China Is Coming: Why Investors Need to Answer the Call

By: Claudio Ochoa

When Paul Revere made his famous ride in 1775, his primary mission was to warn the countryside that British troops were on the move. Although often given the most credit, Revere was just one of many patriots who were part of a well-designed network to ensure, in part, the militia’s store of powder and ammunition was secure once the British arrived.

The beauty of the story is not just Revere’s courage, but the scores of civilians who heard the call and took to action that night. Without them and their coordinated response, the first battle of the Revolution may have turned out very differently.

Today, we don’t have a foreign army camped in Boston, but we face no less a threat from a foreign adversary who is just as omnipresent in our everyday lives. To defeat them, we’ll need just as coordinated a response from everyday patriotic Americans.

The fact that China has sought to compete with the U.S. shouldn’t be news. What most Americans probably don’t appreciate is how it has expanded the battlefield — in particular, how it has weaponized investment to go after today’s version of powder and ammunition: our technology and IP.

China is the single largest source of foreign investment into U.S. VC-backed startups. Since 2015, that is approximately $35 Billion, 78% of which China (or its proxies) have deliberately invested into “strategic technology” — in other words, technology that forms the underpinning of our economy, infrastructure, and military capabilities. The purpose? Well, you don’t have to steal it, if you already own it.

In some cases, the attempt has been much more overt. As in 2018, when the U.S. Government forced Chinese investors to divest from PatientsLikeMe, a startup that had millions of data points about diseases, and Grindr, a LGBTQ dating app with personal data that could be used to blackmail or target individuals.

China has gone so far as to actively monitor bankruptcy filings, with the goal of quietly buying up valuable assets. In 2017, companies linked to the Chinese government acquired at auction the IP of a lithium-ion battery manufacturer, which it had previously been prohibited from purchasing because of national security concerns, and an interest in the only rare earths mine (which is necessary to make everything from cell phones to fighter jets) in the U.S.

All this is against the backdrop of Made in China 2025, a state-led policy that seeks to establish China as the global leader in technology, with the goal of surpassing the West in twenty-five years through IP “acquisition,” heavy government subsidies, and investment in R&D. If the U.S. won the Industrial Revolution, China is determined to win the technological one. To do that, it has called on all its resources. For example, through a policy called Civil-Military Fusion, China has mobilized $50+ Billion to “fuse” commercial companies with its military industrial base. Not to mention the already existing legal requirement that Chinese companies assist state intelligence operations.

Using these resources, and in some cases outright theft (90% of industrial espionage cases involve Chinese parties), China has already surpassed the United States in 16 key technologies of the future, including cryptocurrency, drones, 5G, and genetic data. In 2017, not a single Chinese company was in the top 100 of defense contractors in the world. Today, 6 are in the top 15.

The obvious question is, “So what? So what if my cell phone relies on Huawei, my family DJI drone sends data back to China, and my kids are sharing videos of themselves on TikTok?”

First, when a country that does not share our democratic values controls the infrastructure through which we communicate, it can ultimately control the content — e.g., the censorship of anything related to Tiananmen Square on TikTtok. Second, it can use those tools to attack disenfranchised groups, such as China’s use of facial recognition and DNA to track the Uighurs. Lastly, it can ensure the vulnerability of the systems the U.S. relies upon economically, industrially, and militarily — .e.g., the recent concern that a single circuit board from a Chinese supplier could have compromised the $122 million F-35.

So, what does this have to do with Paul Revere?

To borrow from experts Kurt Campbell & Jake Sullivan, it is not that we should aim to be anti-China*, as much as we should be pro-democracy and pro-freedom. In order to maintain our technological advantage to achieve those ends, however, we must do individually and voluntarily what the Chinese government has done through compulsion.

Like the minutemen of the Revolution — I know this might be a little bit of a metaphorical stretch, but stick with me — individual investors need to step in to support the growth of technologies that are critical to our national security. Founders should not be forced to take foreign capital because U.S. investors are unwilling to support the R&D necessary to support our national security innovation base. Likewise, VCs should take a hard look at their LPs and be the first-line of defense against IP transfer. Lastly, Congress should consider incentivizing investment in these critical sectors — somewhat like economic opportunity zones.

Another Sputnik Moment is around the corner. How we mobilize now as individual citizens to invest in our own national security and prosperity will ultimately determine the next 200 years.

* To be clear, this article is not meant to demonize the Chinese people, who are our global neighbors and share many of our values and dreams. It focuses only on the policies and actions taken by the Communist Party of China, which is the sole governing body of China.