U.S. Officials Tell Tech Startups to Beware of Foreign Spies Cloaked as Investors

For every Facebook, Twitter and Reddit, there are thousands of technology startups that sputter, stall and collapse. They typically face ruthless competition to secure sufficient funding to begin building their businesses. Now it seems startups need to guard against more than just aggressive competitors swimming around in the metaphorical shark tank of venture capital.

According to U.S. intelligence officials, tech startups must now be wary of a more sinister threat in the form of “foreign threat actors” who pose as investors to gain access to sensitive data, putting national security at risk. In a July 24 release, the U.S. Office of the Director of National Intelligence said it sent a joint bulletin to U.S. companies to protect emerging technology startups from investment by “wolves in sharks’ clothing.”

“U.S. emerging tech startups are at the forefront of American innovation, but they face risks when seeking potential foreign investment to expand their firms,” said Michael Casey, director of the U.S. National Counterintelligence and Security Center, in the release. “Unfortunately, our adversaries continue to exploit early-stage investments in U.S. startups to take their sensitive data. These actions threaten U.S. economic and national security and can directly lead to the failure of these companies.”

Meanwhile, the Committee on Foreign Investment in the U.S., which has oversight of transactions that might pose national security risks, is also sounding alarm bells. The Committee, formed in 1975 under the Ford administration and chaired by the U.S. Secretary of the Treasury, revealed in a report to Congress last week that it assessed more penalties in 2023 than it ever had in a single year. The total number of penalties assessed, four, may not sound like much, but CFIUS had only issued two penalties in its entire 50-year history prior to that.

The uptick in penalties fits with a more proactive approach to enforcement on the part of CFIUS. Congress expanded the committee’s enforcement powers in 2018, and CFIUS published guidelines in 2022 detailing a more vigorous approach to laying down the law. (Prior to that, its most significant moment had come in 1988 when Congress passed the Exon-Florio amendment and President Reagan delegated the review process to CFIUS.)

In testimony delivered to the Senate Committee on Banking, Housing and Urban Affairs, Treasury Assistant Secretary for Investment Security Paul Rosen noted that the growing complexity of transactions involving foreign capital has made the oversight responsibilities of CFIUS even tougher.

Naturally, much of the concern about foreign investors starts with China. The chief economic rival of the United States has built up a notorious reputation for corporate espionage, and trade secrets in the tech industry are especially coveted. Consequently, interest from Chinese venture capital in emerging technologies such as artificial intelligence is raising red flags among U.S. national security authorities.

For its part, Beijing is dismissing the U.S. government’s security concerns as hypocritical. Wall Street is also expressing misgivings about China’s impact on the tech sector, though. Notably, discount e-commerce companies Temu and Shein have made a splash in online retail this year. Their upstart success now poses a threat to U.S. competitors, such as Amazon and Etsy, and early signs from earnings season suggest their fears are well-founded.

Ironically, U.S. tech companies are apparently looking for – you guessed it – help from the government to blunt the ability of Temu and Shein to compete for e-commerce market share. Amazon, for instance, is lobbying for greater scrutiny of Chinese companies’ supply chains and trade loopholes benefiting foreign companies that export goods to the U.S.

Perhaps government officials will eventually make time to explore fixes to trade policy and the regulation of goods coming into the U.S. market from outside the country’s borders. For now, however, they seem to have their hands full looking out for corporate spies.