The FBI is investigating whether a US venture capital fund that used Chinese money to become one of Silicon Valley’s most prolific early investors allowed Beijing to obtain the trade secrets of tech start-ups.
California-based Hone Capital, which launched in 2015 with $115mn of initial capital from a Chinese private equity group, invested in 360 US tech start-ups in less than three years. This included acquiring stakes in driverless-car maker Cruise, payments group Stripe and aerospace engineer Boom.
The FBI is examining whether Hone Capital accessed information about the technology, finances or clients of start-ups for the benefit of its Beijing-based owner or Chinese authorities, said several people close to the matter.
The FBI declined to comment.
These people said concerns have been raised during FBI interviews that some of its portfolio companies are contracted to provide services to the US government, and that some of Hone’s money may have originated from Chinese government funds.
The probe comes as heightened geopolitical tensions between the US and China have rattled Silicon Valley’s venture industry, which for years had welcomed Chinese investment before more recently being put on notice by US authorities to beware foreign espionage.
In July, the US National Counterintelligence and Security Center warned tech start-ups that overseas adversaries, including China, were using investments to acquire sensitive data and threaten national security.
FBI agents have interviewed individuals who worked at or with Hone Capital over the past year and have questioned the founders of some start-ups that received investment about the risk that their intellectual property could have been passed to China.
Hone has divested from many of its holdings since 2019, with some of its stakes transferred to another US vehicle controlled by its Chinese parent company, said people familiar with the matter. Hone did not have access to sensitive information from many of the start-ups it invested in, such as Stripe, said people familiar with its dealings.
The FBI probe has also engulfed one of Silicon Valley’s most storied investment platforms, AngelList, which took an $80mn cash injection from Hone between 2015 and 2016. In exchange, Hone was given access to all “syndicate” deals in its system — whereby investors can pool resources to make an investment — and partnered with AngelList as one of its largest external investors.
“Hone went from no name to the number one seed investor in Silicon Valley, with [access] to every single deal on the AngelList platform,” said a former executive of a sovereign wealth fund who was approached by Hone in 2018 regarding investment opportunities. “I had never seen a fund like this.”
AngelList declined to comment.
According to fund documents and people close to the matter, Hone’s money was provided by China Science & Merchants Investment Management Group (CSC), a Beijing-based private equity group established in 2000 and led by billionaire chief executive and chair Shan Xiangshuang.
CSC’s money flowed through Shanghai and Cayman Islands entities to several funds registered in Delaware and operating in Palo Alto, which included Hone, CSC International and CSC Upshot Ventures.
CSC transferred $215mn to its US entities between 2015 and 2018, which was then deployed into about 360 start-up companies and used as leverage to secure financing for a vast portfolio of real estate.
The Beijing-based group describes itself as “one of the first large-scale and Chinese-government approved RMB private equity investment and fund management firms”. It was forcibly delisted from the Chinese NEEQ stock market in 2018 over a breach of securities regulations.
One person who the FBI interviewed in connection with Hone raised concerns that CSC had access to Hone’s US servers, which meant data from portfolio companies may have been accessed by the Chinese parent group.
Separately, Hone and CSC Group have been locked in legal battles with two former executives since 2020.
Hone has sued its former Silicon Valley head, Veronica Wu, who previously worked in China for Tesla, McKinsey and Apple, as well as its ex-chief financial officer, Purvi Gandhi, for alleged fraud and breach of their fiduciary duties. Wu and Gandhi have, in turn, denied the claims and sued to enforce their rights to an interest in Hone’s profits. They both left the company in 2020.
Wu and Gandhi have alleged in public court filings that Hone’s Chinese owners incentivised them to invest in specific technologies with “critical intellectual property”.
Wu has further alleged her employment was terminated in 2020 because she reported “violations of laws and regulations and she refused to take part in the same”. Hone claimed in court filings it terminated Wu over performance issues and has denied the substance of both claims.
Legal representatives for CSC and Shan said: “Allegations that CSC Group, its chairman, or any of its affiliates, including Hone Capital, have misappropriated trade secrets are completely baseless and grounded in nothing but insinuation and speculation fuelled by anti-Chinese sentiment and self-serving allegations from former executives who are actively in litigation with CSC Group over, among other things, their own self-dealing.”
They added: “To be clear, CSC Group firmly believes that all of its US investments were conducted in full compliance with applicable laws.”
Wu declined to comment. Gandhi said investments she made while at Hone produced “phenomenal” returns, adding: “CSC Group’s lawsuit was filed in response to my request to be paid my [share of the fund’s profits], following the strong exits.”
Boom and Stripe declined to comment.
Cruise, which was acquired by General Motors in 2016, said Hone is not an investor and it has “no record of outreach from any law enforcement or regulatory agencies on this”.
Read the full article here