Startups in the field of life sciences, like medtech and biotech, rely on significant investment capital to bring groundbreaking ideas to life. But the source of that funding—especially when it comes from foreign entities like China—can be just as consequential as the innovation itself, creating a liability that startups can no longer afford to ignore.

As U.S. lawmakers tighten the reins on Chinese investment in sensitive sectors, medtech and biotech businesses must take a closer look at their cap tables. Heightened scrutiny from the Committee on Foreign Investment in the United States (CFIUS), the Food and Drug Administration (FDA), and new legislation like the BIOSECURE Act have transformed foreign ownership from a mere footnote in investor decks into a potential regulatory obstacle that can significantly impede growth.

This piece examines why foreign investment is becoming increasingly risky for U.S. life sciences startups, highlighting recent cases to underscore the importance of strategic cap table management and proactive compliance.

CFIUS is a federal body tasked with reviewing certain foreign investments and transactions involving U.S. businesses to assess potential risks to national security. That covers deals in a variety of sectors, including biotech and medtech, where access to sensitive data, proprietary technologies, or emerging AI tools could pose strategic vulnerabilities to U.S. national security, economic competitiveness, or public health infrastructure.

Investments from Chinese firms into the life sciences industry are reported to trigger more intensive investigations. For U.S. medtech and biotech CEOs, this means foreign capital must be evaluated not just for strategic value, but for potential regulatory risk that could delay innovation or hinder growth.

Foreign investors, particularly those from countries deemed national security threats, can also complicate regulatory approvals beyond CFIUS concerns. The FDA evaluates not only a product’s efficacy and safety but also its manufacturing, supply chain, and data security protocols. When foreign ownership is in play, that evaluation may get more intense.

In recent years, the FDA has faced mounting criticism over its oversight of drugs and devices from China and India. That same scrutiny may shift toward U.S. medtech and biotech firms with overseas backers. Concerns include the reliability of testing data, adherence to ethical standards, and risks tied to sensitive health information and intellectual property, especially when investors may have links to foreign governments of concern.

Adding to these regulatory challenges, the BIOSECURE Act, introduced in 2023 with bipartisan backing, has passed the House of Representatives and is now under consideration in the Senate. If enacted, it would bar U.S. government agencies from contracting with biotech companies that have ties to “foreign adversaries,” including China. While, it effectively draws a line. For businesses that hope to work with the federal government or receive federal funding, ties with certain investors would have to be severed.

For medtech and biotech startups eyeing government contracts, NIH grants, or Department of Defense pilots, the implications are serious. Even minority stakes from flagged investors, or suppliers linked to China, could disqualify a company from federal opportunities.

Even small stakes can carry outsized risk. Under expanded powers granted by the Foreign Investment Risk Review Modernization Act (FIRRMA), CFIUS can review certain non-controlling foreign investments if they involve U.S. businesses working with critical technologies, infrastructure, or sensitive personal data. For medtech and biotech startups, where sensitive data and emerging technologies are often core to the business, even a minority investment can raise red flags, especially if it comes with board rights, technical access, or strategic input.

Several real-world cases illustrate these concerns:

In 2017, Chinese digital health company iCarbonX acquired a majority stake in U.S.-based health data platform PatientsLikeMe, which raised concerns with CFIUS. By April 2019, CFIUS ordered iCarbonX to divest its stake, citing national security concerns related to the handling of American health data. This case underscores how foreign investments, even in the digital health sector, can be unwound if they pose perceived risks to U.S. data sovereignty.

In October 2022, the U.S. Department of Defense added BGI Genomics Co., Ltd., a subsidiary of China’s BGI Group, to its list of Chinese military companies operating in the United States. This action followed reports that BGI developed a prenatal test in collaboration with the Chinese military, raising concerns over mass DNA collection and potential misuse of genetic data. While BGI denied any wrongdoing, the scrutiny may lead to significant reputational damage.

WuXi AppTec, a major Chinese contract research and manufacturing organization, has faced increasing scrutiny from U.S. lawmakers and security analysts. Concerns center on the company’s access to American genetic data and its role in U.S. pharmaceutical supply chains. The proposed BIOSECURE Act explicitly names WuXi as a potential threat, signaling that even established players could be targeted under evolving legislation.

In 2018, China Grand Pharmaceutical outbid Varian by a surprising 20% to acquire a major stake in Sirtex Medical, an Australia-based company known for radioactive bead therapies used in liver cancer treatment. In 2023, Grand Pharma and a partner firm were fined by Chinese regulators for anti-competitive behavior. Additional reports have raised concerns over asset manipulation through shell companies, pointing to broader issues of transparency and governance. With U.S. regulatory approvals and a strong presence in American healthcare, Sirtex may now face added scrutiny due to its ownership ties to China Grand Pharmaceutical.

Given these growing risks, medtech and biotech startups must take proactive steps to navigate this complex regulatory environment. Working with legal advisors who specialize in CFIUS, FDA policy, and federal procurement is essential.

These experts should be involved from the first term sheet to help assess risks and flag potential deal-breakers.

Companies should also conduct thorough audits of their cap tables to identify foreign entities, map their influence, and evaluate potential disclosure or divestment risks under U.S. regulations.

For companies aiming to win federal contracts or accelerate FDA approvals,  preemptive steps like dilution, restructuring, or strategic buyouts to reduce exposure to problematic foreign investors may be necessary.

Building for U.S. compliance from the start by choosing U.S.-based partners, cloud providers, and manufacturers that align with federal security and data handling standards is equally important. This isn’t just about optics, it’s about protecting access to critical technology and sensitive data.

For medtech and biotech startups, where the money comes from matters just as much as what it funds. One red flag, whether on the cap table, in the supply chain, or in a partnership, can delay approvals, derail deals, or shut the door to government opportunities.

In an age of rising protectionism and data scrutiny, due diligence isn’t optional — it’s essential to choose capital as carefully as a co-founder.