The FBI has launched an investigation into Hone Capital, a California-based investment firm, over the possible transfer of intellectual property to China, the Financial Times reported. The firm, controlled by billionaire Shan Xiangshuang, has invested in nearly 400 US tech startups, raising national security concerns amid rising trade tensions between Washington and Beijing.
Shan Xiangshuang, a member of the Chinese Communist Party and former official, founded CSC Group, a venture capital firm valued at $10 billion. Five years ago, Shan announced that his company was building a “direct train” to Silicon Valley to accelerate the introduction of foreign high-tech technologies into China. Through Hone Capital, CSC has acquired stakes in companies developing critical technologies, from artificial intelligence to cybersecurity to supersonic aircraft.
The FBI investigation is focusing on Hone portfolio companies that have contracts with the federal government, particularly in the pharmaceutical and biotechnology sectors. An executive at a startup backed by Hone, interviewed by the FBI, said accepting investments from Chinese funds was “not worth the headache” because of the attention it would attract from U.S. authorities.
Hone Capital was launched in 2015, at a time when Chinese money flows into the US tech sector were at their peak. That year, Chinese investors poured $4 billion into fast-growing US startups, accounting for 13% of all foreign capital going to US venture capital firms between 2015 and 2017, according to data from the US Department of Defense.
To quickly gain credibility, Hone engineered a partnership with AngelList, the largest portal for connecting American startups with seed capital. CSC pledged $400 million to create a fund dedicated to early-stage startups, the largest investment by a Chinese venture capital firm in an American fund. This partnership allowed Hone to make more investments between 2015 and 2017 than most venture capitalists make in their entire lives.
By 2017, Hone had invested $215 million in some 360 startups. The companies backed include payments group Stripe, logistics firm Flexport, self-driving car maker Cruise and artificial intelligence platform DataRobot. Hone also invested in Boom, a startup developing supersonic passenger aircraft that has established partnerships with the US Air Force and NASA.
The FBI interviewed Boom executives last year to find out whether there was a risk that information had flowed to China. One person close to Boom said they were “comfortable that absolutely no technical or financial information from Boom was transmitted.” Hone divested himself of Boom in 2019, although a small number of his shares were transferred to another CSC Group fund in Silicon Valley, CSC Upshot Ventures.
In 2018, distrust of China in Silicon Valley increased, especially after President Donald Trump signed the Foreign Investment Risk Review Modernization Act (Firrma), which required more vigilant reviews of foreign investments in U.S. companies on national security grounds. Around the same time, CSC ran into financial difficulties, and Chinese securities regulators sanctioned Shan and CSC, delisting their public subsidiary from China’s NEEQ exchange for securities law violations.
During meetings in Palo Alto in 2019, CSC Group financial executives ordered Veronica Wu, head of CSC’s Silicon Valley business, to sell off most of Hone’s assets to generate the capital needed to meet its financial obligations. These moves sparked legal battles that have raised allegations about CSC and Hone’s business practices and the conduct of their executives.
Hone has sued Wu and his former chief financial officer, Purvi Gandhi, alleging they conspired to defraud the fund for personal gain and mismanaged its capital. Wu and Gandhi have denied the allegations and sued Hone and CSC, alleging they made misrepresentations and false promises in relation to performance incentives.
Wu has accused CSC in court documents of trying to circumvent U.S. and Chinese laws, including Chinese rules on currency controls. She claimed that executives at the buyout firm, including Shan, gave her a “quota” based on how many companies “with critical intellectual property” she could bring into the Chinese market.
The legal and financial status of CSC and Hone remains uncertain, and FBI investigations continue amid an increasingly tense climate between the United States and China.
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