US Capital Is Incubating Beijing’s Autocracy-Serving Tech Firms

June 28, 2019 Updated: June 28, 2019

As China tightens its oppression of Uyghur Muslim minorities in the western region of Xinjiang in recent years, a group of technology firms received international attention for helping the Chinese Communist Party (CCP) regime build a massive surveillance network with state-of-the-art security technology.

A fact that’s often overlooked is that most of these autocracy-enabling firms have been incubated with capital from Western countries. One example is the leading artificial intelligence (AI) firm SenseTime.

Money Behind the Scenes

Established in 2014, SenseTime provides AI products and solutions such as face, voice, text, and image recognition along with a deep learning platform. The company was first known for its extraordinary fundraising abilities. Recently SenseTime received criticism for its technologies’ broad application in Beijing’s surveillance war on its citizens.

There’s no doubt that Chinese AI unicorns like SenseTime and Megvii are behind the regime’s massive and advanced facial recognition system that it uses to monitor and control the Uyghurs. Though SenseTime denied any knowledge of its facial recognition application, both facial recognition and content censoring are listed on its website as the company’s core products.

Beijing’s expansion of its mass monitoring systems like Skynet and Xue Liang projects boosted the valuation of AI firms such as SenseTime. These companies’ rapid growth could not have happened without large seed investments. SenseTime, the fastest growing and the largest Chinese AI company, received a large portion of its capital from U.S. companies.

In November 2014, only five months after its establishment, SenseTime raised tens of millions of dollars from New York-based IDG Capital in a Series A financing round. Two years later in December 2016, SenseTime raised another $120 million from various investors including China-based CDH Investments, Wanda Group, and IDG.

Shortly after, SenseTime raised a record-breaking $410 million on July 11, 2017 in a Series B round, with a valuation of $1.5 billion. Four months later, SenseTime received tens of millions of dollars from U.S. chipmaker Qualcomm Inc.

The list goes on. In 2018 SenseTime raised over $1.2 billion, including $600 million in a Series C round from Alibaba and other investors and partners such as Temasek Holdings of Singapore and China’s Suning Holdings. In May 2018, SenseTime raised $620 million in Series C+ round of fundraising from Fidelity International, Hopu Fund, Silver Lake Partners, Tiger Global and Qualcomm Ventures. The company was valued at $4.5 billion post the fundraising, according SenseTime.

Bloomberg reported in January that SenseTime plans to raise another $2 billion this year. SenseTime declined commenting on this report.

Public records indicate that SenseTime has raised over $2 billion over eight rounds of fundraising since inception. Half of the amount was from funds directly controlled by the Chinese regime or private equity funds from China. The other $1 billion, though, came primarily from overseas, especially U.S. investors.

SenseTime’s initial outside investor, IDG Capital, bills itself as the first U.S. venture capital firm to explore the Chinese market. It was also an early investor in Chinese technology giants Baidu, Tencent and Qihoo 360, all targets of criticism for working with the CCP regime to infringe internet users’ privacy. In 2010 IDG became one of the first companies approved by the Chinese National Development and Reform Commission to sub-advise the country’s social security funds, and launched the first yuan-denominated fund the same year.

In the C+ financing round, most of the venture capital firms that invested a total of $620 million funds came from the United States. Fidelity International is a subsidiary of FMR, one of the world’s largest asset management firms. Silver Lake is a private equity investor headquartered in the U.S. Qualcomm Ventures is the investment arm of California-based Qualcomm. Tiger Global is a New York-based hedge fund. Even Hopu Fund, which was established in China, is founded by a former Goldman Sachs partner Fang Fenglei. Hopu is primarily funded by Goldman Sachs and Temasek Holdings, Singapore’s sovereign wealth fund.

U.S. Universities and Retirees Are Funding China’s Surveillance

U.S. university donations, foundations, and pension funds have been funding for China’s mass surveillance technology, according to BuzzFeed. A report titled “U.S. Universities And Retirees Are Funding The Technology Behind China’s Surveillance State” revealed that American public pension funds are the biggest source of U.S. capital invested in SenseTime and Megvii, China’s top two facial recognition technology providers.

Through Silver lake, 14 pension plans maintain stakes in SenseTime as of May 2018, according to PitchBook and public filings data. Among the largest investors in Silver Lake is CalPERS, the Teacher Retirement System of Texas, and the Washington State Investment Board. Silver Lake’s limited partners include public employee pension and retirement plans from Illinois, Michigan, Minnesota, New York, Ohio, and the city of Los Angeles, according to BuzzFeed. As limited partners, these organizations do not control the day-to-day operations of the venture firms, but they can include clauses in agreements with venture funds that prevent them from investing in certain industries, a Silicon Valley investor told BuzzFeed.

However, the investor said, they had never seen clauses that directly address issues around human rights.

An unnamed private equity investor told BuzzFeed that his firm decided to invest in Sensetime regardless of the human rights issues because of the financial upside for his limited partners. SenseTime’s collaboration with the Chinese government was a given from the start, the investor said. “If you don’t work with them, you’ll no longer have a business. Doing business is expected.”

The SenseTime story shows that the CCP has mastered the art of using funds from the United States and other developed countries to incubate technologies that would help the regime maintain their autocracy.

What’s worth mentioning is that although the U.S. government has strengthened supervision on Chinese investment in American high tech companies, it did not stop the U.S. investors, including pension funds, to exhibit even greater interest in Chinese companies and capital market.

Last September, for example, CalPERS appointed former Chinese State Administration of Foreign Exchange (SAFE) official Ben Meng as its Chief Investment Officer. Meng, who started work in January 2019, already proposed to expand the company’s private equity program.

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