GeoTech Wars - De-Risking Venture Capital with Anzu Partners co-founder David Michael
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In this episode of GeoTech Wars, Kirti and Andrew discuss how investors are assessing the business environment in China in the current geopolitical climate. They are joined by guest David Michael, co-founder and managing partner of Anzu Partners, an investment firm focusing on industrial and life science technology companies. Prior to starting Anzu Partners, David spent 24 years at The Boston Consulting Group, where he led the firm’s Greater China practice, founded the firm’s Beijing office, and established the firm’s overall emerging markets practice.
As David explains, the broader economic de-risking between the United States and China is particularly pronounced in the venture capital (VC) industry. In the 2010s, Chinese-backed VC firms operated freely in Silicon Valley while U.S. VC firms invested heavily in Chinese companies. Today, that has largely ended. Chinese VC firms have left the United States, while U.S. VC investment in China has plummeted. U.S. VC firms are even separating their Chinese operations into distinct corporate entities given the current difficulty of assessing risk in China.
There are several reasons for this shift. From the perspective of U.S. VC firms, policy developments from both the U.S. government and the Chinese Communist Party (CCP) have made the business environment in China increasingly problematic for investment-oriented companies. In the United States, Congress now closely scrutinizes U.S. VC firms that invest in critical technologies in China, while the Biden Administration recently released an executive order asserting its right to cut off U.S. investment into designated Chinese technology sectors. In China, intensified oversight of companies and a broadened definition of state secrets has made it more difficult for investors to evaluate opportunities. Other developments such as the “Walking 500,000” initiative which encourages the entire Chinese population to hunt for potential foreign spies makes operating in China less palatable.
These new policies stem from a shift in government priorities. Ten years ago, the CCP was focused on economic growth and was therefore pragmatic in its policy development. Policies were established slowly, with a high degree of consultation and consensus. Today, economic growth is less of a priority. Decision-making in the CCP is no longer slow and consultative, but instead is less transparent and more abrupt. This creates a degree of unpredictability, which is unattractive for investors as they cannot reliably evaluate the risk of future policy changes.
Ultimately, the de-risking underway in the VC industry imposes costs on everyone. Despite a shrinking population, China remains critical to the global economy, both as an integral link in the supply chain of many goods and as a massive consumer market. For instance, as financial flows stagnate and supply chains become less elastic due to prioritization of security over economic efficiency, the risk of inflation increases.
Furthermore, de-risking is detrimental to innovation in both the United States and China. Innovation relies on global exchanges of information and people. Practices such as studying abroad and working for foreign companies provide individuals with the ability to acquire tacit knowledge, such as the most cutting-edge manufacturing techniques, which is fundamental to economic growth. Businesses often collaborate with foreign partners to spur innovation as well. A U.S. pharmaceutical company in pursuit of new therapeutics, for instance, naturally would want access to Chinese patients for trials to ensure their products are effective for a diverse population. Geopolitical developments and policies which limit the opportunity for these exchanges of people and ideas hinder the entire global economy.
This piece summarizes the discussion in GeoTech Wars, "De-Risking Venture Capital with Anzu Partners co-founder David Michael” It does not represent the opinions of the hosts.