Is VC Funding Moving Away from China’s Start-ups? Here’s How India is Benefitting

Posted by Written by James Fox Reading Time: 7 minutes

We discuss whether the regulatory crackdown in the tech sector in China has slowed VC funding, and if start-ups in India are benefitting as a result.

In the first four months of 2022, the value of new venture capital (VC) deals in China was US$24.7 billion, down 44 percent from the same period last year. There appears to be several reasons for this, including Beijing’s zero-Covid policy, which is seen as a threat to business, and China’s evolving position on homegrown tech. Around 18 months ago, China kicked off a crackdown on its technology firms due to antitrust and security concerns. While China remains an attractive destination for venture capital funding, leaning more towards hard tech, it is increasingly looking like a riskier investment destination.

One beneficiary of China’s apparent loss is India. The world’s second most populous nation has seen the value of new venture capital deals shoot up. Not only does India appear more tech-friendly than China, it’s also a fast-growing market with increasing internet adoption. As such, venture capitalists, especially those with an eye for soft tech start-ups, are turning to India.

Status of venture capital operations in Asia

VC investments in Asia hit a new record in 2021, totaling US$165.1 billion, up 50 percent from 2020, according to Crunchbase data. The previous regional record was set in 2018, at US$150.2 billion. Unsurprisingly, Chinese companies were the biggest recipient of VC funding, accounting for nearly 48 percent of all funding in Asia. Chinese companies took in six of the 10 largest funding rounds last year, including shopping platform Xingsheng Youxuan’s US$2 billion raise last February. The US$78.5 billion raised in China was a 50 percent increase from 2020.

Indian companies were the second highest recipients of VC funding. Companies in Asia’s second most populous country saw US$37.6 billion invested, representing a 12 percent increase from 2020. Israel, Singapore, and Indonesia rounded up the top five, while companies in Vietnam and South Korea were also major recipients of VC funding. Meanwhile, the world’s third largest economy, Japan, saw VC funding dip 14 percent to below US$5 billion.

China’s tech crackdown and the impact of zero-Covid

While VC funding in Asia as a whole is unlikely to fall dramatically in 2022, there are signs of a downturn, particularly in China. The value of venture deals in the country tumbled 44 percent to US$24.7 billion in the first four months of 2022, according to data from the research firm Preqin. The decline in China is almost four times the global average and twice the rate of decline in the US.

There are several reasons for this. To start, technology and growth stocks have seen billions wiped off their valuations over the past 12 months. After a decade of surging valuations, many tech stocks, which trade largely on future revenue potential, were looking very expensive. As a result, investors pulled back from higher risk deals, meaning less backing for such companies and stocks. We’re also seeing higher inflation and interest rates globally. Higher rates mean the cost of growth increases, which has compounded the run on the tech industry.

More specifically to China, Beijing’s policies, regulations, and interference have influenced a paradigm shift in VC funding in China. In November 2020, the Communist Party (CCP) embarked on a crackdown against tech giants, which started when the regulator prevented Jack Ma’s Ant Group from listing in the US.

Despite this, funding soared in 2021 and specifically in the final quarter despite the continuing crackdown. There appears to be two explanations for this. Firstly, Beijing targeted companies that dominated certain areas of the market like online retailer Alibaba and food delivery leader Meituan. So, some investors bet that smaller players would escape the crackdown and even thrive.

But the tech crackdown also marked a shift in focus by the CCP. China was apparently uneasy with the wealth and influence accumulated by software technology firms like Alibaba. But the government also signaled its desire to back “hard tech” like semiconductors, renewable energy, agritech, biotech, and industrial automation like factory robotics. As such, VC investors appear to be shifting from internet companies to sectors such as AI, chips, auto tech, and new energy, in line with China’s focus on social stability (Common Prosperity Policy) and national security. This may explain why VCs continued to back selected players in 2021.

While the government’s assault on soft tech is likely to have contributed to falling VC funding in China in 2022, there were some recent developments signaling an ease in the hardline position taken by Beijing. (See here to know more.) There have also been reports that China would consider reviving Ant Group’s IPO.

Another reason for slowing VC movement is China’s slowing economy and successive Covid-19 lockdowns. Beijing is standing by its zero-Covid policy that has seen mega-cities locked down over just a handful of virus cases. This is having a negative impact on economic growth and investors are worried that China will continue to enact lockdowns for the foreseeable future. China’s economy is now expected to grow slower than anticipated, at 4.3 percent this year. Such an environment is not attractive to VC investors already dealing with a war in Ukraine and global economic downturn.

Is China’s loss, India’s gain?

India has emerged as a beneficiary of China’s crackdown on soft tech. It has long been a promising second choice Asian market for foreign investors, but events in China, combined with ample global liquidity and rapidly increasing internet adoption in the country of 1.3 billion people has fueled a VC bull run. As China looks increasingly risky for venture capitalists, India is coming into its own.

India has a rapidly growing middle class and internet adoption, which has been on the rise for some time and accelerated during the Covid-19 pandemic. Analysis from Bain & Company in 2019, suggested that if India’s economy grew at a consistent rate of 7.5 percent, 500 million people would move into the middle and high-income bracket by 2030. While these figures are slightly outdated as the pandemic saw India’s middle class shrink, this economic cohort is growing once again, representing a massive market.

Another factor making India more attractive to VC funds is increased internet penetration. According to a report by IAMAI-Kantar ICUBE in 2020, India will have 900 million internet users by 2025, up from 622 million in 2020. Meanwhile, Invest India predicts that the nation will become the third largest online retail market by 2030, with an estimated annual gross merchandise value of US$350 billion. E-commerce, like internet usage, boomed during the pandemic. E-commerce accounted for nearly a third of sales in the country in several electronic categories, almost half of smartphones sold, and about a fifth of all apparel sales during the first six months of 2021.

There are other factors at play too. Noting the rise in investment in 2021, Bain & Company pointed to India’s maturing digital infrastructure, an improving start-up ecosystem, and rejuvenated investor confidence. Investor confidence was driven by significant public and secondary exits and a positive economic outlook for India. Total VC exits – when a VC firm sells its stake – reached north of US$14 billion in secondary transactions and IPOs. Although not all of the listings have performed well on the stock market. 

In fact, a number of the listed stocks were particularly uninspiring. Paytm (One97 Communications), Zomato, and Freshworks are examples of Indian start-ups that were recently listed but underperformed on the stock market. As of writing this article, Zomato was down 51 percent year to date, while Paytm and Freshworks were down 53 percent and 38 percent, respectively. This would normally be a warning sign for VC firms as investors traditionally look to groom a company before selling shares for a profit. VC firms will otherwise be cautious of choosing the exit via public listing route. However, the stock market performance of Paytm, Zomato, and Freshworks does not appear to have deterred India’s VC funders.

India’s fast-growing marketplace makes it a magnet for technology start-ups and VC investment. The country has the third largest start-up ecosystem after the US and China and recently recorded its 100th unicorn – a start-up company with a value of over US$1 billion. In fact, according to a report titled “India Tech Trends”, India has 130 tech unicorns with a combined value of US$535 billion as of March 2022. The report forecasts that there will be 250 unicorns in India by 2025. Moreover, according to Bain & Company, there were more unicorns in India in 2021 than China.

44 unicorns were minted in India during the year, exceeding China’s count of 42 unicorns. As a decacorn – a privately held start-up with USUS$10 billion valuation or above – Flipkart is considered India’s most valuable start-up entity. Last year, Flipkart was valued at US$37.6 billion, making it one of the world’s most valuable e-commerce firms.

Who is funding India’s start-ups?

According to an Inc42 report, there were 506 startup funding deals in the Indian start-up ecosystem in Q1 2022. More than US$11.8 billion was raised by Indian start-ups in this quarter, 186 percent higher than the same period in 2021. Enterprisetech start-ups received the most funding, while e-commerce, fintech, edtech, and consumer services sectors all saw more than US$1 billion in VC funding. According to Bain & Company, consumer technology, fintech, and software as a service (SaaS) accounted for more than 75 percent of all VC investments by value in 2021. Certain areas saw particular growth, including funding for new e-commerce-focused start-ups.

In 2021, Tiger Global and Sequoia Capital were the most active in terms of deal volume and capital deployed. But in Q1 of 2022, the two most active start-up investors were AngelList India and Sequoia Capital. The former made the highest number of investment deals by investing in 82 start-ups in the first quarter of 2022. AngelList India has backed firms like sharer-centric community app SuperShare, Hiver, and Crib.

Sequoia Capital India participated in 31 start-up funding deals in Q1 2022. Sequoia is an American venture capital firm and was the most active VC fund company in India in 2019. It has backed firms like smart credit card provider OneCard, Polygon, and CredAvenue.



Deal count (Q1) sources from Inc42

Notable investments

AngelList India



SuperShare, Hiver

Sequoia Capital



CredAvenue, Polygon

Titan Capital

Gurugram, India


Hatica, ClaimBuddy

Alteria Capital

Mumbai, India



ah! Ventures

Mumbai, India



Better Ventures








InnoVen Capital

Mumbai, India



Capier Investments

Bangalore, India


Eat Better

iSeed Ventures




While the above list shows only Indian and American VCs, India’s VC landscape is particularly broad. In 2021, global sovereign funds, including Abu Dhabi Developmental Holding Company [ADQ] and the Qatar Investment Authority [QIA]), made direct investments into India’s start-up ecosystem. SoftBank – the Japanese multinational conglomerate known for its Vision Fund – made a few selective large deals as it tempered its investment strategy. As reported by the Wall Street Journal, Vision Fund invested US$4 billion in India-based companies. If the VC firm finds “the right companies”, it has said it could invest US$5-10 billion in India in the 2022 calendar year.

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