May 24, 2019 - Economy & Business

"New Cold War" fears hit Silicon Valley

Illustration of a robot arm holding an ice cube with a stack of money frozen in the center.

Illustration: Aïda Amer/Axios

A prominent Silicon Valley investor tells Axios that U.S.-China trade tensions are "the new Cold War."

Driving the news: In this Cold War, tech has evolved from a negotiating point (IP theft, forced transfer) into a cudgel (Huawei, rare earths, etc.). Trade tensions are also having a negative impact on startups, particularly in "hard tech" areas like AI, advanced manufacturing, IoT, machine learning, and networking.

Several venture capitalists tell Axios:

  • Chinese investment in American "hard tech" companies has all but dried up, and portfolio company CEOs are being told not to count on it changing when planning future fundraising.
  • Chinese companies are no longer viewed as viable acquirers due to concerns that the deals could be blocked by CFIUS.
  • Impacts are beginning to be felt on both supply chains, and cross-border VCs are having a tougher time creating mutually-beneficial partnerships between U.S. and Chinese portfolio companies.

What's new: For the first time, these venture capitalists are worried about accepting Chinese investors as limited partners. Not because such passive investments are currently illegal, or really even scrutinized, but because there's a belief that could flip in a hurry. If so, it would reduce the amount of future available capital and create massive complexities for existing investments.

The bottom line: The U.S.-China trade war seems to be spiraling out of control, with even the pretense of progress being dropped by both sides. And, if it continues, tech startups and investors in both countries will need to contend with guardrails that were inconceivable just one year ago.

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