US warns tech start-ups on security threats from foreign investors

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The US National Counterintelligence and Security Center has warned technology start-ups that foreign adversaries, including China, are using investments to acquire sensitive data and threaten national security.

The warning comes as Silicon Valley companies have stepped up their screening of staff and potential recruits in recent months due to the threat of Chinese espionage, and in some cases have been ordered by their American investors to turn away capital linked to China.

The NCSC on Wednesday shared a bulletin with US companies warning that “foreign threat actors” might use private investment such as venture capital and private equity to exploit tech start-ups in ways that could threaten economic and national security.

They “face risks when seeking potential foreign investment to expand their firms”, said Michael Casey, NCSC director. “Unfortunately, our adversaries continue to exploit early-stage investments in US start-ups to take their sensitive data. These actions threaten US economic and national security and can directly lead to the failure of these companies.”

The bulletin said hostile foreign groups might prey on struggling start-ups by taking advantage of their need for cash to gain access to intellectual property, and could obtain proprietary data “under the guise of due diligence before investing”.

Rapid advancements in artificial intelligence over the past 18 months have led to greater concerns from industry and the US government about attempts by Chinese security services in particular to steal the technology.

A spokesperson for the Chinese embassy in Washington said: “On one hand, the US demands that China further open its market, while on the other hand, it frequently imposes restrictions on normal Chinese trade and investment activities under the pretext of national security.”

“Suppressing China’s technological development and progress under the guise of national security is essentially an act of economic and technological hegemony,” the spokesperson added, saying China was “ready to work with other countries to seize new opportunities” from technological and industrial advancements.

The NCSC bulletin, which was developed with the Office of the Director of National Intelligence’s unit for economic security and emerging technology, the Air Force Office of Special Investigations and the Naval Criminal Investigative Service, did not single out Beijing. But it does stress that Chinese venture capital investment had focused on US emerging tech sectors such as AI — a Chinese government priority.

The memo highlighted IDG Capital, a China-based investment firm designated as a Chinese military company by the US Department of Defence, which had invested in more than 1,600 businesses, including in the US.

Washington and Beijing are engaged in an intensifying strategic rivalry, with the US imposing export controls to make it harder for China to obtain and develop cutting-edge technologies, including in AI and advanced chips.

The bulletin warned of the strategies used by foreign actors to shield their ownership and intent, including channelling investments via intermediaries in the US or abroad, and designing investments to avoid scrutiny from the Committee on Foreign Investment in the United States, an inter-agency panel that vets inbound investment for security risks.

“If a sovereign wealth fund is going to invest in a tech company, you have to follow the letter of the law with Cfius. But the reality is there are a tonne of sovereign wealth funds investing in US tech firms through funds of funds or special purpose vehicles,” said a partner at a Silicon Valley venture capital firm.

“Most start-ups are just trying to survive, and when you’re desperate for capital you have to stand out there and show everyone what you’re doing,” said Greg Levesque, chief executive of Strider Technologies, which helps companies defend themselves against nation state espionage.

“It’s a model that China has employed to great success, getting access to emerging frontier technologies and replicating it while the start-up is still early-stage,” he added.

Foreign actors could also target start-ups that have contracts with the US government, threatening national security, according to the bulletin.

The NCSC warned that these schemes could lead to the collapse of start-ups if foreign investors obtain proprietary data and use it to compete against US businesses. It mentioned an unnamed UK company that faced bankruptcy after sharing its intellectual property with an investor in China as part of an acquisition that was ultimately abandoned by the prospective acquirer.

The bulletin urged start-ups to take steps to shield themselves from potentially nefarious actors, including guarding critical assets and limiting data shared with investors.

Washington has recently identified other intelligence threats stemming from Beijing. The US, UK, Canada, Australia and New Zealand in June jointly warned that China’s People’s Liberation Army was “aggressively recruiting” western fighter pilots in an effort to train its own military aviators.

Additional reporting by Demetri Sevastopulo