The Trump administration's increased scrutiny of college endowments and pension funds backing Chinese firms is creating more roadblocks for venture capital funds looking for the next big tech winner.
Just six U.S.-dollar funds with exposure to China have sought to raise capital this year, down from 21 last year, according to researcher Preqin. Of those, only one has managed to complete a preliminary closing, compared with 10 last year.
It's a drastic reversal of the venture capital boom that fueled China's tech industry in the past decade. The U.S. State Department has asked colleges and universities to divest from Chinese holdings in their endowments, warning of potentially more onerous measures on holding the shares. That's on top of a wider campaign to curb Chinese tech champions and slow the money flowing into what are some of the world's largest tech companies, including Alibaba Group and TikTok owner Bytedance.
"A total decoupling of U.S. funding and Chinese technology would also hurt American investors," said JP Gan, founding partner of Ince Capital, which last year raised $352 million for its first fund with the backing of Duke University in North Carolina, and University of Pittsburgh and Carnegie Mellon University, both in Pennsylvania.
"U.S. pension funds and endowments have been the biggest beneficiaries from investing in the China growth story," he said.
While some venture capital funds including DCM and Jeneration Capital were able to close financing rounds this year, those efforts started last year. Preqin tallies the initiation of a fund based on public filings such as with the U.S. Securities and Exchange Commission.
The coronavirus has hit funds globally. In the U.S., while fund launches didn't see as drastic a fall in relative terms, new funds with U.S. exposure seeking money fell by 6% to 646. The number of funds that managed to complete an interim closing fell 76% to 14 compared with last year.