Sequoia Capital has started screening some investments its China arm is considering in technology companies there for US national security concerns, according to people familiar with the matter, as Washington steps up efforts to stop American money from funding China’s development of sensitive technologies.
The Biden administration is expected to soon unveil investment restrictions that would prevent US capital from flowing to companies and startups in China that are developing cutting-edge technologies in sectors including advanced semiconductors.
Sequoia’s China arm, Sequoia Capital China, raised a record $8.5bn last year, including from large US institutional investors, drawing scrutiny from the White House and US lawmakers. In response, Sequoia, based in Menlo Park, California, briefed US officials in late 2022 about its plans to screen certain investments those funds make, the people said.
The screening for national security concerns, a first for the firm, is being conducted by outside American policy experts and applies specifically to new investments in Chinese semiconductor or quantum-computing companies, though it isn’t meant to be binding.
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Between 2021 and 2022, Sequoia China made at least 20 investments in Chinese semiconductor and related companies. Since the screening process was implemented in the autumn of 2022, the firm hasn’t made any investments in Chinese semiconductor or quantum-computing startups from its new funds, which were raised in July 2022.
Sequoia, an early backer of tech giants including Apple and Airbnb, has long stood out from its US rivals because it also has a large portfolio of China investments.
Sequoia China’s new funds drew capital commitments from large US institutional investors, including the endowments of the University of Texas and the University of Washington, as well as the Massachusetts Pension Reserves Investment Trust, according to data from PitchBook. Representatives of those investors didn’t respond to requests for comment.
While the additional vetting doesn’t bar sensitive investments outright, the people familiar with the matter said, it appears to be deterring the new China funds from taking stakes in companies that develop sensitive technologies, which US officials believe could aid China’s military development and present other concerns.
The scrutiny over the storied venture firm’s activities comes as Sequoia Capital has been trying to navigate an increasingly complex relationship with its powerful China arm, whose founder and managing partner, Neil Shen, is one of China’s best-known venture capitalists. He has produced enormous returns for the firm through investments in companies including e-commerce platforms JD.com and PDD Holdings and food-delivery company Meituan.
Sequoia executives have long said that the firm has a globally decentralised structure and that the China team makes its own investment decisions. The two sides maintain separate teams of investment professionals and share some back-office functions including IT, compliance, finance and accounting, according to people familiar with Sequoia.
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Sequoia’s US and China operations are intimately connected in other ways. Profits from the two businesses are shared across Sequoia’s various investment arms, and the US arm has invested in some Chinese companies, people familiar with the matter said. Sequoia’s other businesses include Sequoia India & SEA, which backs startups in South and Southeast Asia; a wealth-management business called Sequoia Heritage; and a hedge fund called Sequoia Capital Global Entities.
“From inception, we created a structure of independent entities with separate investment decision authority,” Sequoia said in a statement to The Wall Street Journal.
Sequoia’s global growth funds, which are operated by the US business, invested hundreds of millions of dollars in ByteDance, the parent of TikTok, in the years after Sequoia China led an initial funding round for the Chinese company. ByteDance, which counts Shen as a board member, is now one of the world’s most valuable private technology companies, and its eventual listing would bring a windfall to Sequoia’s US and Chinese investment arms. The popular video app TikTok, with more than 100 million American users, is facing the prospect of a ban in the US over national security concerns.
Last year, Shen played a more active role during Sequoia China’s fundraising than in past Sequoia capital raises, which were coordinated by the firm’s US headquarters, according to people familiar with the firm. They said the recent change reflected Sequoia China’s effort to chart a more independent path from its US counterpart as geopolitical tensions rise.
Sequoia China also manages billions of dollars worth of yuan-denominated funds. Although these funds are smaller than the firm’s US dollar funds, capital deployed from yuan-denominated funds has been on the rise relative to dollar funds, according to some of the people, highlighting an increasing bifurcation in venture capital investments in China.
Companies in sectors that China wants to develop more self-sufficiency in, such as semiconductors, prefer to take yuan funding as they are more likely to go public in the country’s domestic stock market in the future. The new US screening for Sequoia China applies only to its dollar-based funds.
Some of Sequoia’s US-based investors have had misgivings about Shen’s association with China’s Communist Party, based on a post he held in the science and technology group of a top Chinese government political advisory body. Although that role is largely symbolic under China’s one-party rule, it is a coveted status that usually implies political endorsement from Beijing. Shen’s post wasn’t renewed when his five-year term ended recently.
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As the managing partner of Sequoia Capital China, Shen is a member of Sequoia’s stewardship council. “The steward role does not include participating in investment decisions for other Sequoia entities or geographies,” Sequoia said.
Sequoia China and other China-based affiliates of Silicon Valley venture firms have come under scrutiny for dozens of investments in Chinese chip sector companies and other technologies. Senior Biden administration officials have expressed concern about US deals they believe could undermine national security by blunting the US’s technological edge or undermine its supply chains in times of crisis.
Other US-based venture firms, including Lightspeed Venture Partners and Redpoint Ventures, have raised China-focused venture funds, though not at the scale of Sequoia China. Hillhouse Capital, one of Sequoia China’s biggest rivals, was seeded in 2005 by the endowment of Yale University, which is founder Zhang Lei’s alma mater.
The White House is expected to issue in the coming months an executive order to screen outbound US investment in semiconductors and other technologies, and officials have been talking to US companies and allied governments as they refine the plan, people familiar with the matter said.
Lawmakers tried last year to pass legislation that would have imposed similar restrictions but ultimately dropped it from a package aimed at boosting US competitiveness that became law last summer, amid concerns from some in the business community that it would generate uncertainty and harm US competitiveness.
Write to Aruna Viswanatha at aruna.viswanatha@wsj.com, Jing Yang at jing.yang@wsj.com and Berber Jin at berber.jin@wsj.com
This article was published by The Wall Street Journal, a fellow Dow Jones Group brand
