In the past few months, the Chinese authorities have unleashed a massive crackdown on their startups, notably tech giants such as Alibaba, Tencent, Pinduoduo, JD, etc. The first major flare-up was when the #37 billion Ant Group IPO was cancelled at the last moment in November 2020 after Jack Ma badmouthed Chinese regulators. Alibaba was fined a record $2.8 Billion, was forced to restructure, and Jack Ma was sidelined from the management.
And then, in August, the Chinese competition unleashed a massive crackdown right after Didi, the Chinese Uber listed in the US. Didi was ordered to stop new signups and was subject to a cybersecurity investigation. Immediately after, the regulators unveiled new regulations requiring companies seeking to list overseas to seek prior approval.
Food delivery giant Meituan was hit with a $500 million fine for anti-competitive practices. Ed-tech was next. Private school tutoring companies were forced to become not for profit entities and were barred from raising overseas capital. Chinese ed-tech was a hot sector, and the likes of Tiger, Softbank, Techcent were big investors. It looks like those investments have to be written off.
Alibaba and Tencent were also forced to open up their platform. Both these platforms were mostly walled gardens, so much so that links from rival platforms weren’t allowed. The crackdown extended to online gaming next, with kids under 18 restricted to 3 hours of gaming per week. Apart from the headline-grabbing fines and investigations, there was a sweeping crackdown across media, celebrities, e-commerce, among other sectors.
Astute China watchers attribute the crackdown to the following reasons:
- This was the Chinese govt reasserting its control
- These crackdowns were a pre-emptive move to reduce inequality and hence social unrest. Because rising inequality means unhappy people, and that’s not acceptable in a communist country like China. This is short term pain for long term pleasure. Hence the “common prosperity” slogan.
- Growing corporate power and concentration is a threat to the political powers that be.
But in any case, it looks like this might be spooking venture capitalists. And China’s loss is India’s gain. According to data cited in this FT article:
For every dollar invested in Chinese tech in the quarter that ended September, $1.50 went into India, according to the Asian Venture Capital Journal. India’s benchmark Sensex equity index is up 25 per cent this year, the best performer among Asia’s large economies, while China’s Shanghai SE Composite index is flat over the same period.
Here’s how the VC funding trends stack up across India and China:
India
China
There are measurement issues with VC data, so here’s data from CB Insights:
There are still very early trends. Given how big a market China is, it’s unlikely that the VCs will stay away from it in a big way. Having said that, VCs who fo get spooked by the regulatory uncertainty in China will inevitably have to come to India. It looks like good times ahead for the Indian startup ecosystem.