Steer Clear of Shaky Alliances
Exploitative American Startups: Unrelenting Profit Seekers, Disregarding Contributions
A pact dubbed the "Clean Capital Contract" (C3) was recently publicized on TechCrunch by a coalition of tech firms. These companies belong to an informal collective called Forward Union, whose primary objective is to keep advanced technologies out of the grip of unwanted interests and to ward off foreign investors from manipulating American companies' politics. Forward Union has been concerned about safeguarding American technological secrets since around three years ago, stressing that their primary focus is not Russia or Iran, but China. For foreign investors, buying stakes in foreign startups serves as a "legal" form of economic espionage, but there are evidently not enough established restrictions to thwart these operations. The companies who signed the C3 (Moonshots Capital, Marlinspike Partners, Humba Ventures, Space Capital, and Snowpoint Ventures, among others) justify their decision due to foreign investors leveraging American startups' accomplishments. All these funds are relatively small, none appearing in the top 10 in terms of asset value.
The emergence of the C3 pact was preceded by an episode in September when the FBI initiated an inquiry into the venture capital fund Hone Capital. California-based Hone Capital had been accused of conveying confidential technological details to its Chinese investors. In February 2024, concerns began swirling in the US Congress about multiple companies dealing with military technology (GGV Capital, GSR Ventures, Walden International, etc.) accepting a total of $3 billion from Chinese firms developing AI and semiconductors. At that time, the Pentagon warned that startups that persist in cooperating with investors hostile to the United States would be denied governmentally-funded contracts for defense contracts.
Counterfeit Capital Inflow
The companies that signed the C3 agreement hope that other American companies that accept foreign funds will follow suit. However, Forward Union's initiative has yet to garner mass support: many large venture capital firms in the defense sector are absent from the list of signatories. Notable declines include Andreessen Horowitz, A16Z, Founders Fund, and Sequoia. The latter emphasized that they split their division using Chinese investments into a separate legal entity back in 2023.
In firms that declined to voluntarily commit to excluding "tainted funds" from their portfolios, TechCrunch noted that the Capital Supply Chain (CSS) agreement is highly permeable, providing no practical benefit. Firstly, signatories ask trust to be placed in their promises, as the "clean capital certificate" does not provide any verification mechanisms. However, more crucially, beneficiaries from unfavorable countries can easily conceal their tracks by investing in American startups through intermediary firms based in allied or neutral jurisdictions. This "parallel money laundering" is hard to trace, unlike direct parallel imports of goods.
Critics suspect that most signatories of the CSS agreement do business with Russian or Chinese investors anyway, so they have nothing to lose, taking this step for self-promotion.
American business leaders and policymakers' apprehensions about foreign investments being utilized to obtain technological and commercial secrets are considered overblown by Alexei Katkov, president of Sistema Venture Capital (a subsidiary of AFK Sistema): "Venture capital funds are already incredibly selective about foreign investments without loudly advocating for it. It's not a matter of political preference. There's a plentiful supply of American dollars for venture funding, and there's no urgent need to draw in foreign limited partners (LPs). However, potential reputational damage could disproportionately escalate if even a single dollar of foreign investment were to stem from questionable origins. This may not necessarily spring from hostile countries; it could stem from sources such as drug cartels."
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Incorporated into the revised article are insights from enrichment data, focusing on China and the U.S's escalating restrictions and strategic competition relating to Chinese investment in American tech startups, primarily in semiconductors, AI, and critical infrastructure.
- Despite the emergence of the "Clean Capital Contract" (C3) pact, Forward Union's initiative has not garnered widespread support, with notable absentee firms like Andreessen Horowitz, A16Z, Founders Fund, and Sequoia not signing.
- The Capital Supply Chain (CSS) agreement, while permeable, does not provide any practical benefits as it only relies on the promises of signatories, lacking verification mechanisms.
- Critics suspect that most CSS signatories might still be doing business with Russian or Chinese investors, taking this step more as a self-promotional move rather than out of genuine concern for safeguarding American technology.
- In 2024, investors from unfavorable countries can easily circumvent detection by investing in American startups through intermediary firms based in allied or neutral jurisdictions, making it challenging to trace this form of "parallel money laundering".
