US sounds alarm on Chinese investment threat to tech sector

The US National Counterintelligence and Security Center has issued a warning to technology startups about the security risks associated with foreign investments, particularly from adversarial nations like China.

The bulletin, released on Wednesday and obtained by The PUNCH, highlighted that while venture capital and private equity from foreign sources are crucial for many US tech startups, they also pose risks of exploitation to access sensitive data and undermine national security.

“Foreign threat actors can also use these investments to exploit US startups and harm U.S. economic and national security interests. US startups can lose market share and fail if foreign threat actors obtain their proprietary data in the investment process and then use it to compete against them in global markets,” the bulletin stated.

The NCSC underscored several key risks, including the possibility of startups losing market share and facing failure if foreign entities gain access to proprietary data and use it to compete.

“Foreign threat actors can acquire data and technology from U.S. startups that advance their nation’s economic and military capabilities at the expense of the US,” the report added.

The bulletin disclosed that foreign investments could also lead to denied US government contracts or funding if foreign actors gain influence within these firms.

The warning extends to the risk of undue foreign influence impacting corporate decisions, potentially prioritising foreign interests over US priorities.

Additional concerns include the use of technology and data from US startups to advance the economic and military capabilities of foreign nations, especially those involved with government contracts or critical sectors.

The NCSC advised that assessing foreign investors can be challenging, as some may structure their investments to avoid scrutiny from the Committee on Foreign Investment in the United States, which reviews transactions for national security risks.

This warning follows growing concerns since 2018 about Chinese government-directed investments aimed at acquiring US technologies and intellectual property.

The agency cited recent developments, which include the addition of China-based venture capital firm IDG Capital to the US Department of Defense’s list of “Chinese military companies” and reports of China-based VC firms targeting US startups to acquire technology.

“Some U.S. and European firms have alleged China-based investors offered them investments, then withdrew the offers after obtaining their proprietary data in the due diligence process.

“One U.K. firm, after agreeing to a takeover by an investor in China, began transferring technology to its would-be acquirer in exchange for part of the firm’s sales price. The investor in China later abandoned the acquisition. The UK firm was left facing bankruptcy after sharing its IP, the bulletin said.

The NCSC urged US startups to exercise caution and ensure their national security interests are protected when seeking foreign capital.