FBI Investigating Chinese-Funded US VC Hone Capital For Passing Secrets

Rather than recruiting/buying software engineers to provide models and data on which they are working, the FBI is investigating whether China set up a venture capital firm to invest in startups of interest to its strategic objectives as well as allying with other tech-related firms such as AngelsList in order to gain access to startups' intellectual capital.

The US has repeatedly warned the tech industry about what is called industrial espionage, but startups desperate for funding or which assume they are too smart to be gulled like this continue to fall prey.  JL

The Financial Times reports:

The FBI is probing Hone Capital to determine whether it was a conduit for Beijing to obtain tech start-ups’ trade secrets. Hone launched in 2015 with $115mn of capital from Chinese private equity China Science & Merchants Investment Management. Hone became one of the most prolific in Silicon Valley, investing in 360 US tech start-ups in three years, including Cruise, Stripe and Boom. The FBI’s looking into whether Hone accessed information about the technology, finances or clients of start-ups for the benefit of Chinese authorities. The US has warned the tech industry to beware of foreign espionage. The FBI probe includes tech-related firms Hone dealt with such as AngelList which Hone provided with $80mn in exchange for access to all “syndicate” deals in its system. 
In the past few years, billions of dollars from all over the world have sloshed into Silicon Valley through venture capital firms, as investors have scrambled to ride the US tech boom. But now, the FBI is probing one of those firms, Hone Capital, to determine whether it was used as a conduit for Beijing to obtain tech start-ups’ trade secrets, DD’s Tabby Kinder reports.

 

Hone launched in 2015 with $115mn of initial capital from Chinese private equity group China Science & Merchants Investment Management Group (CSC). Soon, the firm became one of the most prolific investors in Silicon Valley, investing in about 360 US tech start-ups in less than three years. It built stakes in a whole fleet of companies, including self-driving carmaker Cruise, payments group Stripe and aerospace engineer Boom. Yet the FBI’s looking into whether Hone accessed information about the technology, finances or clients of its start-ups for the benefit of its Beijing-based owner or Chinese authorities, said several people close to the matter.

 

Legal representatives for CSC said: “Allegations that CSC Group, its chairman, or any of its affiliates, including Hone Capital, have misappropriated trade secrets are completely baseless and grounded in nothing but insinuation and speculation fuelled by anti-Chinese sentiment and self-serving allegations from former executives who are actively in litigation with CSC Group over, among other things, their own self-dealing.”

 

Tensions between Washington DC and Beijing are already high. While the tech industry for years welcomed Chinese investment, more recently it has been told by US authorities to beware of foreign espionage. And the FBI probe has engulfed other fixtures of the tech industry that the venture capital firm has dealt with over the years, including AngelList, one of Silicon Valley’s most storied investment platforms. Between 2015 and 2016, Hone provided AngelList with $80mn in exchange for access to all “syndicate” deals in its system, which allow investors to pool resources to make an investment. AngelList declined to comment. On top of all that, Hone is also in a bitter legal fight with former executives including Silicon Valley head Veronica Wu and chief financial officer Purvi Gandhi.