC reported similar allegations from some U.S. and European companies, where Chinese investors withdrew investment offers after obtaining proprietary data during due diligence.

The bulletin was a collaboration with the Director of National Intelligence’s economic security and emerging technology unit, the Air Force Office of Special Investigations, and the Naval Criminal Investigative Service.

In addition, the bulletin warned that startups can be denied contracts or funding from the U.S. government “if foreign threat actors gain a footing in their firms.” They can also be influenced by foreign entities, resulting in corporate decisions that benefit foreign interests over those of the U.S. company.

The NCSC cited IDG Capital as an example of a China-based investment firm designated as a Chinese military company by the Pentagon earlier this year. IDG Capital has invested in over 1,600 companies, including those in the United States.

In 2018, the U.S. Trade Representative (USTR) warned that the Chinese communist regime increasingly focused on venture capital investment in the United States. “Significantly, the sectoral focus of China’s VC investors in the United States aligns with the Chinese government’s continued focus on acquiring emerging technologies via foreign investment and international engagement.”

The USTR found that technological sectors that Chinese venture capital investors prioritize include artificial intelligence, robotics, biotechnology, augmented reality/virtual reality, and financial technology.

Besides warning about Chinese investments in U.S. startups, the federal government increasingly imposes restrictions on outbound investments from U.S. firms to China.

In August 2023, President Joe Biden signed an executive order banning outbound U.S. investments in critical technologies that “significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern.”

Last month, the federal government proposed new regulations that restrict U.S. outbound investments that support the development of critical technologies, such as artificial intelligence, quantum computing, and semiconductors, in China, due to national security concerns.