Employees of a startup work in front of computer screens. (Photographer: Akio Kon/Bloomberg)

Trade War Is Hurting Silicon Valley Augmented Reality Startup

(Bloomberg) -- Augmented reality startup Meta Co. was on the verge of raising funds from Chinese backers when the lead investor froze the deal at the behest of a Chinese official who cited the trade war.

It’s the latest sign that U.S. tariffs on Chinese goods and a crackdown on foreign investment in U.S. tech companies is casting a chill in Silicon Valley. Small hardware makers are already suffering from rising tariffs, and now startups looking to raise money in China are feeling the effect.

Meta Chief Executive Officer Meron Gribetz says he had locked up a $20 million investment from a Chinese private-equity firm and real estate entity. Other backers had also agreed to commit but could pull out now that the lead investor is balking. The reversal prompted Gribetz to furlough about two-thirds of his approximately 100 employees for 30 days.

“The Chinese government sent an official request to our lead investor to re-evaluate the deal based on the recent actions from the Trump administration,” Gribetz said in a phone interview. “This was a big shock to us.”

Founded in 2012 and based in San Mateo, California, Meta is one of many companies large and small working on augmented reality, which superimposes digital images on the real world. For its part, Meta makes a headset that lets architects, auto manufacturers and other customers control 3-D holograms with their hands and visualize data and designs. Chinese investors are pouring money into AR and virtual reality, and Meta already has Tencent Holdings Ltd. and Lenovo Group Ltd. as backers.

With the new investment on hold, Meta is accelerating other plans to raise cash and capital. The company is opening a Chinese subsidiary that will generate revenue independent from the U.S. operation. That way, Gribetz said, the Chinese investor can fund the local entity in yuan without getting sideways with the government. Most Meta suppliers are in China, so having operations there would also help the startup avoid future tariffs.

Tensions between the world’s two largest economies have been escalating, with U.S. President Donald Trump poised to slap tariffs on an extra $200 billion in Chinese imports (and threatening to throw in an additional $267 billion worth). Meanwhile, Chinese acquisitions and investments in the U.S. have fallen to the lowest level in seven years, according to the Rhodium Group. Exacerbating the situation is updated legislation that gives the Committee on Foreign Investment in the U.S., or CFIUS, broader authority to scrutinize and potentially block foreign deals on national security grounds.

“My sense is Beijing wants Chinese investors to slow down investments in the U.S. and wait this out,” said Steve Klemencic, a managing director at Ankura Consulting Group who advises clients on CFIUS-related issues.

The worsening environment could hit augmented and virtual-reality companies especially hard. Many U.S. startups are chasing funding in China where deals in such technology with Chinese participation has surged 23-fold since 2014 to almost $1 billion last year, according to CB Insights.

“The Chinese government understands that augmented reality and virtual reality are the future of computing,” Gribetz said. “Any company that needs to raise significant amounts of capital and manufacture goods in a cost-effective way and conquer markets hungry for early adoption must have a presence in China.”

©2018 Bloomberg L.P.