The congressman investigating four VC firms with ties to China has a message: This is just the beginning

The Committee, formed at the beginning of this year, was set up to protect both U.S. military interests as well as prevent human labor abuses. Chaired by Republican Wisconsin Representative Mike Gallagher, the Committee is just one piece of the U.S. government’s broader crackdown on companies and investment firms that are investing in China-based companies. President Joe Biden signed an executive order this summer that restricted potential new investments into high-tech Chinese companies. 

The House Committee’s inquiries into venture capital firms, in particular, began in July, when the group sent letters to four VC firms that had made investments in Chinese semiconductor, AI, and quantum computing companies, requesting further information and suggesting that the firms had invested in companies that could be “linked to China’s efforts to profile and track” Uyghurs, a Muslim minority group in China. Since then, the inquiries have expanded to venture-backed startups, including Sequoia China-backed fast fashion unicorn Shein, which has been eyeing a public debut in the U.S.

In an interview with Term Sheet, Representative Gallagher said that these letters to venture capital firms were just the beginning of the Committee’s investigation. “We can’t be complicit in gross human rights abuses like genocide, and that’s really what these investigations are about,” Gallagher said.

Gallagher was referencing the alleged detention of Uyghurs and other predominantly Muslim minority groups in Xinjiang, a region in Northwest China where the U.S. government and dozens of other countries have accused the Chinese government of ongoing human rights violations, citing evidence of torture, sexual and gender-based violence, forced abortion and sterilization; as well as forced labor. The alleged abuses led to a new law in the U.S. that went into effect last year, called the Uyghur Forced Labor Prevention Act, which banned a list of Xinjiang-based entities from importing goods into the U.S. (Beijing has repeatedly denounced these allegations as false and accused the U.S. and Western countries of using false information to “strategically use Xinjiang to contain China.”)

Shein, in particular, which is backed by Sequoia China and General Atlantic, has repeatedly been accused of its supply chain being connected to Xinjiang, and an interim report the Committee on the CCP released this summer echoed those concerns and also accused the company of evading U.S. tariffs. Earlier this year, a series of U.S. attorneys general requested the SEC require Shein to independently prove it does not utilize forced labor before it be allowed to go public in the U.S. markets.
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“Certainly I think any company listing in the U.S. should face a lot of scrutiny, particularly if there’s evidence that their supply chain runs back to Xinjiang,” Gallagher said.

Shein told Term Sheet in a statement that its policy is “to comply with the trade laws of the countries in which we operate” and that the company has “zero tolerance for forced labor and no contract manufacturers in the Xinjiang region.” “We will continue to engage with U.S. federal and state officials to answer their questions,” a company spokesperson said. GGV and General Atlantic declined to comment. A Sequoia spokesperson didn’t respond to a request for comment.

In the last few years, venture capital investments into China from investors based elsewhere have shrunk as Beijing has introduced new challenges for foreign investors and as the U.S. has scrutinized investments in the area. In 2021, there were more than 1,100 deals in China. In the first half of this year, there have only been 264 deals so far, according to PitchBook. The percentage of deals including investors headquartered outside the region—10% of investments into Chinese startups for the first half of this year—is the lowest it’s been since PitchBook started tracking the metric.

Gallagher said that his Committee is trying to “get our head around the scope and scale of” U.S. investment in private Chinese companies, and it will ultimately recommend a set of controls for investment firms to legislators. He emphasized that the tranche of letters sent thus far to VC firms hasn’t included “some of the biggest actors,” including Sequoia, which split its U.S., China, and India teams earlier this year.

While Gallagher declined to say whether his Committee planned to open an investigation into Sequoia China, he confirmed he is looking into other investments Sequoia has made.

“I’m not going to list the other ones that I think are problematic, but it goes beyond Shein,” he said.

The Select Committee on the CCP has subpoena authority, though Gallagher says the group has yet to use it.

“If we can get the answers and the participation we want without subpoenas, that’s great,” Gallagher said. “But we’re prepared to use them as soon as we feel like we’re being stonewalled and people are refusing to testify or answer questions when asked.”

Gallagher said that he thought “it’d be a mistake” for companies to assume that any of the Committee’s efforts were “just Republican China hawks in Congress” or that this was just a “passing moment.”

“I think Republicans and Democrats are sincerely trying to get this admittedly very complex issue right and legislate a solution that endures beyond this administration and the next,” Gallagher said.

Gallagher said he ultimately envisions Congress passing legislation that would outright ban both public and private investors from making investments within certain sectors, such as investments into Chinese companies that build military equipment or Chinese AI companies. 

“I actually think we can agree on this with the White House of sectors that that should be off limits,” Gallagher said.

It’s unclear how widespread the impact will be across the industry. “We have not seen a clear, outstanding trend across the industry for U.S. VC firms to cut ties with their China arms,” Kaidi Gao, a VC analyst at PitchBook said in an email, though she noted that “many U.S. investors” have become more cautious to invest in China and are closely monitoring how U.S.-China tensions evolve.

OpenAI’s potential blockbuster new valuation…The ChatGPT creator is reportedly in talks with investors to sell existing shares at a valuation between $80 billion and $90 billion, the Wall Street Journal reported this week. That’d be a massive uptick from the company’s last valuation earlier this year, at roughly $30 billion, and comes as OpenAI is reportedly on track to do over $1 billion in revenue in the next 12 months. Plus, the report was right around the same time that Amazon announced a massive investment into OpenAI competitor Anthropic of up to $4 billion. The OpenAI sale would reportedly allow employees to sell their existing shares versus issuing new ones. —Anne Sraders

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Update, Sep. 28, 2023: This newsletter has been updated with a comment from Shein.

Joe Abrams curated the deals section of today’s newsletter.

VENTURE DEALS

- Arc, a Los Angeles, Calif.-based company that manufactures and sells electric boats, raised $70 million in Series B funding. Eclipse led the round and was joined by Menlo Ventures and existing investors Andreessen Horowitz, Lowercarbon Capital, and Abstract Ventures.

- League One Volleyball, a Los Angeles, Calif.-based youth volleyball brand and professional volleyball league, raised $35 million in Series B funding. Left Lane Capital led the round and was joined by Ares Management Funds and others. 

- Slope, a San Francisco-based platform for business-to-business payments and financing, raised $30 million in funding. Union Square Ventures led the round and was joined by Sam Altman, Y Combinator, and others. 

- Gem Security, a New York City-based platform that detects and responds to cloud security risks, raised $23 million in Series A funding. GGV Capital led the round and was joined by IBM Ventures, existing investor Team8, and angel investors. 

- PortX, a Mercer Island, Wash.-based platform designed to simplify the management of and access to financial data, raised $16.5 million in Series B funding. FUSE and Curql led the round and were joined by BankTech Ventures, EJF Capital, and the Btech Consortium.  

- Canvs AI, a New York City-based platform using AI to analyze customer and employee feedback, raised $15 million in funding. Fulcrum Equity Partners led the round and was joined by Engage. 

- TravelLocal.com, a Richmond, U.K.-based travel planning platform that connects travelers with local experts and experiences, raised £8.3 million ($10.1 million) in Series B funding from Active Partners, Gresham House, and Puma Private Equity.

- Echomark, a Kirkland, Wash.-based data security company, raised $10 million in seed funding from Craft Ventures. 

- UserEvidence, a Jackson Hole, Wyo.-based AI platform that automatically generates social content, case studies, and aggregates customer feedback, raised $9 million in Series A funding. Crosslink Capital led the round and was joined by Founder Collective, Afore, and Next Frontier Capital. 

- Fhenix, a Tel Aviv, Israel-based blockchain platform with end-to-end encryption, raised $7 million in seed funding. Multicoin Capital and Collider Ventures led the round and were joined by Node Capital, Bankless, HackVC, TaneLabs, and Metaplanet.

- Cognota, a Toronto, Canada-based platform designed to organize company trainings, plan projects, track employee capacity, and view company performance metrics, raised $5.5 million in Series A funding. Grotech Ventures led the round and was joined by IDEA Fund Partners, BDC Capital, Generation Ventures, CEAS Investments, Tyton Partners, and others. 

- Boisson, a New York City-based non-alcoholic beverage retailer, raised $5 million in funding from Convivialité Ventures and Connect Ventures.

- Rayon, a Paris, France-based company developing a collaborative architectural design platform, raised €4 million ($4.2 million) in seed funding. Northzone and Foundamental led the round and were joined by existing investor Foundamental and angel investors. 

- Invoke AI, an Atlanta, Ga.-based platform that enables artists and creatives to create visual content collaboratively or render it with the help of AI, raised $3.75 million in seed funding. Storm Ventures led the round and was joined by SignalFire and Universe Software. 

- Scentian Bio, an Auckland, New Zealand-based company that’s researching insect smell and taste receptors in order to create a sensor capable of creating new foods and smells while analyzing existing ones, raised $2.1 million in seed funding. Finistere Ventures and Toyota Ventures led the round and were joined by Icehouse Ventures, Our Crowd, and others.

- Breezit, a Los Angeles, Calif.-based marketplace that connects clients with event planners, raised $2 million in pre-seed funding. Practica Capital led the round.  

- Novo, a Berlin, Germany-based platform for homeowners to monitor and reduce their carbon emissions, raised €1 million ($1.1 million) in pre-seed funding. Citizen Capital led the round and was joined by Antler and angel investors. 

PRIVATE EQUITY

- Gryphon Investors agreed to acquire AirX Climate Solutions, an Oklahoma City, Okla.-based designer, manufacturer, and distributor of heating, ventilation, and air conditioning products. Financial terms were not disclosed. 

- Susquehanna Private Capital acquired U.S. Compliance, an Excelsior, Minn.-based provider of environmental, health, and safety compliance management solutions. Financial terms were not disclosed. 

- Technical Safety Services, a portfolio company of Levine Leichtman Capital Partners, acquired Controlled Environment Management, a Gilbert, Ariz.-based testing, inspection, and certification provider for the pharmaceutical, healthcare, and life sciences markets. Financial terms were not disclosed. 

OTHER

- Tendo acquired MDsave, a Brentwood, Tenn.-based healthcare marketplace designed to connect patients with low-cost procedures and care providers. Financial terms were not disclosed. 

FUNDS + FUNDS OF FUNDS

- Anzu Partners, a Washington, D.C.-based venture capital firm, raised $202 million for its third fund focused on clean tech, industrial, and life sciences companies.