Should India Reopen its Doors to Chinese Start-up Investments?

Until Doklam and the 2020 border clashes upended commerce, China was among the most prolific backers of Indian start-ups. Led by deep-pocketed funders such as Meituan, Tencent, Alibaba and Hillhouse Capital, it poured billions into Indian ventures, propelling household names like Swiggy, Paytm, Zomato and PolicyBazaar into the unicorn orbit while leaving Chinese investors with sizeable equity stakes. But as tensions rose, New Delhi clamped down with new restrictions, braking the flow of deals and making Indian founders increasingly wary of Beijing’s money.

The sharp reversal underscored how quickly politics can disrupt the seemingly borderless world of venture capital. A relationship once celebrated as symbiotic now sits in cold storage, with the Indian government intent on tightening its grip and start-ups scrambling to fill the void.

Recent months have heralded a significant geopolitical shift with Donald Trump’s tariff salvos straining New Delhi’s ties with Washington, even as Beijing has struck a warmer note.

This has left India between the rock of managing a turbulent United States and the hard place of responding to an adversarial China’s sudden signs of accommodation. Analysts suggest that if relations with Washington worsen, Chinese investment could re-emerge as a tempting, if risky, option, particularly in capital-hungry sectors like semiconductors and electronics.

Rajat Tandon, President of Indian Venture and Alternate Capital Association (IVCA), calls for recalibration: “India’s startup ecosystem has grown into one of the most vibrant globally,” with Chinese capital playing a substantial role in fuelling its growth. The chill after 2020 has addressed potential risks, but also introduced operational complexities. “As the broader geopolitical context evolves, it may be useful to examine whether certain procedural refinements could make the framework more predictable, without diluting its intent,” says Tandon.

The dilemma remains: should India prioritise future economic opportunity or stand firm on safeguarding sovereignty?

Chinese Capital & PN3 Shock

Between 2015 and 2020, Chinese firms struck 124 funding deals worth more than $9.2 billion with Indian start-ups, peaking in 2017 with 18 cheques totalling $2.9 billion, Venture Intelligence data shows.

Flipkart alone raised $1.4 billion from Tencent and others, while Swiggy, Ola, Udaan and Snapdeal each attracted hundreds of millions. The influx of Chinese capital gave Indian founders something they had long sought: patient investors willing to bet big on scale. For China’s tech giants, it offered a foothold in a fast-growing neighbour’s digital economy

On April 17, 2020, the Indian government issued Press Note 3 (PN3), an amendment to foreign direct investment rules. It required that any capital from a country sharing a land border with India, or where the beneficial owner was a citizen of such a country, could flow in only with government approval.

The intent was clear: to prevent opportunistic acquisitions during the Covid-19 downturn and blunt potential Chinese influence at a moment of national vulnerability. PN3 soon became as much a political signal as an economic tool, applied most forcefully in the wake of the 2017 Doklam standoff and the 2020 border clashes.

The impact was immediate. Dozens of China-linked investments were stalled or derailed. Ant Group pared down its stake in Paytm’s parent, One97 Communications. Start-ups such as Udaan, Pocket FM and Vedantu began looking for ways to dilute or remove Chinese investors from their cap tables.

Even industrial projects ran aground. Chinese EV major BYD’s $1 billion manufacturing proposal was blocked after failing the multi-ministerial scrutiny PN3 required. Concerns over dumping, security and political optics made approval impossible.

Funding Gap

The numbers tell the story. Between 2021 and 2025, Indian start-ups struck only 29 deals with Chinese investors, raising a total of $2.4 billion. Of this, $1.5 billion came in 2021, during the last major funding boom. Since then the flow has dwindled to a trickle: by September 2025, just two cheques worth $50 million had been completed with Chinese investors.

For many founders, the retreat of Chinese capital opened up an uncomfortable gap. Domestic and Western investors have plugged part of it, but not all. Capital-intensive industries such as semiconductors, electronics and EVs remain particularly exposed.

Raj Sethia, Founder and Managing Partner of MountTech Growth Fund - Kavachh, acknowledges the gap but sees promise in local capital. “While a funding gap exists, it is being speedily bridged through domestic family offices, high-net-worth individuals, and institutional investors who increasingly see the [industry’s] wealth-creation and nation-building potential. Encouragingly, this pool of diverse and informed investors is expanding, supported by the Union Budget’s ₹1 lakh crore innovation and R&D financing corpus.”

The shortfall coincided with geopolitical turbulence, where shifting alliances began to reshape the calculus for Indian policymakers.

Geopolitical Thaw

With Donald Trump training his tariff guns on Indian goods after years of pressure on China, New Delhi began to reassess its economic bets by hedging, diversifying partners and reducing reliance on the US market. That recalibration has enabled a public thaw, building on the limited disengagement agreed in 2024 at Depsang and Demchok to reduce the risk of confrontation.

The Shanghai Cooperation Organisation summit in Tianjin in late August 2025 provided the perfect stage for clearer signalling between Indian and Chinese leaders. Commentators read the pictures of bonhomie from Beijing as a calculated attempt to showcase India’s strategic autonomy in the face of US coercion.

The images of repartee featuring Modi, Xi and Putin carried an unmistakable message: India retains the agency to engage with Beijing on its own terms, and Washington cannot take alignment for granted. For China, it was a chance to project regional leadership and to signal that its capital might once again find welcome in India’s start-up sector.

The Road Ahead

Yet rapprochement with Beijing does not erase fundamental risks. India must weigh commercial opportunities against the long shadow of mistrust. The PN3 framework was born of security concerns; dismantling it entirely would expose vulnerabilities all over again. The real challenge is to design targeted safeguards: sectoral filters, enforceable covenants, stricter disclosure norms, that could allow selective reopening without compromising sovereignty.

Manu Iyer, Co-Founder and Managing Partner of Bluehill, warns: “We need to be self-sufficient; we cannot build our policy on the assumption that China will always be friendly. Geopolitical winds change quickly. Today China may seem cooperative, tomorrow it may not.”

Salman Waris, Founder of TechLegis LLC, favours balance: “India seems to prefer calibrated coexistence, balancing risk reduction with economic ties, not full decoupling from China.” He adds, “JVs with Chinese firms can legally mandate tech transfer and Indian control by using careful contractual terms and compliance with FDI policies, avoiding WTO violations.”

Geopolitics now revolves as much around semiconductors and AI as it does around territory and trade. Breakthroughs in these fields are central to India’s long-term strategy.

Anushka Saxena, an international relations expert, underlines the gap: “AI, large language models, defence tech, space innovation — all of these have become part of national security conversations. Breakthroughs here are essential for India’s long-term strategy. But since we don’t yet have the foundational background to be fully self-reliant, we need partners.

Whether it’s AI, defence tech, or semiconductors, India needs to learn, exchange know-how, and build capacity with global partners just as China once learned (or even acquired) technology from the US.”

India’s efforts to build semiconductor fabs and data centres are notable but still lag behind Taiwan, the US and China. Strategic partnerships remain unavoidable for the foreseeable future, though the ultimate goal is technological sovereignty.

The defence sector remains the most sensitive. Chinese participation here is out of the question. Drones illustrate the dilemma: most are still assembled with imported parts.

Iyer notes, “Today, many drones assembled in India actually rely on imported parts, batteries, flight controllers, motors, even propellers. Most of this technology isn’t very complicated. The reason we never built them here earlier was that there wasn’t a market for them. That’s changing now.”

He adds, “The Indian Army has made it clear: for defence use cases, they will not accept foreign-made flight controllers. They’ve already started verifying this, asking companies to prove their systems are made in India. Eventually, they want 100% compliance. So, this is less about technology transfer and more about having the will and the ecosystem to build here.”

Abhijeet Inamdar, Co-founder of SiriNor, underscores the business trade-off: “At the start-up level, foreign investment is valuable irrespective of the tech sovereignty question. The priority is securing enough capital to develop and prove the product at scale. However, once a company matures, becomes cash-rich, and begins working closely with the government or defence sector, the calculus changes completely. At that point, technology sovereignty becomes critical, and protecting control over IP, supply chains, and sensitive systems is non-negotiable.”

India’s choice is stark. It can keep Chinese capital at bay and rely on domestic and allied funding, slower but safer. Or it can cautiously reopen the door, knowing that capital brings both growth and risk. What is not an option is drift: in a world where technology is power, finance is geopolitics and capital is leverage, India must decide whether to play defence or offence.