Westlake is not alone. The Information has learned that the governments of Beijing, Shanghai and Shenzhen have each approved funds targeting Silicon Valley investments, according to the people who run them. The government of Hangzhou has backed two. Together the funds, which are typically raised in U.S. dollars, total hundreds of millions in potential investment into startups. You can read more details about each in the chart below.

“There will be more and more Chinese local governments’ money heading into Silicon Valley,” said Wei Luo, the chief operating officer for Beijing’s ZGC Capital Corp. ZGC is part of Zhongguancun Development Group, a state-owned industrial developer behind the area where major tech companies like Lenovo and Microsoft have Beijing offices. He said the firm wants to raise $500 million in next five years to invest both in funds and early and growth-stage companies in the U.S.

The funds typically don’t advertise their links to Chinese government agencies. Complicating the picture, they have a bewildering array of corporate structures connecting them to the government. What’s clear is that their limited partners are all either state-owned enterprises or government entities, whose funding is dependent on following Chinese government policy.

That funding is generally through so-called government guidance funds. Central and local Chinese governments have been aiming to raise 3 trillion yuan, or $4.4 billion, for these funds to promote innovation and pursue a range of priorities the government deems important, from new energy and biopharma to “advanced information technology.” Fund managers are also seeking companies willing to open offices in their hometowns or whose technology they can learn about to bring back home.

While most government guidance funds have sprouted up in the past two years, some funds have been around for a decade. With so much money raised so quickly, funds are finding it challenging to find enough good investments in China; hence some of the money is coming to the U.S.

Today, the funds targeting U.S. investments are just a drop in the bucket of the billions flowing into U.S. startups. But if the Chinese funds continue to allocate more money to the U.S., they could fuel an asset bubble the way Chinese investment has in other sectors like real estate.

And the funds raise other issues. For one, the source of the money is rarely easy to identify, which makes it difficult for startups to determine a fund’s particular priorities.

Lu Zhang, managing partner at NewGen Capital, an early stage VC based in Palo Alto, said there are additional risks. The Chinese government could further limit the amount of money that can leave China or change its policies and priorities over time. “Understanding the culture differences and the potential risk level of working with different types of government-backed funds is critical,” she said.

Different Agendas

Westlake is among the easiest fund to understand. It’s part of the Hangzhou High-tech Investment Co. Ltd, a company that manages 2.5 billion yuan, about $370 million, from the Hangzhou government and other state-owned enterprises. The funds are earmarked for innovation in areas like artificial intelligence and digital health.

One of the firm’s investments, a company called ScaleFlux, has already registered a company back in Hangzhou, said Hao Zhong, the chief executive officer of the cloud software and infrastructure startup, and is considering opening operations there.

Westlake has also invested $6 million in more than 10 venture firms that focus on U.S.-China cross-border investments, mostly in Silicon Valley. They include WI Harper Group, SVC Angel Fund, Amino Capital and FreeS Fund.

Mr. Zhao, the CEO of Westlake Ventures, said the firm wants to keep branching out.

“We will invest more in 2017—not only in funds with Chinese backgrounds or Chinese founders but also more local funds.”

Some funds say they are after more than scouting talent to bring to China. “We run the fund just like any other market-oriented venture capitalist,” said Hongbin Zheng, the head of HEDA Investment and a firm back in China called Hegang Venture Capital. “Attracting U.S. startups to China is not our top priority.” Instead, he said, the goal is to make a lot of money and to invest in companies that would have a huge market in China.

Even an affiliate of China’s top science school, Tsinghua University, which is a state institution, opened two venture capital funds to invest directly in the U.S. in 2015. It has two people scouting biotech, energy and health care investments in the Bay Area and one in Boston. The fund is part of the university’s joint venture with the municipal government of Shenzhen, the export manufacturing hub in Southern China.

Playing by the Rules

These new funds face plenty of obstacles, including attracting top entrepreneurs and well-entrenched competition in the Valley. Some Chinese investors have also gained a reputation for backing out of term sheets, which is more common in China than the U.S.

“Some Chinese investors come to the States and do things in a very Chinese way here,” said Chris Evdemon, a partner at Sinovation Ventures, an early stage VC investing in Chinese and U.S. startups. “It’s not the right approach. We all need to play by the rules of the local market and have the patience to plan and execute for the long term, if we want to be competitive and respected in the Valley.”

And even for firms with government ties, getting regulatory approval to get money out of China to invest in the U.S. is also getting more challenging.

Earlier this month, Mr. Luo of ZGC Capital Corp. said tighter capital controls would “increase costs for us to get money out, but it won’t have any significant impact on our investment plan this year.”

Some funds are smoothing out the startup risk but also investing in real estate, long a staple of Chinese investment in the U.S.

ZGC, for instance, spent $24 million with a Hong Kong tycoon on a 70,000-square-foot space in Santa Clara for their Silicon Valley headquarters in 2015. Mr. Luo said that its U.S. investments include Kiloangel, a fund managed by AngelList founder Naval Ravikant.