U.K.’s Souring China Relations Leave Venture Investors in Limbo
(Bloomberg) -- The U.K.’s deteriorating relations with China are casting a pall over venture capital firms, with investors saying that a lack of clarity over what further restrictions could be imposed is leaving them in limbo.
Foreign Secretary Dominic Raab told the House of Commons July 20 that the U.K “won’t accept any investment that compromises our domestic or national security.”
Without a definition of what constitutes technology critical to national security, venture capitalists say investments into the U.K. are facing heightened scrutiny -- and deals are drying up. China and Hong Kong is the fifth-biggest source of foreign direct investment into projects in the U.K., according to the Department for International Trade.
The government has promised more details on what it will allow when it publishes the National Security and Infrastructure Bill later this year. Ian Harvey, former chief executive officer of BTG Plc, the once state-owned British Technology Group, is skeptical that a distinction between secure and non-secure technologies can be made.
“You can’t ring-fence technology,” he said, “The boundaries are very hard to define.”
Any widening of the definition of critical technologies is a cause for concern, said Martin Rigby, said co-founder of ET Capital, a Cambridge, England-based venture firm that oversees a fund backed solely by Chinese investors.
He said he’s thinking twice about investing in any firm active in cyber security, telecommunications and, more broadly, any technology that could be “subverted for surveillance.”
Source of Funds
“We don’t know, given the present climate, what the government’s attitude is going to be,” he said.
British firms are also more closely scrutinizing their Chinese partners in potential joint ventures, said Julian Godding, head of Business Development at Shanghai-based Dipole Tech, a clean-energy data firm.
“It’s much more of a priority to understand where your company comes from, who is behind it, who are the investors and where it is originating from geographically in a way that I don’t think used to matter as much five years ago,” he said.
Universities, too, have already become more sensitive to the risks of Chinese investment in spin-outs, according to David Gill, managing director of the St John’s Innovation Centre in Cambridge, England. The group advises 80 small, high-growth companies, many of them with roots in the university, on commercializing their technology.
On the Chinese side, the mood could be already altering. Gill said that none of the companies he works with reported doing any business with a Chinese partner in the past seven weeks -- despite the pace of international deals picking up swiftly after lockdown was eased.
Whatever the government’s plans for its relationship with Beijing, Gill said that all deals could collapse if China chooses to turn its back on Britain.
“If they decide Britain is no longer one of our friends, they stop returning the sales calls,” he said. “And those contracts which are being negotiated just fall away.”
©2020 Bloomberg L.P.