On March 20, 2020, Hanson Hu frantically packed his essential belongings into a suitcase and rushed from his one-bedroom apartment in Koramangala, in Bengaluru, to the airport. The previous evening, Indian prime minister Narendra Modi had announced a one-day stay-at-home curfew to cut off the spread of Covid-19. It was a primer to the longer nationwide lockdown that would follow four days later. Hu wanted to stay in the country rather than head home to China, but a friend talked him out of it. So, with the window closing for foreign nationals to leave India, he booked a one-way ticket to Shanghai.

“I still have my luggage stored in my friend’s place,” Hu told Rest of World over Zoom from China. “I didn’t expect it to be like this. I felt like two months, three months [and I would be back]. So I didn’t pack too much. Clearly that’s not a smart choice.”

Hu wasn’t a tourist in India. After five years spent working at Chinese technology firms, including the search giant Baidu, in 2019, he’d uprooted his life and moved to Bengaluru to lead Indian investments for a venture capital firm, a heavyweight backer of China’s tech sector with $5 billion in assets under management. Hu spoke to Rest of World on the basis that we wouldn’t name the firm he works for, which is prominently displayed on his Twitter page and LinkedIn profile.

By the time Hu arrived in Bengaluru, Chinese money was already flooding into India’s startup ecosystem, lured by the country’s half a billion internet users. In 2018, Chinese VCs invested $5.9 billion into India. E-commerce giant Alibaba was an early investor in Paytm, Zomato, Bigbasket, and Snapdeal, while its rival, Tencent, backed Flipkart, Byju’s, Ola, and Swiggy.

But the euphoria hadn’t been enough to warrant an on-the-ground deal scout, and most investors flew in, did their deals, and flew out. Hu was a pioneer. His Twitter caption read: “The Chinese VC guy based in Bangalore,” a descriptor that reflected the oddity of his presence. Just by being on the ground, Hu hoped to build trust and show that the links between the Chinese and Indian tech sectors were deepening. He led investments into three Indian startups, two of which became unicorns, private companies valued at over $1 billion.

In 2020, the environment got a whole lot more challenging. First, the coronavirus hit India in January, and then in June, while Hu was back in Beijing, a deadly border clash in the Himalayas worsened an already tense relationship between China and India. The Indian government blocked more than 100 Chinese apps, including TikTok and WeChat, and restricted all forms of investment from China. A deep well of risk capital that had been crucial for the early growth of India’s startups vanished, and Chinese investors like Hu were suddenly out in the cold, unsure if they would even be able to get their money out. “We had planned to do many more deals in 2020,” Hu said. “We actually did a deal, but because of foreign direct investment [restrictions] it didn’t get done.”

The sudden nationalist turn means that some of the most significant players in the creation of India’s tech sector have been unable to participate in a new funding boom — $7.2 billion was raised in the quarter ended June 2021 alone. Instead, as several Indian tech giants go public, their Chinese backers are cashing out. 

Rest of World

Through the early 2000s, most Chinese technology companies had focused almost exclusively on their 1.3 billion-strong domestic user market. Companies like Alibaba, Tencent, Baidu, and Xiaomi emerged to address China’s domestic challenges of bringing at-scale internet access and financial inclusion, creating vast companies offering digital payments, messaging, e-commerce, and affordable hardware. When, in 2014, Alibaba listed in the U.S., its $231 billion valuation made it the largest IPO in history.

Flush with cash, Chinese corporations started to look overseas for strategic investments. India’s huge and growing consumer internet market seemed a natural fit. In 2015, Alibaba paid $680 million for a 40% stake in the digital wallet company Paytm. Later that year, they were part of a $500 million investment round in the e-commerce startup Snapdeal. Tencent joined the party in 2016, leading a $175 million round in Hike, a messaging service. 

The investments came at the right moment. Indian conglomerates like Reliance, Tata, and Infosys were risk-averse and unwilling to back loss-making internet companies. Chinese investors provided the patient capital needed to support Indian startups and helped to shape them in their own image. “There is a change of guard at the investment front,” declared the front page of India’s biggest financial daily, The Economic Times, in 2016.

In 2017, in a much-memorialized moment in Indian startup history, Paytm founder Vijay Shekhar Sharma was asked how he’d meet his future capital needs. He replied, “Mere paas Ma hain, Jack Ma” (I have Ma, Jack Ma), a reference to a famous line from the Bollywood film Deewar, in which the character says a person with a mother — Ma — has all the riches one needs in life.

Fueled by Ma’s money, Paytm’s valuation almost tripled to $8.3 billion in two years. The success attracted smaller players and venture capitalists, like Morningside and Shunwei Capital, to come in search of deals. 

While working at a private equity firm, Arpit Beri first heard about Shunwei Capital sometime in 2017, when the Chinese fund invested in a regional social network app, ShareChat. He noticed a sudden rush of investment coming from Shunwei Capital. “[They] would have done about 15 investments in that twelve-month horizon,” Beri recalls.

“When you go to China, the realization of the scale difference hits you really hard. That is where my thought process completely changed.”

While working on his master’s degree at INSEAD, Beri joined Shunwei as an intern, going on to lead India investment  — becoming one of the first Indians to be posted as an in-country representative of a Chinese venture capital firm. 

Shunwei’s hot streak in India was partly driven by the success of the smartphone maker Xiaomi, which, by 2017, had become the top smartphone seller in India. Xiaomi’s founder, Lei Jun, is also Shunwei’s founding partner and chairman. In 2018, Shunwei Capital led a $50 million investment in social commerce firm Meesho. The next year, Facebook followed up to lead a $25 million round. Shunwei Capital has since invested over $100 million in Indian startups, including in podcasting company KuKu FM and Twitter clone Koo

Shunwei was joined in the Indian market by CDH Investments, Qiming Ventures, Orchid Asia Group, and Morningside, which were mostly looking to back proven business models, ones they understood from their experiences in the domestic market. One such target was Cashify, which resembled AiHuiShou, a Chinese platform on which users bid for secondhand electronics. Three Chinese funds — CDH Investments, Morningside, and Shunwei Capital — invested in Cashify in 2018. “When the Chinese investors came to India, it’s like when Columbus reached America — we were the first guys who they tapped into,” Mandeep Manocha, cofounder of Cashify, told Rest of World.

One study conducted by Mumbai-based think tank Gateway House estimates that Chinese tech investors have pumped an estimated $4 billion into Indian startups. Their success is such that in the five years to March 2020, 18 of India’s 30 unicorns had Chinese funding. 

Manocha visited AiHuiShou in 2018. “They were 30 times our size,” he said. “When you go to China, the realization of the scale difference hits you really hard. That is where my thought process completely changed.” Manocha replicated AiHuiShou’s offline strategy by opening physical stores and kiosks for people to walk in and sell their phones or buy refurbished phones. “It was very counterintuitive,” he said, but within three months of their opening, all 60 of his stores were profitable. AiHuiShou invested in Cashify the same year.

Feiyun Zhao

But entrepreneurs like Manocha were fascinated by the scale and innovation in Chinese e-commerce and wanted more than just money from China. To take advantage of the growing interest, Entrackr, an Indian media startup formed in 2017, began organizing “guided knowledge exchange” tours to China for entrepreneurs, venture capitalists, and other C-suite businesspeople curious to learn about Chinese business models. (More determined executives, like Manocha, learned Chinese.) 

About 35 Indians participated in Entrackr’s first trip to China in 2017. Participants spent a week traveling across Beijing, Shanghai, and Hangzhou, meeting with executives from Tencent, Alibaba, ByteDance, and others. “At ByteDance, we spent around three and a half hours,” said Jai Vardhan, founder and chief executive of Entrackr. “They presented on what kind of technology they’re using, how to manage data, how to manage security at that scale. They used to present for two hours, and then there [were] two hours for audience questioning.” 

Between 2017 and 2019, Entrackr did a total of five trips, taking over 200 people from India to China. They’ve also acted as liaison partners for Chinese delegations visiting India, organizing meetings, including between the cofounder of Chinese shopping platform Meituan and Indian tech companies. 

“Indian companies would tend to agree [for the meeting], because, at that time, Chinese investors were ruling the roost here,” recalled Vardhan. “The narrative was that India would pan out more like China, not like the U.S.”

Entrackr’s ability to get access into the Chinese tech world was partly down to the influence of one of its main investors, Li Jian, widely considered a power broker in the Indo-Chinese tech relationship. Based out of Gurugram, near the capital city of Delhi, for over a decade, Li has run an investment consulting service called Draphant — a portmanteau of dragon and elephant, symbols of China and India — since 2013. In 2007, after graduating from Peking University majoring in Indian Languages and Culture, Li moved to India, where he spent five years as head of public affairs at Huawei’s local headquarters, where he was introduced to the many regulatory issues foreign companies faced in the country.

“That journey helped me understand more about the business structure, the advocacy system, media, public relations, etc. [in India],” Li told Rest of World

As Chinese interest in India swelled, Li identified an opportunity to use his local know-how and networks to build a business that would provide hand-holding to Chinese companies wanting to set up shop locally. 

There were many. Between just 2018 and 2020, bike-sharing startup Ofo, news and video aggregation app NewsDog, and Chinese e-commerce startups such as Shein and Club Factory recruited operation teams in and around Delhi, many coming on the back of the success of TikTok, which amassed around 200 million users in India before it was summarily banned in 2020. Indian financial newspaper Mint estimated, in April 2019, that around 50 Chinese entrepreneurs launched internet companies, intending to ride the Indian consumer internet wave, and Gurugram began developing a Chinese startup subculture within the larger Indian tech startup ecosystem.   

Li said Draphant has helped hundreds of Chinese entrepreneurs — from tech to construction — incorporate companies in India and deal with the often byzantine legal and administrative barriers. Li Jian. Today, Vivo is the third biggest seller of smartphones in India, behind Xiaomi and Samsung. 

Li was also one of the first Chinese angel investors to become personally active in Indian investing circles. He speaks fluent Hindi (much to the surprise of locals) and has adopted an Indian name — Amit, after the Bollywood superstar Amitabh Bachchan. 

Cashify’s Manocha remembers Li hosting, every two or three months, 20-strong delegations of Chinese visitors , who would come to learn about Cashify’s business. Manocha even attended Jian’s Indian-style wedding in Delhi, where he was pleasantly surprised to see a sea of Chinese people dancing to Bollywood songs. “I was like, ‘What’s happening, man?’” he recalled.

Li returned to China in January 2020 to celebrate Chinese New Year with his family in Guli, China. Even then he was sure that India was about to follow China’s track toward prosperity and that Draphant was poised to capitalize on it. What happened next came as a complete surprise.

Kisha Ravi for Rest of World

In April 2020, #BanChineseGoods began trending on Twitter in India. The movement was led by the right-wing nationalist group Swadeshi Jagran Manch, which wanted “revenge” against China for, it said, failing to warn the world about the coronavirus in time to prevent it from spreading. They shared xenophobic tweets, lit lamps, and vowed to boycott all Chinese goods. 

Tensions had been running high well before the deadly border clashes in June, but news of the death of 20 Indian soldiers caused a complete meltdown in relations. Nationalists started smashing Chinese-made televisions; one minister called for shutting down Chinese restaurants. To salvage the situation, smartphone maker Xiaomi rebranded itself as a local manufacturer, co-opting the “Make in India” slogan in its social messaging. 

Import of Chinese mobiles were delayed at seaports. The Modi government, itself dominated by Hindu nationalists, restricted all foreign direct investment (FDI) from China, to prevent “opportunistic takeovers/acquisitions of Indian companies due to the Covid-19 pandemic.” A government notice declared that all Chinese investments in Indian companies would have to be reviewed by the state before they could proceed. It was followed by a three-phase ban of over 250 Chinese-owned apps, including popular ones like TikTok and WeChat, wiping out most of the Chinese internet market that had mushroomed over the years. 

Historically, border skirmishes have always drawn stray protests and online boycotts of Chinese goods — like during a 2017 conflict over unpaved roads along the disputed border — but they have typically faded away; 2020 was different.  

At Shunwei Capital, Beri held on for six months. “We thought it would clear up, but it hasn’t so far,” he said. “We were going to fund about [$25 million] across two companies, and that fell into distress.” Shunwei Capital dropped its plans to expand, then shut down its India outpost. Beri left to join an Indian VC firm, Jungle Ventures. “India’s digital strike, [the media called it]. What the hell is a digital strike? Thousands of people working at TikTok got jobless. What happened to them?” he said. “Whatever was happening on the border started to punish our own startups.”

In January 2020, Indian food-delivery startup Zomato raised $150 million from Ant Financial, but, according to the Financial Times, was then unable to access $100 million of the funds. Koo, the regional language social media company, which has positioned itself as a nationalistic alternative to Twitter, divested the 9% stake that Chinese Shunwei Capital held in the firm. Manocha of Cashify raised a $15 million round in March but without the participation of its existing Chinese investors. Entrackr’s cross-border ferrying business came to a grinding halt. With its business model eroded, Entrackr was compelled to turn to external funding sources, raising $500,000 in February 2021 to keep them afloat. More than $2 billion worth of investment proposals from China are currently held up in India’s slow approval process. In August, after a year-long wait, Chinese car manufacturer Great Wall Motor decided to relocate a portion of its $1 billion investment in India to Brazil.

Some more-determined investors have circumvented the FDI restrictions using debt instruments. Tencent invested $40 million in music streaming platform Gaana and another $224 million in regional social media ShareChat. The Gaana investment came via Tencent’s European entity, using convertible debentures. DraPhant’s Li has helped companies find financial instruments, like external commercial borrowings that let Chinese investors move money into China. But, for the most part, the void in capital in Indian startups has now been filled by U.S. firms, particularly Tiger Global, which cut checks worth $1.74 billion, in 15 deals in the first half of 2021.  

“Whatever was happening on the border started to punish our own startups.”

Those who rode the wave of Chinese investment are now convinced that it’s over. “[India] is a socialist country, which tries to act like [it’s] capitalist,” Beri said.

Even if the Indian government suddenly relaxed its restrictions, “No good entrepreneur will consider Shunwei over a Sequoia, for example,” Beri added. “It wasn’t the case earlier because they were very excited to bring on board Chinese — they brought in wealth and also Chinese expertise. People valued that.”

For Chinese venture capitalist Hanson Hu, India is now in the periphery. “We’ll see what happens because under this situation, even if we want to do [investments], we cannot,” Hu said.

He now spends most of his workday scouting for deals in Southeast Asia and researching cross-border e-commerce. With WeChat banned, Hu uses WhatsApp to stay connected with his friends and portfolio companies in India. Since he vacated his Bengaluru home, Hu has been trying to contact his landlord to get his deposit back.