Billy So and Warren Hui founded Soul Ventures right before the world turned upside down. The firm was founded on the idea that it could bring U.S. startups to Hong Kong, the leading startup hub in East Asia.

The company recently opened an office in Japan but has had to navigate choppy waters as tensions between the U.S. and mainland China grow.

Prior to Soul, So was involved in Hong Kong-based AVP Electronics Ltd., a semiconductor distribution company for the likes of Samsung Electronics. Hui was a vice president of investment banking at Morgan Stanley, working on mergers and acquisitions across Asia for six years. When Hui got the itch to join the venture capital world, he began applying to some of his favorite VC firms without much luck.

“By that time, I had a good bunch of clients from the bank that were willing to support me. So, they wrote me my first check and I raised a fund,” Hui said. “The idea was that we would go and find the best founders and startups – primarily in the U.S., but also across parts of Asia – where the founders are creating technology that would change the daily lives of people.”

Soul Ventures invested in companies like Hawthorne-based SpaceX, Santa Monica-based last mile delivery robot Coco, as well as some of the first movers in generative artificial intelligence like Anthropic and OpenAI.

“When we thought about what our value-add is to startups, we always thought that because Asia is so big and so vast, and we were from this region, it would be very helpful if we could help bridge the gaps and bring the touch points in Asia to U.S. startups,” Hui said.

At the time, the U.S. was able to tap into a growing market in China, a populous country that was experiencing fast mobile internet adoption and had high growth potential. Meanwhile, China’s homegrown companies were able to grow with domestic and international funds.

Malibu-based Soul Ventures, headed up by the pair, raised $25 million and opened in 2020, as startups flourished and before the Covid-19 pandemic effectively shut down the world.

Since then, the world has drastically changed. Tech companies watched their valuations tumble. Venture firms tightened their purse strings. The Biden administration made well known its agenda for U.S. companies to rely less on China-based manufacturing. Geopolitical tensions abroad rose as politicians became concerned about China-based companies like TikTok gaining traction in the U.S. and collecting data.

“I think it’s a growing concern globally,” Hui said. “As users become more adept and use more and more AI, and the AI can read more and more of the users’ data, how does each company actually process or store that data?”

A complicated relationship

In 2016, Rhodium Group reported that Chinese foreign direct investment in the U.S. reached $46 billion. U.S. investors participated in $48.5 million worth of deals in 2018, per Pitchbook.

But investments both ways have steadily declined as Covid-19 changed funding strategies and tensions between the two countries grew. Per Pitchbook, U.S. investors only pumped $2.46 billion into the Chinese market in 2023.

“I think for U.S. companies, they really lose out on the big market,” said Gary Chen, senior counsel at Sherman Oaks law firm Stubbs, Alderton and Markiles LLP. “But whether it’s worth having all those restrictions around them, that’s the question.”

In August, the Biden administration announced an executive order that would restrict U.S. investments into certain China-based companies that were working on key technologies the federal government determined to be at odds with national security. The move mirrored how China regulates foreign investments, which includes a catalog of industries they restrict, prohibit and encourage investments in.

Suddenly the tech industry, which has largely operated freely with little oversight from the federal government, was at center stage. In February, Congress issued a report that accused a handful of venture capital firms of funneling $3 billion into China-based companies that “advance the (Chinese Communist Party’s) military, genocidal, and techno-totalitarian ambitions.”

Of that funding, $1.9 billion went into artificial intelligence technologies that the report said were being used to fuel human rights abuses. The other $1.2 billion went into semiconductors – an industry the Biden administration has been trying to move back to the U.S. with CHIPS and Science Act and more than $50 billion in federal funding into semiconductor chip manufacturing nationally.

Some of those venture firms were required to sever ties with China-based counterparts. One, GGV Capital, was required to separate and rebrand its China and U.S. arms as Granite Asia and Notable Capital, respectively.

“We’re very careful of what we can invest in and where we can take money from. There are a lot of nuances nowadays that weren’t so prevalent,” Hui said. “But we’re really careful of managing both investors and companies we invest into. Now, when we invest in the AI companies from our funds, we make sure that none of them have Chinese and Hong Kong investors.”

The U.S. tightening control on AI technology has a wider effect. HeyGen, a generative AI video platform founded in China, moved to Playa Vista in 2022. The startup was asking its China-based investors to sell shares to U.S.-based investors, according to the Financial Times. The company announced a $60 million raise in June.

“The U.S. has regulations on certain companies with critical technology where if they have foreign investors, not necessarily just Chinese investors, then there has to be an investigation process as to whether the investment needs to obtain CFIUS’s approval,” Chen said.

The future of Soul Ventures

Nevertheless, Soul Venture’s premise of bridging startups and funding between U.S. and China marches on. The company’s presence in Asia allowed it to open up another office in Japan in June. The country is known for its strong chip manufacturing resources. Soul Ventures manages around $300 million in funds.

One of Soul Ventures’ portfolio companies, GMI Cloud, sought out the venture capital firm to expand across Asia and navigate cloud server placement outside of the U.S.

“A lot of them have a lot of interest (in expanding abroad), but a lot of the time they’re not sure of the cultural differences or the nuances of how people use technology,” Hui said. “Even U.S. global apps like WhatsApp or Instagram, they’re kind of different from region to region (regarding) how the app looks and how it functions and what type of features users like to spend time with.”

Soul Ventures is also talking to some AI companies about expanding into parts of Southeast Asia and beyond, and how to navigate the increasingly complex regulations surrounding technology.

“We think the reason there’s geopolitical tension in certain tech industries is because every other country sees that the potential is so huge (and) they want to protect their interests,” Hui said.