Hone Capital in Hot Water as FBI Probes Possible Espionage Activities

The FBI is probing whether a California-based venture capital firm, Hone Capital, inadvertently handed over sensitive trade secrets to Chinese authorities. Founded in 2015 with an initial capital of $115 million from a Chinese private equity group, Hone Capital has emerged as one of Silicon Valley’s most active early-stage investors, backing 360 tech start-ups in less than three years. Some of the notable investments by Hone Capital include stakes in the maker of driverless cars Cruise, the payments company Stripe, and aerospace innovator Boom.

According to sources familiar with the investigation, FBI investigators are looking into whether Hone Capital could have leaked confidential information about either the technology, finance, or clientele of its portfolio companies to its Beijing-based parent company or the Chinese government. The FBI wouldn’t comment on the probe.

Such concerns have emerged as a result of FBI investigations into some portfolio companies of Hone’s, contracted to offer their services to the U.S. government, as sources have claimed that some of Hone’s funds can be linked to Chinese government sources. Against the geopolitical landscape in which the U.S. and China are at a historic high in tensions, this investigation has sent shockwaves in Silicon Valley’s venture capital arena. For several years, the industry welcomed Chinese investment but has lately been warned by U.S. authorities to be watchful against foreign espionage.

In July, the U.S. National Counterintelligence and Security Center issued a warning to tech start-ups that overseas adversaries, including China, were accessing sensitive data by taking investments, thereby threatening national security. In the last year, FBI agents have conducted interviews with hundreds of people associated with Hone Capital and asked start-up founders who had taken money from Hone about their fear of losing ownership of intellectual property to China.

Since 2019, Hone has cashed out most of its investment and divested some of those holdings to another U.S. entity fully owned by its Chinese parent company. Individuals with access to the firm’s operations reported that Hone never received confidential information from many of the start-ups in which it invested, including Stripe.

The investigation has reeled in AngelList, a top investment platform in Silicon Valley. The exchange raised $80 million in cash from Hone in 2015 and 2016, but in return, Hone got access to the full set of “syndicate” deals on AngelList-the ability for investors to pool resources for their investments-and teamed with AngelList as one of its largest external investors. “Hone went from no name to the number one seed investor in Silicon Valley, with access to every single deal on the AngelList platform,” says a former executive from a sovereign wealth fund who was approached by Hone about investment opportunities in 2018. “I had never seen a fund like this.”

According to fund documents and insider accounts, Hone’s funding comes from Beijing-based private equity group China Science & Merchants Investment Management Group (CSC), which was established in 2000 and is controlled by billionaire CEO and Chair Shan Xiangshuang. From 2015 to 2018, CSC sent 215 million dollars to its U.S. entities, which were invested into about 360 start-ups and then utilized to build a large real estate portfolio.

CSC describes itself as “one of the first large-scale and Chinese-government-approved RMB private equity investment and fund management firms.” The company was, however, delisted from the Chinese NEEQ stock market in 2018 for violating the country’s securities laws. One interviewee of the FBI pointed out that CSC may have operated U.S. servers accessed by Hone’s U.S. servers, putting the Chinese parent corporation at risk of compromising its portfolio companies’ data.

For its part, Hone and CSC Group have been litigating the two former executives since 2020. Hone has filed a lawsuit against its former head of Silicon Valley, Veronica Wu, who was previously working at Tesla, McKinsey, and Apple in China, and former Chief Financial Officer Purvi Gandhi for alleged fraud and breach of fiduciary duty. Wu and Gandhi retaliated with an enforcement action to vindicate their right to a share of the profits Hone took away when it left the company in 2020.

Wu has claimed in court documents that Hone’s Chinese owners directed her to invest in specific technologies with “critical intellectual property.” She also alleged that she was terminated late last year after she objected to “violations of laws and regulations and she refused to cooperate with the same.” Hone countered through documents in court that Wu was terminated for poor performance, and for dismissing the key points of her allegations.

The lawyers for CSC Group and Shan have stated: “The claims that CSC Group, the chairman, or any of its subsidiaries, including Hone Capital, have misappropriated trade secrets are entirely unfounded and based on nothing other than suspicion and inference fed by anti-Chinese bias and self-serving accusations by former executives actively suing CSC Group on numerous other grounds, including their self-dealing.” Moreover, they clarified: “In simple terms, CSC Group never doubted that all of its US investments were made in full accordance with applicable laws”.

Wu has not commented on the matter, but Gandhi said his investment through his stint at Hone has “phenomenal” returns, adding: “It is an offshoot of CSC Group’s lawsuit, which was filed upon my request to be paid my [share of the fund’s profits], following the strong exits”. Boom and Stripe could not comment on the probe.

Cruise, purchased by General Motors in 2016 said Hone is not an investor, and that it “has no record of outreach from any law enforcement or regulatory agencies on this”.