Chinese subsidiaries of American venture capital firms are investing money from U.S.-based funds into Chinese space startups, even as the Pentagon warns of Beijing’s growing activity in the space arena, according to data reviewed by TechCrunch.
The data, collected by PitchBook, includes information on past limited partners and investments of the Chinese units of Sequoia Capital, Matrix Partners and Lightspeed Venture Partners. Space industry investments represent a very small but notable portion of these firms’ portfolios, with Sequoia Capital China and Lightspeed China investing in two companies each and Matrix China investing in eight. Startups that have landed funding include companies working on launch, satellite manufacturing and Earth observation.
According to recent reporting from The Wall Street Journal and Politico, the White House is considering new screening requirements on U.S. investment flowing to foreign-based technologies that could be sensitive to national security, like semiconductors, though it’s unclear whether space technologies would be considered as part of a future order. But one investor, who asked to remain anonymous, citing co-investments with Sequoia Capital, told TechCrunch that the stakes are high.
“The dividing line between what is an aerospace technology and what is a defense technology is even more blurry than in the case of semiconductors, which we need to drive our cars and use our phones,” the investor said.
While Sequoia Capital China did not disclose the LPs that contributed to its most recent $9 billion fund, LPs that have contributed to previous funds include the Ford Foundation, the employees’ retirement plan of Duke University and the Bush Foundation, according to PitchBook. Matrix Partners China and Lightspeed China Partners also include U.S. endowments, pensions and other American-domiciled money. LPs have no control over the funds’ investment decisions, though they can set certain limits or restrictions on how the capital is allocated through vehicles known as “vice clauses.”
Sequoia Capital, Matrix Partners and Lightspeed Venture Partners, as well as their Chinese affiliates, did not respond to TechCrunch’s inquiry into what percentage of the Chinese funds comes from U.S. money.
The U.S. has some regulations in place governing foreign investment in U.S. companies, such as the Committee on Foreign Investment in the U.S., but in general, outbound investment in Chinese companies is not in violation of U.S. law or regulatory policy. For example, the U.S. Department of Treasury does maintain a Non-SDN Chinese Military-Industrial Complex Companies list, which prohibits the purchase or sale of securities from certain public companies in China that are related or linked to that country’s military. However, the list does not include private companies.
“I think the ongoing conversation or debate about investment now has shifted towards [ … ] trying to understand exactly how much and what kind of investment are [VC and private equity companies] contributing to Chinese technology development, especially in early-stage companies,” said Ngor Luong, a research analyst at Georgetown University’s Center for Security and Emerging Technology.
A Sequoia Capital spokesperson told TechCrunch that its structure consists of “independent entities with separate investment decision authority.”
LandSpace Technology Corp., a Chinese startup that is developing a rocket powered by liquid methane and liquid oxygen (“methalox”) engines, has received investments from Sequoia, Matrix and Lightspeed. China SME Development Fund, a state-owned and operated fund, is also an investor. Several of the top American launch companies, including SpaceX and Rocket Lab, are also developing methalox-fueled rocket engines for their next-gen vehicles.
LandSpace’s $175 million Series C plus round in 2020 was jointly led by Sequoia Capital China, Matrix Partners China and three Chinese venture firms. Overall, the rocket company has raised at least $300 million (2.1 billion yuan) since its founding eight years ago.
Matrix Partners China and Sequoia Capital China have also contributed funds to iSpace, another Chinese launch firm. That company is also developing a methalox-powered rocket. The exact amount of money that each firm contributed to these rounds is not disclosed.
It’s not just launch companies that are attracting investment. Chinese affiliates of U.S. VC firms have also contributed capital to satellite startups like MinoSpace, Spacety and GalaxySpace: Lightspeed China co-led MinoSpace’s $46 million pre-Series B round in 2021, while Spacety attracted investment from Matrix China in 2018. Just this week, the U.S. Treasury Department issued sanctions against Spacety for allegedly supplying synthetic aperture radar data to aid Russia’s war effort against Ukraine. Spacety denied the allegations in a statement.
Even acting as two separate entities, Sequoia’s brand recognition — as the flagship American fund — is itself valuable for Chinese tech startups, who can parlay that association to garner more support and backing from other investors, Luong said.
The commercial space industry in China has flourished since 2014, when Beijing shifted its policy on private investment in the space sector. Prior to that, nearly all of China’s space program was driven by two state-owned enterprises: China Aerospace Science and Technology Corporation (CASC) and China Aerospace Science and Industry Corporation (CASIC). Many Chinese space startups are headed by founders or CEOs with previous work experience at these enterprises. Ispace’s founder, Peng Xiaobo, was a former director of R&D at CASC subsidiary China Academy of Launch Vehicle Technology.
It is without question that the U.S. Department of Defense views China’s activity in the space domain as one part of a broader effort to establish itself as a global power. Consequently, the DOD has made major changes of its own — to procurement processes and how it works with startups in particular — to ensure it has a competitive advantage in space.
If the White House issues an order requiring U.S. firms to report China-based deals in industries considered sensitive to national security — or if it takes a more aggressive approach, restricting some investments altogether — it could be the start of a radical shift in how capital flows between the two countries. Should space-related technologies be included in the order, the overall effect on the Chinese space startup scene would likely be marginal, as most of the money funding these companies is from domestic Chinese investors. But as tensions increase between Washington and Beijing, American policymakers may look to cut off any real or perceived Chinese advantage in developing tomorrow’s technology.