Did a law signed in August by President Trump kill one of Jeff Bezos’s Boston investments?
It sure seems that way.
The impact on Bezos, one of the many ducks who populate Trump’s personal shooting gallery, was probably not intentional. But the law, which took effect in November, is making life more complicated for Boston startups in a wide range of industries.
The law expanded the authority of a little-known arm of the federal government called the Committee on Foreign Investment in the United States, or CFIUS. It’s chaired by Treasury Secretary Steven Mnuchin and includes senior members of other Cabinet departments, including State, Defense, and Commerce.
Usually, you hear about CFIUS when it blocks the purchase of a US company by a foreign concern — as it did in 2018 with several attempted acquisitions of chip makers by Chinese and Singaporean companies. But the new law requires any foreign investor putting money into a US company that operates in any of 27 “critical” industries to file paperwork with CFIUS — or face penalties.
The industries covered include some obviously sensitive technologies such as guided missiles, tank manufacturing, and navigation and guidance systems. But they also include a huge swath of the innovation economy, such as biotechnology, nanotechnology, data storage, computers, and batteries.
Investing in those sorts of companies can give foreign investors a glimpse of the cutting-edge technologies being developed in the United States. So the impetus behind keeping a close eye on that activity is understandable. But the new CFIUS rules cover investors from any country — from China to the Czech Republic to Canada. And foreign investors have pumped more than $100 billion worth of venture capital into US companies in the past two years, according to Pitchbook, a database of investing activity.
In Boston, foreign investors range from China-based Qiming Venture Partners to the corporate venture capital arms of big European pharma companies such as Sanofi, Novartis, and GlaxoSmithKline, which often help fund fledgling biotech companies.
So that — on top of signs of an economic slowdown — has entrepreneurs and investors worried. Will raising money from venture capitalists take longer, incur more legal fees, and potentially give them fewer options — which means less negotiating leverage?
Robert Kidwell, an attorney at the law firm Mintz, says he was at a conference in Washington, D.C., late last year “where some folks from the [CFIUS] filing office were saying that uncontroversial, typical CFIUS reviews are taking four to six months.” In the life cycle of a startup, that’s “forever,” Kidwell says.
Plus, the CFIUS office has been touched by the partial shutdown of the federal government, which means a lot of paperwork is just sitting there, Kidwell says.
“My impression,” says biotech industry consultant Steve Dickman, “is that yes, it’s a big impact and that it will raise the bar” for biotech companies that plan to raise money with foreign investors as the primary, or lead, investor in a funding round.
And Peter Kolchinsky, managing partner at RA Capital, a Boston investment firm, says CFIUS could also affect what are known as “tranched financings,” in which previous investors put additional money into a startup that has hit certain agreed-upon milestones. If a foreign investor is blocked from honoring a commitment to participate, that could put the startup in a tight spot, forcing it to scramble to find additional sources of funding, or potentially to cut staff. While he hasn’t seen that happen yet, Kolchinsky says, “experiments are running. We’ll have plenty of data within a year.”
The new law was intended to respond to legitimate concerns about Chinese access to advanced technology developed in the United States, explains Russ Wilcox, a venture capitalist at Pillar VC in Boston.
The law was passed primarily in response to China’s “Made in China 2025” plan, which made it a priority for the country to rely more on its own domestically developed innovation and intellectual property.
“Chinese investment in US startups immediately shot up from $200 million to $300 million per year to $2 billion per year,” Wilcox says.
And Chinese firms were offering sweeter financing deals to startups than US-based investors — as long as the startup would agree to “give the Chinese VC an independent right to exploit the tech freely in China.”
The result, he says, was that US government agencies such as the National Institutes of Health or the Pentagon were funding research projects at startups that were then essentially giving Chinese firms access to that intellectual property “for peanuts,” Wilcox says.
Wilcox says he supports “the spirit of what the USA is trying to do here, which is to defend itself against calculated attempts to steal our intellectual property, and thus to destroy the future competitiveness of the US economy.”
But, he adds, “What is regrettable is how the government is starting with a sweepingly broad approach on Day 1 that will create a tidal wave of administrative work for our startups, and likely create a logjam of chaos in 2019.”
This month, the National Venture Capital Association is scheduled to hold a lunch in Boston to discuss the committee’s impact on startups that want to accept funding from foreign sources, as well as on US-based venture capital firms that have money from foreign investors as part of their investment war chests. At what point might they be subject to making CFIUS filings?
And about that Bezos-backed startup: It was Rethink Robotics, a maker of user-friendly manufacturing robots that had raised $150 million from Bezos’s private investment firm and several other investors, including General Electric. The company shut down in October.
Paul Maeder, an early investor in the company, says there was a potential sale to Chinese buyers that would have left control with a US entity — “but at the last moment, they backed out because they became deeply troubled about the prospect of the CFIUS review, and its likely blocking the deal.”
While CFIUS was created during Gerald Ford’s presidency, Maeder says the current president is using “it as an instrument to impede commerce and destroy tech jobs in states that did not vote for him.”
If the CFIUS rules hadn’t changed, says Rethink Robotics founder Rodney Brooks, “I believe that Rethink Robotics would still exist today.”
Rethink’s situation may look, for now, like a one-off. And the breadth of CFIUS’s impact could at some point be curtailed; Kidwell at Mintz notes there is lots of lobbying happening in D.C. on behalf of industries that don’t think they should be covered by it.
But if CFIUS over time dissuades global investors from continuing to pour money into US startups, it will create new challenges ahead for the innovation economy.Scott Kirsner can be reached at firstname.lastname@example.org. Follow him on Twitter @ScottKirsner.