The Jaws of Chinese startups and investors

For years, entrepreneurs and investors have talked big about “building for Bharat,” but it was the Chinese firms that had led the way in creating products for the Indian masses. From 2016, the availability of fast, cheap internet connections together with the proliferation of low-cost smartphones (most of them Chinese) brought hundreds of millions of Indians in semi-urban and rural areas online.

Dozens of Chinese firms, which had seen a similar internet boom in their country, rapidly launched internet browsers, video apps, messaging services and other products specifically designed for this audience. By mid-2017, apps like Bigo Live, UC Browser, SHAREit and UC News had already become hugely popular among Indians in smaller cities and towns.

Looking at the success of the Chinese firms, investors started hunting for local startups in social networking, video and news content with a focus on vernacular language offerings. For a short period, companies like ShareChat, Clip and Dailyhunt became investor darlings.

However, the expansion of TikTok with its endless stream of addictive entertainment in 2018 nearly destroyed content startups. In 2018, ByteDance also launched Helo to crush ShareChat, from which Helo was copied, and outspent its stunned rival many times over to attract users. As a result, ShareChat’s growth slowed, Clip was forced to sell itself for a pittance and investors deserted content startups.

After establishing a large user base, ByteDance began to sell ads on TikTok and Helo in 2019. TikTok was expected to become the fastest-growing digital ads platform this year and emerge as a serious rival to Facebook and YouTube, an achievement that no company has achieved in nearly a decade.

Alongside this, Chinese investment in India’s startup ecosystem were also reported to have risen to $3.9 billion in 2019, up from around $2 billion in the previous year. A majority of India’s most valued internet companies — Flipkart, Paytm, Ola, Byju’s, Zomato, Bigbasket, Dream11 — count either Alibaba Group or Tencent, two major Chinese internet conglomerates, as shareholders.

Over the last few years, Chinese capital has come to replace American funds. In fact 18 of 23 Indian unicorn (startups with over $1 Billion value) have Chinese investors

How the ban imposed acts as a saviour-

The government’s move was cheered by local entrepreneurs and venture capitalists who expect startups in social networking, media and other spaces to benefit from the forced withdrawal of TikTok, Helo, SHAREit, NewsDog and others. Indian startups have faced existential threats mostly from American and Chinese companies that use their technology prowess and limitless capital to overpower local rivals. If the ban on Chinese companies stays, it’ll provide respite to local startups by permanently removing one set of competitors whom they believe was engaged in the unfair practice of “capital dumping.”

The ban has put the brakes on this transformation of India’s social networking and online advertising spaces. One big beneficiary so far has been ShareChat. Its app base has risen by more than 50 million in the week after the ban. The company plans to raise a large new round of capital that will lift it into the unicorn club from its present valuation of about $600–650 million.

Short-video platform Roposo (owned by ad tech firm InMobi) followed by other TikTok clones like Chingari and Mitron have all registered a spike in app downloads since the ban. “If the ban continues, it’ll be a defining moment for social networking startups,” said Anand Lunia, partner at venture capital firm India Quotient, which was one of the earliest backers of ShareChat, Clip, Roposo and other social networking startups.

The new FDI guidelines essentially imply Chinese capital will require prior government approval. In effect, given the uncertainty around approval, startups will shy away from Chinese capital

Till a few years ago the US was the only major pool of capital until China also emerged as a major option. With this move by the government. one major pool of capital gets restricted as funds being raised from China will be under question

The restriction on Chinese investments is likely to change the way founders think, as many were sourcing investments from China not just for capital but also to learn best operational strategies is clear that India’s startup ecosystem has become a key geo-political battleground notwithstanding its small size — imports in sectors like smartphones and pharmaceuticals from China dwarf startup activity involving the two countries. But as foreign policy experts have pointed out, India has few viable options to undertake substantial retaliatory actions against China. In this context, banning apps and placing investment restrictions are seen as low-risk manoeuvres that could help the government save face.

Join us in our annual entrepreneurship summit esummit

Written By- Daksh Jaglan

References-Livemint article, FDI report and interview of employees at top VC firms