Venture Firms Pledge to Avoid Funding from China and Russia

Protecting Investments from Foreign Adversaries

A new mechanism is now available for company founders to verify that their investors have not sourced funding from nations such as China, Russia, Iran, or Cuba.

Currently, more than 20 venture capital firms have adopted the Clean Capital Certification. This certification confirms they have not, and will not, accept capital from countries considered adversaries. Participating firms include Marlinspike Partners, Humba Ventures, and Snowpoint Ventures.

A Commitment to National Security

“It is essential to guarantee that our nation’s adversaries do not directly benefit from our achievements,” stated Craig Cummings, a partner at Moonshots Capital. “Publicly endorsing the Clean Capital Certification represents a collective commitment to this responsibility.”

The initiative was developed by Future Union, an advocacy group focused on addressing foreign interference within the private sector. The pledge acknowledges that emerging technologies, if exploited, have the potential to “foster authoritarianism, spread misinformation, and exacerbate societal divisions.”

Long-Standing Concerns

Andrew King, Executive Director of Future Union, has been developing this pledge for approximately three years. However, his concerns regarding Chinese interference extend much further back.

He recounted extensive discussions with a contact at the Department of Defense regarding “the detrimental impact of Chinese operations within the U.S.” and how China was actively “influencing venture capital and private equity through financial incentives and other means to gain access to crucial technologies.”

Potential Risks of Foreign Investment

King explained that the presence of Chinese investors in a venture firm could potentially allow those investors – and, by extension, the Chinese government – to obtain confidential information concerning portfolio companies.

While largely a theoretical concern within the venture capital landscape, this apprehension is increasingly shared. Recent reports indicate heightened scrutiny of potential risks.

Recent Investigations and Congressional Action

In September, the Financial Times reported on an FBI investigation into Hone Capital, a California-based venture capital firm, alleging the sharing of information with its Chinese investors. Furthermore, a February report from a congressional committee identified five U.S. investment firms for investments in Chinese entities.

The report asserted that these investments contributed to China’s military capabilities and facilitated human rights violations.

Praise for the Pledge

Congressman John Moolenaar, Chairman of the Select Committee on the CCP, expressed his support for the pledge. “The national security and economic well-being of the United States are jeopardized when U.S. companies invest in our primary adversary or allow CCP-affiliated investors onto their boards,” he noted.

“This Clean Capital Certification provides a benchmark for evaluating investments, enabling Americans to make informed decisions.”

Foreign Investment in Defense Technologies

The concentration of investment in defense technology startups by numerous firms on the list is not accidental. Accepting funds with connections to specific nations can potentially compromise a defense contractor's capacity to secure contracts with the Department of Defense.

A significant number of larger investment firms actively involved in the defense sector are conspicuously absent from the approximately 20 signatories of the pledge, including prominent entities like Andreessen Horowitz and Founders Fund. Generally, these firms refrain from participating in public commitments such as this pledge.

However, a representative from Founders Fund clarified that the firm does not accept capital originating from any of the countries addressed in the pledge. Previously, partner Delian Asparouhov characterized firms accepting Chinese investment as acting against national interests.

A similar position was articulated by a16z partners Katherine Boyle and David Ulevitch in a Wall Street Journal opinion piece published last year. They stated, “Certain American investors previously prioritized investments in nations considered adversaries, such as China, but it is now evident that this was a misjudgment regarding governmental allegiance.”

This statement appeared to be a pointed reference to Sequoia, a longstanding competitor of a16z, which previously operated a substantial Chinese investment division before separating it into an independent entity in mid-2023.

The pledge, while a positive step, is not without limitations. It functions as a voluntary declaration lacking a formal verification process to ensure adherence. Even if a firm confirms its limited partners are not based in China, those partners may still receive funding from Chinese sources.

King highlighted that this pledge represents an initial action, with potential future developments including the involvement of a third-party organization to scrutinize investor backgrounds or a more comprehensive certification process extending to limited partners.

He expressed optimism that even a voluntary commitment will encourage accountability. “The public nature of the self-attestation creates a degree of transparency,” he explained. “Potential reputational harm could arise from making a declaration that is subsequently proven inaccurate.”