Growing Up in a Trade War: China Is Off Limits for This Startup

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(Bloomberg) — The China-U.S. trade war threatens to upend the supply chains of multinational technology companies. But smaller businesses are also getting caught up in the dispute.

U.S. startups seeking funding must now consider relations between Beijing and Washington. According to one, that means turning away from Chinese investors and overseas cash in general in favor of raising money in the U.S. It could also accelerate the need to go public, according to Ripcord Inc. founder Alex Fielding.

“Would I say that there was any risk from any investment that we took from a Chinese fund? No. I think they’re all great investors. It’s good money from good people and banks that are well known. This isn’t terrorist money,” he said. “Is there risk to Ripcord as a company for taking it? There is now.”

Ripcord, which uses robots and artificial intelligence to scan and classify paper documents, previously got financing from sources including the venture capital arms of Chinese search leader Baidu Inc. and Beijing-based conglomerate Legend Holdings Corp. Now Fielding is looking for new investment to help the Hayward, California-based startup expand overseas. The trade war stands in his way.

Instead of expanding to China and raising more money there, Ripcord’s first international move is to enter Japan via a new branch in Tokyo that will work with a large bank. And Fielding is eyeing cash from U.S. strategic investors with the ability to commit more in further rounds as needed. That should give Ripcord more time to grow before turning to public markets, he said.

Decisions like this are part of the reason Chinese investment in U.S. startups is falling. There have been 25 rounds with at least one China-based investor so far in the third quarter, down from a peak of 67 in the second quarter of 2018, according to market tracker Preqin.

Ripcord, whose clients include Coca-Cola Co., has carved out a niche by digitizing information on paper so it can be loaded into corporate data bases. Its 30,000-square-foot-factory space in the San Francisco Bay area houses giant machines that the startup builds itself. Ripcord has the equipment made domestically by U.S. companies. That’s more expensive than outsourcing to Asia, but more prudent in this new environment, he said.

The problem with a greater association with China is that the U.S. administration could decide to classify a Ripcord investor or partner as a security risk, which could be fatal for the startup, according to Fielding.

“There’s a lot of companies that are probably in that boat, weighing: Do we take a local investment that’ll cost us more than a foreign investment when there’s risk that comes with that?” he said. “It was never a part of the narrative, and now it is.”

For Ripcord, Fielding believes the extra maneuvering will be worth it because he sees such a big opportunity. About 49 trillion sheets of paper are printed annually. Ripcord has scanned hundreds of millions of sheets this year and will pass 1 billion sheets next year.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Alistair Barr, Mark Milian

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