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Team Conflicted Capital
Original problem statement
Chinese investment in US start-ups poses a threat to
US military capabilities across critical technologies,
but the lack of transparency in venture capital makes
it challenging to track these threats.
Final problem statement
Chinese adversarial venture capital investments in US dual-
use startups continue to threaten US military capabilities
across critical technologies, but the scope of the problem
within the USG is relatively small. VCs and entrepreneurs
can play a role in addressing the challenge by shunning
known sources of adversarial capital.
Total interviews completed: 20
Total outreach: >100 contacts
Megan Hastings
MBA ‘22
Angela Chen
MIP ‘23
Zac Blasdel
MSx ‘21
Connor Love
MBA ‘22
Our journey wasn’t always smooth
Overview of our journey
1 2 3 4 5 6 7 8 9 10
Week
Team energy
Does anyone but the
government care?
Is this even
a problem?
Entrepreneurs need
better information!
Would VCs
share
information?
Smaller scope in USG, but
some potential for impact
outside the government
???
We originally thought Chinese investment in U.S. startups
was a high-priority, widely relevant issue
● We initially thought this was a
big, “pants-on-fire”, burning
issue
○ Unclassified DoD Industrial
Policy brief dated June 2021
described three threat avenues
to attack national security and
Defense Industrial Base (DIB)
● We focused on
“transactional” threats
● However, there was no data
readily available to qualify
how often transactional
threats occurred
Starting point for problem
We used cold emails, LinkedIn DMs, and our own
connections to “get out of the building”
Getting out of the building
Our interviews led to many, many discussions - we
woke up thinking about the problem (see below)
In total, we sent out over 100 requests
for interviews
Raj Shah did not believe adversarial capital is still as
widespread a challenge in current VC market
Heather Richman clarified that CFIUS is voluntary and
only applies to specific transactions
DIU has only found instances of adversarial capital in
10% of potential partnerships
Our understanding of the problem rapidly evolved...
Adversarial capital is widespread in the startup and
VC ecosystem
CFIUS catches the majority of problematic investors
Organizations like DIU encounter adversarial capital
in almost all partnerships
Challenging our assumptions
Scope of
the problem
Affected
stakeholders
Solutioning
Ingoing assumption Insight from interviews
This is a 3-sided problem involving startups, VCs,
and the government, which all have a role to play in
the solution
Multiple groups across the DoD look at this
challenge daily because it is so widespread
This is a government problem and solutions must
come from the government
Entrepreneurs will accept capital that presents the
best terms and are not willing to consider national
security risk
Philip Clark said this is inherently a government / military
challenge to solve through faster-moving and expanded
sources of trusted/patient capital
DIU’s 2-person Business Intelligence team only looks at
foreign ownership as a final step because of manual,
time-intensive nature of vetting
Colin Supko shared how Trusted Capital is working to
rebuild connective tissue with VCs and promote
understanding of problem/risks
CEO at NSIN Demo Day shared that if founders had the
tools to avoid Chinese capital, they would do so; all they
can do is ask VCs who their LPs are
4
4
7
3
6
5
6
Week
…And it was a rocky journey at times
Current market conditions influence the
attractiveness of adversarial capital
Team takeaways
VCs do not see themselves as part of the
solution
The USG seeks to work with VCs to
expand trusted capital sources, but limited
incentives to offer to share information
Scope of the
problem
Affected
stakeholders
Solutioning
4
4
7
3
6
5
6
???
How we felt
Week
???
In current market, problem is less salient because
entrepreneurs have choice
Minority investments fall outside of CFIUS’
current scope
Foreign ownership has small impact even in
USG entities that work with startups like DIU
In-depth vetting of foreign ownership occurs
in small pockets within the DoD that are
limited by manual processes
Entrepreneurs would be willing to shun
adversarial Chinese capital if they had the
tools to do so
We were confused about who was tackling this
problem in the USG
Team discussions
The problem is less widespread across the DoD
and USG than we expected
Some team members thought the USG shouldn’t
ask VCs to take action
Where vetting occurs within the DoD, there is a
need for automated tools
Will VCs actually share information about their
LPs?
???
Entrepreneurs would be willing to change
behavior if given the right information
Team debates and discussions Conflicting team views
Team confusion/frustration
A-ha moment!
??
We identified a solution by focusing on relevant personas
DIU Business
Intelligence team
Entrepreneur
Venture capitalist
Personas Role Challenge Need
Conducts diligence on foreign
investors’ ownership or control as
last step before DIU begins
partnership with startup
Makes decisions about which
investments to accept with simple
background checks
Decides which LPs to accept as
backers of fund with each new
fundraise
2 people complete highly
manual process, with little
coordination across DoD
Automated tool that flags
potential adversarial capital that
can be shared within DoD
In a downturn when
entrepreneurs have fewer
options, foreign investors may
be more attractive or offer better
terms than U.S. investors
VCs may not know where LPs’
money comes from, or if linked
to state-backed entities
More advanced tool to vet
potential investors and identify
whether any are considered
“adversarial”
More advanced tool to vet
potential investors and identify
whether any are considered
“adversarial”
Converging on a solution
Our proposed solution is an automated tool that meets needs
of entrepreneurs, USG, and investors
● At first, we debated trade-offs between
usefulness, buy-in, and feasibility
● We set the criteria that any realistic
solution needs to be:
○ Better than the status quo
(manual/inconsistent diligence)
○ Understood as “worth it” to
entrepreneurs and investors
○ Balance requirements and
available data with ease of use
and overall ecosystem benefits
Refining our solution
● An automated screening tool and database can
solve for investor, entrepreneur and USG needs in
a single platform
● Includes details available on investors’ location,
links to state actors, shell companies, other
investments to inform decision-making
● AI-generated risk score would flag companies,
investors, and LPs as high-, medium-, or low-risk
● Data pulled from Pitchbook, Carta, CB Insights,
LinkedIn, news reports / open source, and
voluntary information
Our criteria Proposed solution
There are many potential cons that may limit adoption
Pros and cons of our solution
Pros
Gives dual-use entrepreneurs a greater chance of
scaling with clean capital
Augments existing USG efforts
Could allow slower-moving USG capital allocators
to close faster
Keeps the clean/adversarial capital distinction
front of mind for entrepreneurs and investors
Cons
Voluntary with potentially limited buy-in
Unknown to what extent VCs would vet/disclose
LPs
Wide range of understanding of scope of problem
(hot air? )
Founders of dual-use tech may already self-select
for trusted capital
We do not recommend building out this MVP Ourselves
Next steps
● Where we started is not where we ended
● We fundamentally know two things:
○ Chinese adversarial capital in US backed technology companies exists and it poses a potential threat
our nation’s national security
○ BUT it is not as big of an issue as we first thought
● There are many outstanding questions we do not have answers to:
○ Do market conditions (cash-rich funding environment) solve this problem?
○ Are the Chinese just bad venture capitalists? Are they putting their money in the wrong companies?
Should we let them keep wasting money?
○ Do regulatory bodies like CFIUS and the SEC solve this problem simply by scaring founding teams
from taking Chinese money?
○ How should we think about ‘politicizing’ this problem? When does China fear-mongering produce
inefficient uses of government agency time/energy/funds?
● From here we recommend working with relevant government agencies and public-
private partnerships to educate decision makers on what we learned, but we do
not recommend building out this MVP ourselves
Appendix
Interviewee List
● Philip Clark, Chief of Staff, 8VC
● Heather Richman, Founder, Defence Investor Network / FOCOM
● Steve Blank
● Raj Shah
● Captain Colin Supko, CFIUS
● Oriana Mastro, FSI Professor
● Trea Stephens, anduril /founders fund
● Ian Owen, Jaia (NSIN Demo Day Start Up) CEO
● Dean Zody, Ghostwave (NSIN Demo Day Start Up) CEO
● Mike Brown, Director, DIU
● Pavneet Singh, Fellow, Brooking Institute (Co-author of report w/ Mike Brown)
● Matt Turpin, Fellow @ Hoover, Senior Advisor @ Palantir
● Barry Eggers, Lightspeed Founder - VC
● David Ulevich a16z
● Andy Ku, Partner, IQT
● Tai Ming Cheung, UCSD Professor, Director, UC Institute on Global Conflict and Cooperation
● Linda Lourie, Assistant Director for Research and Technology Security at White House Office of
Science and Technology Policy
We tested our solution with all three stakeholder groups
Government users validated need for this solution:
● We validated a need for this solution with Mike Brown, Director of DIU
○ We were unable to speak with DIU’s Business Intelligence team directly
● We also shared our draft solution with Heather Richman
Entrepreneurs expressed a willingness to use this solution:
● Ghostwave, Jaia CEOs at NSIN Demo Day
VCs are still skeptical about sharing LP information
● “I haven’t seen Chinese investment into any fast-growing technologies that have
national security significance - almost all of the adversarial capital that I’ve seen
has been into companies that quite frankly were never likely to work.” - Tier 1 VC
Testing our solution

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Team Conflicted Capital Team - 2021 Technology, Innovation & Great Power Competition

  • 1. Team Conflicted Capital Original problem statement Chinese investment in US start-ups poses a threat to US military capabilities across critical technologies, but the lack of transparency in venture capital makes it challenging to track these threats. Final problem statement Chinese adversarial venture capital investments in US dual- use startups continue to threaten US military capabilities across critical technologies, but the scope of the problem within the USG is relatively small. VCs and entrepreneurs can play a role in addressing the challenge by shunning known sources of adversarial capital. Total interviews completed: 20 Total outreach: >100 contacts Megan Hastings MBA ‘22 Angela Chen MIP ‘23 Zac Blasdel MSx ‘21 Connor Love MBA ‘22
  • 2. Our journey wasn’t always smooth Overview of our journey 1 2 3 4 5 6 7 8 9 10 Week Team energy Does anyone but the government care? Is this even a problem? Entrepreneurs need better information! Would VCs share information? Smaller scope in USG, but some potential for impact outside the government ???
  • 3. We originally thought Chinese investment in U.S. startups was a high-priority, widely relevant issue ● We initially thought this was a big, “pants-on-fire”, burning issue ○ Unclassified DoD Industrial Policy brief dated June 2021 described three threat avenues to attack national security and Defense Industrial Base (DIB) ● We focused on “transactional” threats ● However, there was no data readily available to qualify how often transactional threats occurred Starting point for problem
  • 4. We used cold emails, LinkedIn DMs, and our own connections to “get out of the building” Getting out of the building Our interviews led to many, many discussions - we woke up thinking about the problem (see below) In total, we sent out over 100 requests for interviews
  • 5. Raj Shah did not believe adversarial capital is still as widespread a challenge in current VC market Heather Richman clarified that CFIUS is voluntary and only applies to specific transactions DIU has only found instances of adversarial capital in 10% of potential partnerships Our understanding of the problem rapidly evolved... Adversarial capital is widespread in the startup and VC ecosystem CFIUS catches the majority of problematic investors Organizations like DIU encounter adversarial capital in almost all partnerships Challenging our assumptions Scope of the problem Affected stakeholders Solutioning Ingoing assumption Insight from interviews This is a 3-sided problem involving startups, VCs, and the government, which all have a role to play in the solution Multiple groups across the DoD look at this challenge daily because it is so widespread This is a government problem and solutions must come from the government Entrepreneurs will accept capital that presents the best terms and are not willing to consider national security risk Philip Clark said this is inherently a government / military challenge to solve through faster-moving and expanded sources of trusted/patient capital DIU’s 2-person Business Intelligence team only looks at foreign ownership as a final step because of manual, time-intensive nature of vetting Colin Supko shared how Trusted Capital is working to rebuild connective tissue with VCs and promote understanding of problem/risks CEO at NSIN Demo Day shared that if founders had the tools to avoid Chinese capital, they would do so; all they can do is ask VCs who their LPs are 4 4 7 3 6 5 6 Week
  • 6. …And it was a rocky journey at times Current market conditions influence the attractiveness of adversarial capital Team takeaways VCs do not see themselves as part of the solution The USG seeks to work with VCs to expand trusted capital sources, but limited incentives to offer to share information Scope of the problem Affected stakeholders Solutioning 4 4 7 3 6 5 6 ??? How we felt Week ??? In current market, problem is less salient because entrepreneurs have choice Minority investments fall outside of CFIUS’ current scope Foreign ownership has small impact even in USG entities that work with startups like DIU In-depth vetting of foreign ownership occurs in small pockets within the DoD that are limited by manual processes Entrepreneurs would be willing to shun adversarial Chinese capital if they had the tools to do so We were confused about who was tackling this problem in the USG Team discussions The problem is less widespread across the DoD and USG than we expected Some team members thought the USG shouldn’t ask VCs to take action Where vetting occurs within the DoD, there is a need for automated tools Will VCs actually share information about their LPs? ??? Entrepreneurs would be willing to change behavior if given the right information Team debates and discussions Conflicting team views Team confusion/frustration A-ha moment! ??
  • 7. We identified a solution by focusing on relevant personas DIU Business Intelligence team Entrepreneur Venture capitalist Personas Role Challenge Need Conducts diligence on foreign investors’ ownership or control as last step before DIU begins partnership with startup Makes decisions about which investments to accept with simple background checks Decides which LPs to accept as backers of fund with each new fundraise 2 people complete highly manual process, with little coordination across DoD Automated tool that flags potential adversarial capital that can be shared within DoD In a downturn when entrepreneurs have fewer options, foreign investors may be more attractive or offer better terms than U.S. investors VCs may not know where LPs’ money comes from, or if linked to state-backed entities More advanced tool to vet potential investors and identify whether any are considered “adversarial” More advanced tool to vet potential investors and identify whether any are considered “adversarial” Converging on a solution
  • 8. Our proposed solution is an automated tool that meets needs of entrepreneurs, USG, and investors ● At first, we debated trade-offs between usefulness, buy-in, and feasibility ● We set the criteria that any realistic solution needs to be: ○ Better than the status quo (manual/inconsistent diligence) ○ Understood as “worth it” to entrepreneurs and investors ○ Balance requirements and available data with ease of use and overall ecosystem benefits Refining our solution ● An automated screening tool and database can solve for investor, entrepreneur and USG needs in a single platform ● Includes details available on investors’ location, links to state actors, shell companies, other investments to inform decision-making ● AI-generated risk score would flag companies, investors, and LPs as high-, medium-, or low-risk ● Data pulled from Pitchbook, Carta, CB Insights, LinkedIn, news reports / open source, and voluntary information Our criteria Proposed solution
  • 9. There are many potential cons that may limit adoption Pros and cons of our solution Pros Gives dual-use entrepreneurs a greater chance of scaling with clean capital Augments existing USG efforts Could allow slower-moving USG capital allocators to close faster Keeps the clean/adversarial capital distinction front of mind for entrepreneurs and investors Cons Voluntary with potentially limited buy-in Unknown to what extent VCs would vet/disclose LPs Wide range of understanding of scope of problem (hot air? ) Founders of dual-use tech may already self-select for trusted capital
  • 10. We do not recommend building out this MVP Ourselves Next steps ● Where we started is not where we ended ● We fundamentally know two things: ○ Chinese adversarial capital in US backed technology companies exists and it poses a potential threat our nation’s national security ○ BUT it is not as big of an issue as we first thought ● There are many outstanding questions we do not have answers to: ○ Do market conditions (cash-rich funding environment) solve this problem? ○ Are the Chinese just bad venture capitalists? Are they putting their money in the wrong companies? Should we let them keep wasting money? ○ Do regulatory bodies like CFIUS and the SEC solve this problem simply by scaring founding teams from taking Chinese money? ○ How should we think about ‘politicizing’ this problem? When does China fear-mongering produce inefficient uses of government agency time/energy/funds? ● From here we recommend working with relevant government agencies and public- private partnerships to educate decision makers on what we learned, but we do not recommend building out this MVP ourselves
  • 12. Interviewee List ● Philip Clark, Chief of Staff, 8VC ● Heather Richman, Founder, Defence Investor Network / FOCOM ● Steve Blank ● Raj Shah ● Captain Colin Supko, CFIUS ● Oriana Mastro, FSI Professor ● Trea Stephens, anduril /founders fund ● Ian Owen, Jaia (NSIN Demo Day Start Up) CEO ● Dean Zody, Ghostwave (NSIN Demo Day Start Up) CEO ● Mike Brown, Director, DIU ● Pavneet Singh, Fellow, Brooking Institute (Co-author of report w/ Mike Brown) ● Matt Turpin, Fellow @ Hoover, Senior Advisor @ Palantir ● Barry Eggers, Lightspeed Founder - VC ● David Ulevich a16z ● Andy Ku, Partner, IQT ● Tai Ming Cheung, UCSD Professor, Director, UC Institute on Global Conflict and Cooperation ● Linda Lourie, Assistant Director for Research and Technology Security at White House Office of Science and Technology Policy
  • 13. We tested our solution with all three stakeholder groups Government users validated need for this solution: ● We validated a need for this solution with Mike Brown, Director of DIU ○ We were unable to speak with DIU’s Business Intelligence team directly ● We also shared our draft solution with Heather Richman Entrepreneurs expressed a willingness to use this solution: ● Ghostwave, Jaia CEOs at NSIN Demo Day VCs are still skeptical about sharing LP information ● “I haven’t seen Chinese investment into any fast-growing technologies that have national security significance - almost all of the adversarial capital that I’ve seen has been into companies that quite frankly were never likely to work.” - Tier 1 VC Testing our solution