DCM Ventures, a Silicon Valley venture capital firm, began investing in China’s start-ups in 1999. The move reaped such blockbuster returns that in 2021, DCM said it planned to “double down” on its strategy of investing in China, the United States and Japan.
Yet when DCM set out to raise money last fall for a new fund focused on very young companies and promoted its “cross-Pacific” expertise, the firm described plans to invest in the United States, Japan and South Korea, according to a fund-raising memo that was viewed by The New York Times.
China was not mentioned.
DCM’s messaging is one example of an industrywide shift happening between Silicon Valley investors and Chinese start-ups. U.S. venture capital firms that once saw China as the next frontier for innovation and investment returns are backing away, with some separating their Chinese operations from their American business and others declining to make new investments there.
The about-face stems from the tense relationship between the United States and China as they jockey for geopolitical, economic and technological primacy. The countries have engaged in a trade war amid a diplomatic rift, enacting tit-for-tat restrictions including U.S. moves to curb future investments in China and to scrutinize past investments in sensitive sectors.
“It was an incredibly fruitful partnership for a long time,” Tomasz Tunguz, an investor at Theory Ventures, said of how U.S. venture firms had invested in China. Now, he said, most investors are “looking for places to invest those dollars because that market is effectively closed.”
A spokeswoman for DCM said that its strategy had not changed and that investments in China had always been “a smaller component” of its funds focused on very young companies. The firm is monitoring U.S. regulations on China to comply, she added.
In Washington, actions to limit investing in China have piled up. President Biden signed an executive order last year restricting investments from U.S. firms in Chinese start-ups working on artificial intelligence, quantum computing and semiconductors.
This month, a congressional committee investigation sharply criticized five U.S. venture firms in a report that outlined their investments in Chinese companies that helped facilitate human rights abuses and built weapons for the Chinese military. The committee did not accuse the firms of breaking the law, but urged lawmakers to pass legislation further restricting such investments.
“We can’t afford to keep funding our own destruction,” said Representative Mike Gallagher of Wisconsin, the Republican chairman of the House Select Committee on the Chinese Communist Party.
Representative Raja Krishnamoorthi of Illinois, the top Democrat on the committee, said Congress might look at other areas where U.S. venture capitalists had invested in China, including biotech and financial technology.
The intensifying scrutiny has prompted U.S. venture firms to make changes. Last year, Sequoia Capital, one of Silicon Valley’s most prominent investment firms, which has invested in China since 2005, separated its Chinese operation into an entity called HongShan. The firms, which shared profits and other administrative operations, now run independently.
GGV Capital, another venture capital firm with a long history of investing in China, said in September that it would separate its American and Asian operations. It is also trying to sell its holdings in two companies that the congressional committee determined were helping the Chinese military.
Deals for Chinese start-ups that included U.S. investors declined 88 percent between 2021 and 2023, from $47 billion to $5.6 billion, according to PitchBook, which tracks start-ups.
The moves are a painful step backward for the venture capital industry, which spent the last decade transforming from a cottage industry into a global force. China was an important part of that expansion, with firms including Lightspeed Venture Partners, Redpoint Ventures and Matrix Partners entering the country.
Silicon Valley venture capitalists “made a whole bunch of bets that the U.S. and China were converging,” said Matt Turpin, a former director for China at the National Security Council and visiting fellow at the Hoover Institution.
Some China-watchers trace the shift in sentiment against Chinese tech investments to 2016, when the U.S. commerce secretary at the time, Penny Pritzker, issued a warning about unfair competition from China in the semiconductor industry.
John Chambers, who was chief executive of the networking giant Cisco and had expanded the company’s operations in China, said he had seen the Chinese government interfering more aggressively with multinational businesses by the time he stepped down in 2015. Now a start-up investor, he has chosen not to invest in Chinese start-ups and has strongly encouraged his 20 portfolio companies to not do business there.
“You can see the security concerns and a government that has become win-lose,” Mr. Chambers said.
The difficulties of investing in China increased in 2020 when President Donald J. Trump tried to ban TikTok, which is owned by a Chinese conglomerate, ByteDance. Two of ByteDance’s U.S. investors, Sequoia and General Atlantic, lobbied members of the Trump administration to let the company strike a deal so TikTok could operate in the United States.
Last year, the congressional committee began investigating investments in China by Sequoia, GGV and three other U.S. venture capital firms: GSR Ventures, Qualcomm Ventures and Walden International. It concluded that they had invested $3 billion in technology that wound up helping the Chinese military and surveillance state, as well as other human rights violations.
The committee’s report said the firms had offered more than just money, helping the Chinese companies go global and recruit talent, providing management expertise and mentorship, and giving them credibility.
One such Chinese company was Megvii, a facial recognition firm backed by GGV. The United States has blacklisted Megvii for its use in surveillance of the Uyghurs in China’s western Xinjiang region. The United States has also blacklisted Yitu, a chip and facial recognition company backed by Sequoia’s China arm.
The report, using an abbreviation for the People’s Republic of China, added that some Silicon Valley venture firms noted Beijing’s “strategic priorities and P.R.C. government support as a positive factor weighing in favor of investment in their internal memos.”
In response, Sequoia and GGV pointed to the separations of their China businesses and divestitures in the region and said they had complied with the law. GGV said it was trying to sell its stake in Megvii, for example. Qualcomm said its venture capital arms’ investments were less than 2 percent of the funds discussed in the report. Walden International and GSR Ventures did not respond to requests for comment.
Any separation of a venture capital business is complicated. The firms invest from funds that last for 10 years. Some firms, including Sequoia, hold investments even longer. Selling stakes in young companies can be difficult since the companies are privately held. Some investors have said Beijing has pressured them not to sell their shares in Chinese companies.
Beijing’s practice of enlisting companies for its own purposes, like aiding in surveillance and modernizing its military, has created further challenges.
“These are not private sector companies in the traditional sense of the word,” Representative Krishnamoorthi said. “It’s just a whole different type of entity than we’ve ever seen before.”
Josh Wolfe, an investor at Lux Capital, a venture capital firm based in New York and Silicon Valley, said it was unfair to punish U.S. firms for assumptions made about their investments in China years ago.
“But it would deserve scrutiny if, as U.S. investors, they more recently disregarded the growing moral, technological, economic and military conflicts we face” with China, he said.