Startups prep for exits as Chinese backers find little love

Mint

2 days ago

Udaan, Pocket FM and Vedantu have joined the league of startups looking to offer exits to their Chinese backers as the industry's appeal to ease restrictions on such investments has failed to secure a policy shift, according to four people familiar with the matter.
Udaan and Pocket FM count Tencent among their investors, while Vedantu's Chinese backers include Legend Capital and the TAL Education Group.
There has been a recent spike in discussions around Chinese investors looking to pull out, several Indian investorsMintspoke with confirmed separately.
'We can expect more block deals within listed startup entities as well, as Chinese investors don't want to stay invested given the current geopolitical scenario," said one of the investors. This shift is more visible in highly regulated sectors such as gaming and fintech.
The people and investors quoted earlier spoke withMint on the condition of anonymity.
In recent months, Antfin andTrip.com have exited or trimmed stakes in firms like Paytm and MakeMyTrip. Last year, Tencent sold its stake in Dream11 parent Sporta Technologies Ltd to Singapore-based Tiga Investment Pte Ltd for $150 million, as the gaming unicorn sought to comply with regulations on Chinese investments.
This wave of exits and stake sales follows a long wait among Indian founders, who anticipated that the government may ease rules governing Press Note 3 (PN3)—the 2020 pandemic-era notification that placed investments from neighbouring countries under a more stringent approval route. The move was largely aimed at curbing inflows from China after a deadly clash between Indian and Chinese soldiers in Ladakh's Galwan valley.
'Many (Chinese) funds, and even some board directors, have stepped back," said Rajat Tandon, president of the Indian Venture and Alternate Capital Association (IVCA), a key industry body. 'The entire wind-up of Chinese funds has happened. While their investments in Indian startups still exist, those startups are now actively exploring exit mechanisms."
A spokesperson for Tencent said the firm has no plans to exit and remains committed to its investments in India.
'The information regarding Tencent is purely speculative, and we have no comments to offer on it. Pocket FM remains a high-growth company with strong investor confidence and continues to engage with several global investors," a spokesperson for Pocket FM said as the company looks to raise $100 million.
Queries emailed to Vedantu, Udaan, Legend Capital and TAL Education Group did not elicit a response at the time of publishing.
Some of these companies are struggling to raise successive rounds of capital as the funding tap dried from the pandemic highs, which has now led to investors chasing fewer startups with a profit-oriented mindset and strong fundamentals.
Several Chinese investment firms may also offload stakes through initial public offerings of startups as a part of the offer-for-sale component. For instance, Hong Kong-based Hillhouse Capital, alongside other investors, is expected to sell some stake in CarDekho when the company goes public, Mint exclusively reported in September last year.
Shrinking Chinese exposure
From 2005, close to $16.8 billion in funding has been channelled from China into India, according to China Global Investment Tracker by public policy think tank American Enterprise Institute.
Tencent has been among the most active Chinese investors in India, backing firms including Swiggy, Byju's, Dream11, Udaan, and PolicyBazaar. Shunwei Capital has invested in ShareChat, Meesho, Pratilipi, Koo, and Cashify, among others. The investor has reportedly exited Pratilipi and Koo.
Alibaba, through Ant Group, had stakes in Paytm and Zomato, which have since been pared down. Hillhouse Capital has backed Zomato and Koo, while Qiming Venture Partners has invested in Pratilipi, partially exiting a few months ago.
Since PN3 came into effect, new Chinese investments in India have plunged. From 17 deals worth $5.2 billion in 2021, the number fell to 10 deals worth $780 million in 2022. While this drop reflected the broader slowdown in funding post-2022, the contrast has become starker more recently.
Overall, private equity and venture capital funding is showing signs of recovery. Indian startups raised $17.1 billion between January 2024 and June 2025. Yet, Chinese participation has continued to shrink, recording only five deals worth $317 million during the 18-month period, indicating a strategic retreat.
What it means
The PN3 restrictions not only apply to direct investments but also slow down approvals for Chinese investors acting as limited partners (or LPs) in domestic funds, or to global funds with Chinese exposure, affecting recent deals. LPs are investors who pool in capital but are not involved in managing funds.
'About 85% of the capital in India currently is international. Chinese money, in particular, was quite significant at one point, with a lot of capital ready to be deployed. Now, most Chinese investors have exited. Only a small, single-digit percentage remains," said Tandon.
He said IVCA had formally requested the government to limit PN3 to general partners or fund managers, given that LPs typically do not influence fund deployment. 'Since LPs don't play an active role, the PN3 framework should focus on general partners (GPs who manage funds), with all necessary background checks done on fund managers. That's the request we've submitted," he said.
Apart from that, IVCA has also sought amendments like defining beneficial ownership (ultimate investor) using a '10% threshold" in line with Indian laws, introducing a 'green channel" for low-risk cases such as repeat investments, listed funds not controlled by land-border countries, and 'minority, non-controlling stakes below 25%". It has also recommended a '45–60 business day" timeline for PN3 approvals to reduce deal uncertainty, he said.
Part of this shift stems from the disadvantages startups face when Chinese investors remain on the cap table.
'Any further fundraises by Indian startups from existing Chinese investors remain a challenge, which can materially affect their business plans and growth prospects," said said Vaibhav Kakkar, senior partner at Saraf and Partners. 'Apart from the regulatory hurdles posed by PN3, companies with Chinese ownership may also face negative perception among regulators and the public."
The retreat, however, also results in the loss of certain advantages. 'Chinese tech majors historically brought patient capital, playbooks on super-apps, social commerce and embedded fintech, and access to low-cost hardware supply chains—advantages that helped Indian startups," said Siddharth Mody, partner at JSA.
While the uncertainty around having a Chinese investor in the cap table complicates follow-on rounds, domestic regulatory pressure and a weaker yuan have also prompted Alibaba's Ant, Tencent and others to monetize offshore bets and repatriate cash, Mody said, emphasising that these factors have made the past year an opportune window for Indian founders to negotiate exits.
The vacuum left by the Chinese capital is already being filled.
'For instance, Gulf sovereign-wealth funds such as ADIA have set up dedicated India vehicles worth US$4-5 billion each and are underwriting late-stage rounds, while North-American cross-over funds and large domestic family offices are increasingly active," said Mody '…Importantly, these new investors (non-Chinese/not sharing a border with India) are generally free of PN3 constraints, allowing quicker closings."