Shan Xiangshuang said five years ago that his $10bn private equity firm CSC Group was building a “direct train” to Silicon Valley to “accelerate the introduction of foreign high-tech technologies” into China.

The billionaire investor, Chinese Communist party member and former civil servant went on to develop US business interests through Hone Capital, CSC’s California-based investment vehicle. Hone built stakes in almost 400 US tech start-ups developing critical technologies from artificial intelligence to cyber security and supersonic jets.

That splurge has caught the attention of US authorities. The Financial Times on Wednesday revealed the FBI is investigating Hone over whether intellectual property may have been transferred back to Chinese companies or authorities raising potential national security concerns.

Court documents, internal fund presentations and several people close to the matter reveal how Hone — a little-known fund ultimately controlled by Shan — targeted the US tech industry and became one of Silicon Valley’s most prolific early investors. That rise has led to official concern at a time of rising trade tensions between Washington and Beijing.

FBI interviews have focused on Hone’s portfolio companies that have federal government contracts, particularly in the pharmaceutical and biotechnology sectors, said people close to the matter.

The FBI declined to comment.

An executive at a start-up that received early backing from Hone and who had been interviewed by the FBI, said: “They got their tentacles into a lot of businesses.” This person added that, in hindsight, accepting investment from Chinese funds was “not worth the headache” because of the attention attracted from US authorities.

The AngelList deal

Hone Capital launched in 2015 as flows of Chinese money into the US tech sector hit a peak. Battling a stock market crash at home, Chinese investors piled $4bn into fast-growing American start-ups that year, representing 13 per cent of all foreign capital for US venture-backed companies between 2015 and 2017, according to data from the US Department of Defense.

Chinese investors often gave their US funds western-sounding names, but behind the scenes had often pooled money from sovereign, provincial and local governments as well as state-owned enterprises, firms and individuals.

To plant his own flag, Shan recruited Veronica Wu, who had previously worked in China at Tesla, McKinsey and Apple. Born in Beijing but educated in the US, Wu was hired to lead CSC’s new Silicon Valley business. She relocated to California’s Bay Area and was told to quickly “get going”, according to a court filing by Hone against its former US head. Around the same time, CSC hired an American start-up entrepreneur, Tom Cole, then chief executive of online wedding retailer Beau-coup, to co-lead Hone’s business.

While many Chinese investors in Silicon Valley had earned a reputation as “dumb money” — outsiders willing to spend over the odds to get access to deals — Hone had an ambitious plan to gain instant credibility. In 2016, it engineered a partnership with AngelList, then the biggest portal for matching US start-ups with seed capital.

CSC committed $400mn to establish a fund, at the time, the largest devoted to early-stage start-ups, as well as the largest single investment by a Chinese private equity firm in a US fund.

The deal gave Hone Capital the right of first refusal on thousands of deals on the AngelList platform and allowed it to make more investments between 2015 and 2017 than most venture capitalists do in their lifetimes.

Hone backed 74 companies in 2015, more than any other seed investor that year, according to Crunchbase. By 2017, it had invested $215mn in about 360 start-ups. “Very quietly, we’ve become the most active investor in the Valley,” Wu said in an interview with Quartz in 2016.

One start-up founder who had discussions with Hone about investment opportunities described the fund’s strategy as “spray and pray”. Wu took over a lead investment role at Hone in 2018 when Cole left for unknown reasons.

“The AngelList partnership gave them more than deal flow — it provided instant credibility and elevated them,” the person added. “It was a very strategic move.”

Hone joined syndicate deals on the AngelList platform — in which investors combine their resources towards a single investment — to buy into companies such as payments group Stripe and supply chain logistics company Flexport. It also invested in self-driving carmaker Cruise and AI platform DataRobot, according to Hone pitch documents from the time.

Hone did not have access to sensitive information from many of the start-ups it invested in, said people familiar with its dealings.

Hone often co-invested alongside major Silicon Valley funds such as Y Combinator, Peter Thiel’s Founders Fund and Andreessen Horowitz, pitch documents claimed. Unusually for a venture fund, it also embarked on a real estate strategy, spending about $140mn on 743 single family homes across the US.

The jewel of Hone’s early investments was Boom, a Colorado-based start-up developing supersonic passenger airliners. Hone lauded the start-up’s strong momentum in a pitch deck from 2017 seen by the FT. The venture firm’s presentation suggested it had developed a relationship with the company’s chief executive, Blake Scholl, by helping him build relationships in China. Through a convertible note, Hone invested about $10mn in Boom, which on a converted basis represented less than 1 per cent of the start-up’s overall capital.

Boom has since grown into a multibillion-dollar company with a slew of government contracts, including a partnership with the US Air Force and a research project with Nasa.

The FBI interviewed Boom executives last year about whether there was a risk that information had flowed to China, said people close to the matter.

A person close to Boom said they were “comfortable that absolutely no technical or financial information from Boom has been transmitted”.

Hone divested from Boom in 2019, although a small number of its shares were transferred to another CSC Group fund in Silicon Valley, CSC Upshot Ventures, which remains an investor. The person said Boom had scrubbed its capital table of all Chinese money in recent years, excluding the small CSC stake.

Boom, AngelList, Stripe and Flexport declined to comment. Cruise said Hone was not an investor and it had no record of outreach from US authorities. DataRobot did not respond to requests for comment.

Legal representatives for CSC and Shan said: “Allegations that CSC Group, its chair, or any of its affiliates, including Hone Capital, have misappropriated trade secrets are completely baseless and grounded in nothing but insinuation and speculation fuelled by anti-Chinese sentiment and self-serving allegations from former executives who are actively in litigation with CSC Group over, among other things, their own self-dealing.”

“To be clear, CSC Group firmly believes that all of its US investments were conducted in full compliance with applicable laws.”

A legal battle ensues

By 2018, Silicon Valley was more wary of China.

At the time, Donald Trump had made Chinese pursuit of US intellectual property a theme of his presidency, signing the Foreign Investment Risk Review Modernization Act (Firrma), which forced more vigilant reviews of foreign investments into US companies on national security grounds. Defence experts feared Chinese investors were more interested in start-ups’ plans and technologies than the potential financial returns.

Around the same time, CSC ran into financial difficulties, according to court filings.

Chinese securities regulators had sanctioned Shan and CSC, and its public subsidiary had been delisted from the Chinese NEEQ stock exchange because of securities law violations.

Over three days of meetings in Palo Alto in 2019, finance executives from CSC Group directed Wu to sell most of Hone’s assets in order to generate the capital necessary to meet its financial obligations. They even failed to meet a capital call from AngelList, ultimately providing just 20 per cent of the $400mn commitment.

These moves sparked legal battles that have brought allegations about the business practices of CSC and Hone and its executives’ conduct.

Hone has sued Wu and its former chief financial officer, Purvi Gandhi, claiming they conspired to defraud the fund for their personal gain and mismanaged its capital.

In turn, Wu and Gandhi have denied the claims and sued Hone and CSC, alleging they made misrepresentations and false promises in relation to performance incentives, claiming the group intentionally failed to pay millions of dollars of carried interest owed to them. Hone and CSC have denied they owe any funds.

Both women left Hone in 2020. Wu’s legal team have attempted to depose Shan since 2022, who has claimed he is under restrictions in China that prevent him from travelling.

Wu has accused CSC in court filings of attempting to circumvent US and Chinese laws, including Chinese rules on currency controls and misrepresenting that a top Chinese executive resided in California. She claimed the buyout firm’s executives including Shan gave her a “quota” based on how many companies “with critical intellectual property” she could introduce to the Chinese market.

Wu said this was “an impossible task given concerns about intellectual property protection in China and legal issues regarding sharing sensitive technology with China”. She has also sued 20 individuals linked to CSC who she believed used fictitious aliases in their dealings with Hone.

Even while working at Hone, Wu had offered a public warning. “Founders should be careful not to accept Chinese money before they understand the trade-offs,” she said during an interview with her former employers at McKinsey in 2017.

“Chinese investors tend to want to own a big part of the company, to be on the board, and to have a say in the company,” she said in the interview. “And it might not be good for a company to give up that kind of power, because it could dramatically affect the direction of the company, for good or bad. It’s smart to insist on keeping your freedom.”