T HE FIRST “demo day” in Beijing last November of Y Combinator ( YC ) hosted two dozen local startups vying for the attention of high-profile investors. It marked the entrance into China of Silicon Valley’s most famous accelerator, which has helped launch the likes of Airbnb and Dropbox. Then, days later, YC abruptly announced it was pulling out of the country.

In a statement YC said that it was returning, under a new boss, to investing in startups from its Californian base. Its Chinese startups will be nurtured by MiraclePlus, YC China’s new, fully localised incarnation. Yet in the context of a deepening Sino-American rift, the retreat looks ominous. “Under the current global environment, to realise our mission—By China, For China, Of China—we must have the ability to master our own destiny,” wrote MiraclePlus in a social-media post, citing Lu Qi, its boss, whom YC had hired to set up its Chinese arm in 2018. (Mr Lu declined to be interviewed for this article.)

At first glance, YC ’s fate seems at odds with the broader health of foreign venture capital ( VC ) in China, with its red-hot tech industry. The Chinese operations of Sand Hill Road heavyweights such as Lightspeed Venture Partners and Sequoia Capital—whose fifth Chinese growth-stage fund raised $1.8bn, twice as much as its last—are thriving. Chinese founders have coveted attention from foreign funds, seen as the best route to listing on American exchanges and keener than Chinese counterparts to back ideas that take longer to make money. Their dollar-denominated funds have durations of ten years or more, whereas yuan investors usually want a return in five. (Most foreign VC s now also raise yuan funds, which enable exits on mainland stockmarkets and investments in more industries.) Foreigners offer expertise on top of cheques, especially to startups keen to expand overseas.

For venture capitalists, China used to be a breeze, notes one based in Shanghai. “You were dealing with the entrepreneurs directly, not with the state. Partners could parachute in, do some deals and leave.” Zhou Wei, who worked for Kleiner Perkins, says that life was especially rosy in the “copy to China” years after the first firms arrived around 2005. But it remained pretty plush for longer. In 2018 China overtook America as the top country for VC returns (measured by current return on investment), according to eFront, a data firm. That year seven of the world’s ten largest VC deals involved Chinese startups. YC called China “an important missing piece of our puzzle” and dreamed of combining “the best of Silicon Valley and China”.