In a post-COVID world, startup investing has grown beyond meeting in Silicon Valley coffee shops to talk business with new projects. This means investors are expanding their horizons to write checks across borders.
As investments grow globally, there’s still a concern stateside for security and making sure the U.S. protects its businesses, meaning it must monitor foreign inflows while still promoting innovation. “In our mandate, national security isn’t specifically defined because in many ways it’s an evolving concept,” Paul Rosen, assistant secretary of the treasury for investment security, said at TechCrunch Disrupt 2023.
As technological developments change, so does Rosen’s position.
For example, consider data and sensitive personal information, which are hot topics for both average Americans wanting to retain privacy and big corporations wanting to gain information on users.
Data is ubiquitous and whenever a company is developing new strategies, there’s a huge reliance on it, Rosen said. “One of the things that we think about is, well, what is the risk to national security if troves of data — whether it’s personal information [or] data around IP or others — get into the wrong hands?”
Rosen oversees all operations and activities regarding hundreds of billions of dollars in investment activity. His main job is to mitigate national security risks through the Committee on Foreign Investment in the United States (CFIUS).
“Our mission is national security,” Rosen said. “What we’re focused on doing is understanding what investors or what individuals or entities are buying U.S. businesses and getting control of having certain influence and what is the risk based on what that U.S. business does.”
If an investment poses a big risk to national security, then it’ll be turned away. “It’s not as black and white as we only look at U.S. businesses because so many companies, whether they’re investors or businesses, are interconnected. But that’s the primary mission,” Rosen said.
Data privacy and security have been evolving for decades, becoming a bigger issue in recent years as foreign companies gain market share in the U.S. At the same time, artificial intelligence is causing Rosen and CFIUS to hunker down.
“Industry founders and others are racing to that space, [and the] government is trying to figure out how to promote the advancement of AI in a safe, responsible way,” Rosen said. “We want founders and technologies to continue to grow and develop and disrupt, while minimizing and eliminating some of those national security risks.”
When asked whether CFIUS is seeing more AI-related investment activity entering the U.S., Rosen shifted his attention to technology’s evolution. “What I would say is the technologies that we’re looking at are becoming more sophisticated. They’re becoming more advanced on multiple levels, whether it’s AI or other critical technologies,” Rosen added. “We as a committee have to get our arms around that.”
With that said, CFIUS and Rosen try to understand the startup struggles of raising capital in a tight environment where checkbooks are close to investors’ chests. “We understand that so often it’s a race to tomorrow in the startup world, and there are issues around funding for survival,” Rosen said. “But as companies grow and develop, thinking about regulatory issues like these early on can be beneficial.”
Some questions for startups to consider are who are you raising money from? Who are the investors? What kind of access to information or board rights are there?
Those are some of the questions CFIUS is trying to answer as well when determining whether sharing sensitive U.S. technology with foreign investors is worth permitting the capital investment.
“We try to use a scalpel, not a sledgehammer,” Rosen said. “We work with the companies to try and deal with [investors] in a way that is tailored to the issue we’re trying to address.”
His biggest piece of advice to founders looking for capital in foreign markets?
Raise money “smartly” and think about raising in a “know your investor context,” Rosen said.