china | Suhas Bhat

India-China-US: Byte back

This was a 2,500-word feature for AVCJ focusing on rising Sino-India tensions and their impact on the Indian venture capital and internet technology ecosystem.

Historically a neutral power, India appears to be siding with the US in a multi-faceted war with China. This could have far-reaching consequences for VC investors and the technology ecosystem

Over the decades, Indian foreign policy has espoused a policy of non-alignment in international affairs across administrations. Prime Minister Narendra Modi has applied this in practice as he regularly seeks to establish a friendly relationship with world leaders of every ilk. Ten months back, Modi invited Chinese President Xi Jinping to an informal two-day summit just weeks after visiting US President Donald Trump in Houston.

What started out as a dispute on the parity of international trade flows between the US and China, however, has now pulled India into the dogfight not necessarily by choice. A high-altitude clash in June at a disputed area along the India-China border that led to the death of 20 Indian soldiers shocked a nation already scarred from the economic shock of COVID-19. While Modi refrained from directly criticizing Xi – he initially claimed China had not encroached on Indian soil much to the displeasure of his detractors – the incident forced Indian policymakers to abandon their friendly outlook on China.

Clearly outmatched on the military front, India took an unexpected snipe at Chinese internet technology by banning 59 apps owned by Chinese companies, most notably TikTok, citing data security concerns. It has inspired similar measures in the US. “It was a great way to apply pressure in a space that matters to the Chinese investor and technology community given that India is a prominent marketplace for products and a promising investment destination,” says Amit Narayan, an India-based partner at Control Risks, a specialist global risk consultancy. “I have no doubt that the intent to put pressure on China will continue for a while.”

Already upset by China’s close economic relationship with Pakistan, which many Indians claim offers base to terrorists, and harboring lingering resentment from a 1962 war that India claims was unprovoked, Sinophobia has come to the fore. There have been increased bureaucratic hurdles, cancellations of government tenders, a review of Chinese investments in the country, queries seeking to discover potential censorship of anti-Chinese content by apps, and higher tariffs on a host of imports from China.

The Indian government has also launched “Aatmanirbhar” or “self-reliant India,” a rhetoric-laden yet premature import substitution campaign that seeks to wean the country off Chinese-made goods.

Friend, not foe

On the other hand, Indian venture capitalists have a more balanced attitude towards their Chinese peers. Apps owned by Chinese companies or those significantly backed by VC investors rarely conflict with their portfolio companies anyway. Instead, Chinese investors – financial and strategic – were seen as a welcome addition to India’s growing stable of capital providers. They were especially of use to cash-burning consumer internet players.

Moreover, support from a Chinese investor was regarded as a kind of validation, given that investor’s experience of an earlier start-up boom. Last year, Chinese parties took part in PE deals totaling $6.9 billion in India. They rarely sought significant stakes, aware as they were of the political sensitivities involved.

Back in April, a regulatory update requiring mandatory government approval of Chinese investments unexpectedly targeted them. The action was taken in response to criticism from an opposition politician for an innocuous public market deal by China’s central bank, with the government maintaining that Chinese investors can participate in the growth of India’s technology sector. They just have to abide by new rules. Chinese VCs and strategic investors have since gone quiet, worrying industry watchers.

“I don’t think Indian venture capital can sufficiently replace Chinese investment,” says Sanjeev Krishan, a partner at PwC. “It may open the door for start-ups to court Western investors but most of them favor mature businesses. They like to sprinkle their financial bullets.”

An Indian VC manager currently fundraising observes there is interest from investors in Europe and the Middle East but it is still too early to tell if they will join a roster of familiar names from North Asia and the US. Anyway, COVID-19 has created a climate of uncertainty, complicating decisions to change emerging markets allocations for most investors.

In the long run, however, investors anticipate that increased digitization of staid sectors and the exponential growth in user activity witnessed by many start-ups in a country where it will take months for life to get back to normal means they will get capital if they have a clear use for it.

“Good companies never die of starvation, but they could die of indigestion,” comments Sanjay Swamy, a managing partner at Prime Ventures Partners. “Every market in India needs to be digitized – we have companies doing this for intercity trucking and gated communities.”

He believes the Indian government will also be more nuanced about its approach to Chinese investment in time. Thresholds for deals that require government approval are likely to be clearly defined, while in many industries data security concerns are meaningless.

Jio politics?

The border conflict also occurred after India’s start-up ecosystem received a huge boost in the form of INR1.5 trillion ($20 billion) of capital commitments for Jio Platforms, the holding company for telecom and internet assets owned by Reliance Industries. Facebook and Google accounted for more than half of this, with global GPs and sovereign funds contributing the rest. In a matter of weeks, it created India’s largest start-up.

Some analysts speculate the deals might have been influenced by US foreign policy and the desire to position India as an ally. The US technology giants and private equity investors could be looking to grab a foothold before major decisions are announced that signal even closer collaboration between the two large democracies.

“India as a country can be some kind of a counterpoint to China in this part of the world,” says Nitish Poddar, a partner and national head of private equity at KPMG India. “India and the US have always enjoyed a good relationship whether it was a Republican or Democrat administration. If the US wants China to be in check and it doesn’t have friends in India, then it can’t grow its influence in Asia.”

Meanwhile, Sanjay Kukreja, a managing partner at ChrysCapital Partners, offers a more prosaic explanation: It was simply a case of investors looking to put capital to work in a large-ticket deal at a time when it was fast becoming clear that private equity deal-making would be muted in 2020.

Jio Platforms plans to further increase access to affordable internet by offering low-cost broadband and telecom services and developing apps that increase their appeal. It will also invest in creating a nationwide e-commerce network. There is an agreement with Google to manufacture low-cost smart phones as well. The goal is to bring 350 million Indians who still use basic phones without touchscreens into the modern internet era.

“A lot of this capital will help roll out internet infrastructure at the size and scale that will play out well for the country in the long term,” adds Kukreja. “There could be a blurring of the lines – the oldworld consumer will finally be reachable by digital companies.”

Like a rising tide that lifts all boats, it is assumed Jio Platforms will look to acquire many start-ups, facilitating exits for VC investors. The company has made no secret of its desire to create a powerful ecosystem of apps under the “MyJio” – Hindi for “My Life” – banner for first-time internet users that are usually subscribers of Jio, the telecom service.

Indian media reports indicate that Reliance Industries, the oil-to-retail parent of Jio Platforms, is also in talks with ByteDance to see if it can acquire TikTok’s Indian operations.

As Google’s $4.5 billion commitment to the company came out of a newly launched $10 billion India digitization fund, there are clearly a lot more checks waiting to be signed. Others could follow the trailblazers.

“With that much capital coming in, every large pocket of capital in the US who hadn’t thought about India will stand up and take notice,” says one local growth stage investor. “They will say,’ ‘There’s something happening in India… why am I not spending time there?’”

Muted outlook

Regardless of any geopolitical agendas, these investments are contingent on monetization, specifically the ability and willingness of Indian consumers to pay for services. Much rests on how the country deals with COVID-19.

As of mid-August, total infections since the start of the pandemic exceeded 2.7 million – behind only the US and Brazil – with 52,000 fatalities. City streets usually characterized by boisterous activity have turned eerily silent in recent months. Businesses remain shuttered while public transport has ground to a halt as strict quarantine measures across states deter what little inter-state travel is being attempted.

People who can work from home continue to do so. Those who are required on-site are taking necessary precautions. Meanwhile, massive layoffs in the informal sector and the return of thousands of migrant workers from overseas imply millions of Indians will be unemployed for the coming months. Everyone agrees that the epidemic has severely dented consumer confidence for the near term.

However, a closer look at the underlying numbers offers some hope. India’s population is larger than that of the US and Brazil, while its infrastructure is less substantial, but the mortality rate is 13 times lower. “The fatality rate has been very, very low,” says Sateesh Andra, a managing director at Endiya Partners, a health tech-focused VC firm. “Nobody knows if it’s because of our genes or because of a particular mutation of the virus. The worst appears to be behind us.”

Exhorted by Modi to live with the virus, India is getting back to work. The recovery is happening at different paces at different locations based on the intensity of local outbreaks, but predictions of catastrophe have largely missed the mark.

“We are all reconciled to India’s economy taking a massive hit,” says Control Risks’ Narayanan. “It could be as much as a 10% decline in the real economy. At the same time, India’s digital economy will grow faster and sooner simply because so much of consumption is moving online.”

Given the formal working class that usually resides in urban areas is a key consumer group, effective remote working measures have ensured they remain financially healthy. As similar trends play out around the world, it has created opportunities for Indian IT services companies to develop their enterprise offerings.

“India never used to have large software-as-a-service (SaaS) start-ups,” says Atul Mehra, a partner at EY India. “Postman [a collaboration platform for API developers] achieved a $2 billion valuation recently, joining Freshworks as a unicorn. There is also healthy investment in Indian data infrastructure from private equity and technology giants alike.”

Hardware dreams

It is too early to say whether the country can add hardware to its software competencies – a clear objective under the “self-reliant India” agenda – despite a general move among multinationals to reshore supply chains that are heavily reliant on China.

The government’s stated desire for a nuts-and-bolts technology sector has been backed up by various policy initiatives, including the relaxation of labor regulations and production-linked subsidies, However, a plethora of problems that have long continued to deter global corporations.

“There is the pentagram of Indian issues – land, labor, capital, infrastructure and taxes,” says Narayanan of Control Risks. “Add to that sector-specific regulation, growing data localization requirements and state-level risk.”

Nevertheless, supply chain diversification efforts could see India win a second chance with multinationals. The country lost out on the first wave – triggered by rising labor costs in China – because the likes of Vietnam were deemed to have a more stable policy environment. Private equity firms are also tracking evolving geopolitical risks and considering the implications for their portfolio companies.

“China is not a final market for our portfolio companies, it’s a source of inputs,” says ChrysCapital’s Kukreja. “I think there will be people who will capitalize on the whole import substitution goal and it’s an opportunity for Indian entrepreneurs.”

Conversations have begun but large corporations will not rush into decisions on manufacturing destinations. At present, India does not have the same purchasing power as China to support expansion plans, but time might be on its side.

“Foxconn has already started manufacturing the latest Apple models in India,” points out KPMG’s Poddar. “There are at least 10 different Japanese companies talking to us about setting up sourcing arrangements in India, either organically or inorganically. It’s happening but the impact will only really be felt over a 5-10-year period because these are long-term strategic investors.”

Exit angst

Ultimately, for investors assessing the potential of India’s technology sector – as an LP, GP or a strategic player with a balance sheet money – exits trump all other concerns. Indian companies can make smart phones and develop software that works on them, and local consumers might be willing buyers, but this commercial activity must crystalize into distributions.

An enduring problem for Indian start-ups is the lack of a reliable path to liquidity via public markets. Trade sales continue to dominate. “While the exit landscape has expanded and diversified significantly in recent years, the market has not been extensively tested yet for large exits, or for large PE-backed IPOs,” says Frank Su, head of Asia private equity at Canada Pension Plan Investment Board (CPPIB).

The industry drew succor from the recent $300 million all-cash acquisition of WhiteHat Jr, an 18-month-old online coding school, by local education player Byju’s, which facilitated exits for several VC investors. However, such deals are few and far between; all-stock acquisitions, which might offer no near-term liquidity event, are much more common.

Meanwhile, the prospect of IPOs on NASDAQ has long been mooted and this year came a little closer to fruition. The Securities & Exchange Board of India has signaled a willingness to explore the possibility of revising rules that currently require Indian companies to complete a domestic listing before listing overseas.

“Rumors in the market indicate Jio Platforms could lead the way but the bar at NASDAQ is pretty high,” says one growth equity investor. “A NASDAQ listing is for people who have private investors chasing them. Apart from Jio Platforms, I’m not sure if most Indian start-ups qualify.”

Jio Platforms has clearly captured the imagination of India across multiple vectors. Not only will its war-chest lead to significant acquisitions, there is a hope it could inspire a new generation of entrepreneurs to leverage a transformed internet landscape. “When you see such a massive level of investment, it will lead to state-of-the-art expertise and innovation coming to India,” says Prime Ventures’ Swamy.

And this is where the US-China angle swings back into view. It is claimed that Google decided to double down on India by investing in Jio because the country had proved itself as a testbed for technology solutions in emerging markets – Google Pay, formerly known as Tez, was first developed here.

“You can’t copy and paste what works in developed markets in India, but you can do the reverse,” Swamy adds. “Jio Platforms is unique but it’s not the only one. There are several diamonds in the rough out there.”

Putting Indian start-ups in a position where they can think about accessing developed markets, and build strategic relationships with large corporate partners, will likely require the return of Chinese capital. For that, relations must thaw between US, China and India.

An online version of the article can be found here. This article featured in the August 18 edition of the Asian Venture Capital Journal released a week before the annual AVCJ India Forum.

Gobi Partners: Beyond the oasis

This was a 2,000-word feature for AVCJ focusing on China and Malaysia-headquartered venture capital firm Gobi Partners, a firm with an eighteen-year history

China’s Gobi Partners has grown from a four-person team to an 11-office franchise. The coming decade will test the VC firm’s aspiration to become a pan-Asian enterprise

Thomas Tsao is a storehouse of memories. The only founding partner still actively involved at Gobi Partners, the affable American from Long Island remembers the 1997 Hong Kong handover, the tumult of the Asian financial crisis, the riots that toppled Indonesian dictator Suharto, and the experience of being quarantined in the US while trying to raise capital amid the SARS pandemic.

Back then, few foreign or local VC funds wanted to invest in China – a promising if somewhat risky investment destination that made more sense as part of a broader regional allocation. Launching Gobi in 2002 with two other partners, Tsao sought to help enterprising Chinese entrepreneurs, many of whom were new to the game.

“I remember taking some of our company founders to Sand Hill Road [in Silicon Valley] and they would put on their best outfits – ill-fitting suits worn with black leather shoes and white socks,” he recalls. “The first thing we did after raising money was get them to dress differently.”

Gobi could have been christened Malibu Partners. A sandy location was picked because the partners believed entrepreneurs are essential for the development of a technology ecosystem but hard to spot – much like silicon, a key component in semiconductor production, which is found in sand particles.

Initial breakthrough

The timing was bad for that debut fund; it launched on the day the Iraq war began. Moreover, LPs that had been jolted by the collapse of the US dotcom bubble were wary of a repeat experience in China. It took Gobi three years to close Gobi Hi-Tech Fund at RMB425 million ($60 million). “We also went in when nobody thought Chinese entrepreneurs could be innovators. A lot of people from the US or Europe were dismissive of whatever came out of China. They thought Chinese companies were only good at copying,” Tsao says.

Nevertheless, anticipating improvements in internet infrastructure, Gobi bet on digital start-ups. Digital Media Group (DMG), a video equipment and content provider for urban subway networks, was an early investee. It won plaudits from commuters and commercial partners for a 40-episode series of two-minute shorts featuring pop star Huang Xiao Ming. Watched by a captive commuter audience in an era before smart phones, DMG was advertising in a way no one had done before. A $125 million trade sale exit came in 2009.

Four successor funds have continued to identify and support local ventures, many of which are situated outside the main start-up hub of Beijing. These include workforce collaboration app Teambition, online travel platform Tuniu, second-hand car trading site Chezhibao and Australian cross-border payments service Airwallex, which counts two founders of Chinese heritage. Teambition founder Junyuan Qi, then an undergraduate, recalls being sought out by a Gobi partner who was an avid user of the beta version.

Fund II, the firm’s first US dollar-denominated pool of capital, which closed at $150 million in 2008, failed to meet expectations due to the global financial crisis. Gobi switched back to renminbi for its next China vehicle. A final close of RMB350 million came in 2012.

Gobi’s first foray into Southeast Asia was essentially a response to this difficult fundraising environment. The Singapore government was willing to seed professional GPs as part of efforts to jumpstart its venture capital ecosystem, so the team seized on the opportunity. In 2010, Singapore’s Media Development Authority appointed Gobi manager of a S$100 million fund. Kay-Mok Ku, a local entrepreneur-turned-investment executive at media conglomerate MediaCorp, was recruited to manage investments in the region.

Ku concedes Gobi was a bit too early because smart phone and internet penetration were not at the same level as China. Moreover, the mandate to invest only in digital media companies meant opportunities in e-commerce and mobility could not be pursued, while attracting institutional LPs was difficult. Few were active in Southeast Asia VC at the time and Gobi had no track record in the region.

“It was a bit frustrating in the early 2010s because the VC ecosystem just wasn’t that ready, the deal flow just wasn’t there,” says Ku. “With the more recent funds, we have seen a turnaround. It’s a confluence of factors – the market is ready and start-ups have cross-border ambitions.”

Five years later after the Singapore fund launched, Tsao relocated to Kuala Lumpur at the behest of Malaysia Venture Capital Management (MAVCAP), the country’s leading fund-of-funds, which sought a similar kind of impetus. MAVCAP supported Gobi’s initial seed fund and now anchors the firm’s $200 million growth fund – the 2017 Gobi Meranti ASEAN Growth Fund.

It represents a departure from the early-stage remit that Gobi previously fiercely protected, but there is a recognition internally of the need to experiment in different segments. Ku observes that there is increasing competition for seed and early-stage deals from local and regional peers.

Change in China

With Tsao concentrating on Southeast Asia, Michael Zhu stepped up as managing partner responsible for China. He had already been with the firm for more than a decade, having been recruited fresh out of university in 2003. “I remember interviewing him and his QQ [instant messaging] name funnily was ‘Michael Bryant’ [like the late NBA star Kobe Bryant],” Tsao recalls. “I asked him, ‘How good are you?’ He said he was the best at his college. I used to play back then and… yeah, he definitely was.”

Zhu is supported by two partners, Wing Hu and Chibo Tang. The trio came to the fore as Don Jiang, Wai Kit Lau and Ken Xu scaled back their involvement due to retirement and commitments related to family office management. Tang actually left the firm once only to return; he observes there is room for career growth at Gobi that he would not likely find in a consulting role with the likes of McKinsey & Company.

China remains a crucial part of the overall business, accounting for more than 70% of its $1.1 billion in assets under management. Gobi uses renminbi-denominated funds for early-stage opportunities and brings in US dollar vehicles for larger-ticket transactions. In 2015, the team closed its largest local currency fund at RMB600 million. A majority of Gobi Fund III’s $150 million corpus went into Chinese start-ups. Zhu is now raising Gobi’s latest China-only US dollar and renminbi vehicles.

As for investment activity in the country, the firm is moving towards enterprise-facing start-ups. “From 2011 onwards, we saw a bubble in the consumer space,” Zhu says.

Considerable effort is devoted to identifying and realizing synergies between portfolio companies in China and Southeast Asia. Gobi’s initial expansion was in part driven by a recognition that established trends in one market were beginning to play out in the other. Ironically, Chinese start- ups once chided for being copycats can now help Southeast Asian counterparts “copy from China.”

“A lot of start-ups say in their fundraising statements that they would like to expand quickly but it’s not easy,” states Eric Cheng, co-founder of Malaysian used car-trading platform Carsome. “In China, some of the Gobi companies expanded to 50 cities within three months. We learned from them how to do it in a sustainable way.” Gobi facilitated exchanges between Cheng and Chezhibao founder Lee Huang and the two companies ended up trading notes on pricing strategies.

Christina Suriadjaja, founder of Indonesian property management platform Travelio, adds that she learned much from Tuniu during meetings at Gobi’s annual general meeting in Nanjing in 2016. Back then, the idea for her company had not fully materialized, so Gobi’s Jiang assigned homework – reading up on several Chinese hospitality start-ups.

However, Suriadjaja adds that Chinese start-ups operate in a more aggressive manner. For instance, Tuniu targeted rapid growth in second-tier cities with a property management arm snapping up assets. Travelio is growing at a slower pace due to lower disposable incomes in Indonesia and does not anticipate much demand in tier two cities. “If I did what Tuniu did, I don’t think we would be alive right now,” she says. “It was definitely helpful, but execution ultimately depends on the entrepreneur and their specific situation.”

Gobi is not alone in pursing China-Southeast Asia synergies. Larger China-focused players such as Qiming Venture Partners and GGV Capital have opened offices in Singapore, while numerous other firms operate on a fly in-fly out basis. According to AVCJ Research, China oriented venture capital investors participated in 35 deals in Southeast Asia last year, up from eight in 2015.

Gobi argues that it stands out from the pack by virtue of its 11-office network and track record of exits in the region. “They enter early and quite often exit through a trade sale. They don’t try to earn the maximum they can but deliver a stable and satisfying return,” says Liyong Zhou, a general manager in the VC unit under Shanghai STVC Group, one of China’s earliest state-backed LPs for venture funds. In Southeast Asia, Gobi claims to have achieved seven exits.

Gobi has leveraged its local presence in Indonesia, the Philippines, Pakistan, and Malaysia to raise single-country funds that scoop up seed-stage deals. However, the firm’s ambitions do not stop there. Gobi wants to use its Malaysia base as a potential conduit within the Islamic world, while the Tokyo team makes overtures to Japanese companies seeking partnerships in Southeast Asia. There are plans to open in Riyadh in Saudi Arabia as well.

Working with multinational corporates has long been part of Gobi’s DNA. LPs in Fund I included IBM, NTT DoCoMo, McGraw-Hill, and Disney’s Steamboat Ventures. In 2015, the firm brokered a deal with the Alibaba Foundation to manage the HK$1 billion Alibaba Hong Kong Entrepreneurs Fund.

The evergreen vehicle arose out of a desire to create more job opportunities for young people in the city. Aspiring virtual bank WeLab, logistics platform Gogovan, e-commerce enabler Shopline, and cooking-based lifestyle platform DayDayCook are among those that have since received funding. “When I moved to Hong Kong four years ago, all my friends doubted whether there could be entrepreneurial projects in Hong Kong. Four years later, seven to eight unicorns have emerged,” says Gobi’s Tang.

Jack of all trades?

However, there is a danger that all this disparate and decentralized investment activity could stretch the VC firm thin. Whenever GPs push aggressively into new geographies and strategies, it always raises concerns internal culture will fray, investment discipline will lapse, and teams will fracture. In addition, efforts to drive synergies between these various moving parts – the very reason for expansion – could flounder.

Like most of its peers, Gobi has seen team members spinout. Two years ago, Victor Chua, a vice president based in Malaysia, departed to form Vynn Capital, a venture capital firm that claims to pursue technology opportunities at the nexus of travel, property, consumer goods, and female economics.

These industry dynamics put pressure on Gobi’s leadership to maintain cohesion, but they believe the firm can become that rare early-stage Asian GP with a multi-regional presence. “We may have started in China, but I don’t think we are a Chinese VC firm,” says Singapore-based Ku. “I think there’s a shot at becoming a homegrown pan-Asian VC fund.”

To that end, Gobi has invested heavily in the last two years to expand headcount in Southeast Asia, including female partners and professionals focused on environment, social and governance (ESG) issues. For example, Thailand-based former entrepreneur Shannon Kalayanamitr was recruited as a venture partner. Several hires reflect the firm’s intent to invest more in healthcare, agricultural technology and advanced manufacturing.

In the end, Tsao believes it will all work out because Gobi has a clear long-term vision that is almost impact-oriented. “We believe great entrepreneurial talent is evenly distributed around the world but access to opportunity is not,” he says. “We don’t operate just to make institutional LPs happy. We do things that we think will create the value that needs to be created.”

India online education: Learning process

This was a 2,000-word feature for AVCJ focusing on India’s burgeoning edtech sector in the middle of 2020 shortly before Byju’s acquisition of WhiteHat Jr.

With millions of Indian students facing the possibility of an academic year conducted entirely online, educational technology start-ups have an opportunity for business model validation

India’s educational institutions – from schools to testing centers – gradually started to reopen last month following a 10-week lockdown intended to curb the spread of COVID-19. Nevertheless, concerned parents and adult students are reluctant to return from virtual to in-person learning, extending the opportunity of a lifetime for educational technology start-ups to rapidly scale their userbases.

“Schools would be the last institutions to open up fully even if other establishments begin to operate,” says Narayanan Ramaswamy, national leader for education and skills development at KPMG. “Not all of the new online users will stay, but they should be able to retain a good chunk.”

Schools in rural areas and small towns unable to offer online classes due to poor infrastructure remain open. But many districts within cities continue to see thousands of COVID-19 cases every day. Some students have simply written off the current academic year, while certain regulatory agencies – operating within India’s decentralized educational ecosystem – have released trimmed- down curriculums.

Those that wish to continue studying have turned to online solutions en masse. None of these platforms claim to be replacements for formal places of learning, but their supplementary classes are extensive enough to pose a challenge to brick-and-mortar coaching centers that primarily offer exam preparation services. These offline players are going online too, but the incumbents have momentum on their side.

“When we speak to students from smaller towns, they tell us they joined Testbook because of a well-known Delhi-based teacher [on our platform]. They never thought they would be able to learn from such instructors,” says Ashutosh Kumar, co-founder of Testbook, an online portal targeting adult students sitting exams for public sector jobs. The public sector is a popular employment option in suburban and rural areas because of a lack of private sector opportunities.

Edtech start-ups have successfully cultivated demand by offering free academic content for a limited stretch plus extensive trial periods. Growth in organic traffic has ensured an exponential increase in monthly revenue across the industry, boosting the financial health of companies. Meanwhile, investors are writing sizeable checks, supporting hiring sprees by start-ups that want the best tutors and technology professionals to ensure Indians can continue learning from the safety of their homes.

A total of $636 million has been deployed in the space so far this year, almost matching the 12- month total for 2019. However, the three largest players – Byju’s, Vedantu and Unacademy – enjoy the lion’s share of the capital.

Customization counts

For Testbook, a large proportion of new users are trying out online educational services for the first time. Many come from areas where internet access is poor. Fortunately, given its long-term focus on small town India, the start-up was prepared.

Not only has it ensured that the Testbook app is easy to download on basic smart phones, users can download videos of classes and watch them offline. The company also has an extensive offline customer acquisition network roping in coaching centers and cybercafés and it operates 50 computer labs that students can use over several weeks for a fee. Other edtech start-ups are expected to follow this playbook in the coming years.

“After every test, we advise on the topics where students are weak. Most of them have never seen this type of analytics,” Kumar says. “While a lot of students were averse to online learning, if the situation doesn’t change for six months or more then user behavior will have to change.”

Other players have introduced additional functionalities to increase student-teacher interaction, incorporated gamification, offered new services, and targeted different age groups. Unacademy, which retains a corps of “star tutors” who have previously excelled at various exams, has expanded through acquisitions or smaller peers and strategic partnerships. Taking advantage of the moment, many start-ups operating in the K-12 segment are trying to convince parents to sign up their children for long-term programs.

“They find parents of kids in middle school and lock them in multi-year contracts offering steep subsidies so there’s a high cost for switching. It’s systematic mis-selling,” complains Aniruddha Malpani, a doctor-turned angel investor.

Last week, Malpani was banned by LinkedIn for violating the social media platform’s terms and conditions. A regular critic of video-based educational platform Byju’s, the country’s leading edtech player, he claims an employee of the company likely reported him. This sensitivity to criticism might be a byproduct of increasing media attention. However, this has yet to be accompanied by regulatory scrutiny, despite the platforms growing in size and importance. It may come as edtech start-ups pursue their frequently stated ambition to move beyond the traditional sweet spot of exam preparation – and enter territory occupied by offline players.

Classplus, a software provider that aims to digitize coaching institutes, operates at the heart of the online-offline conflict. The company provides online tools that help small traditional players with communication, data storage, content delivery, video conferencing and payments. As co-founder Mukul Rustagi puts it, Classplus is arming David in his battle with Goliath.

“There are millions of Davids fighting against the Goliaths [VC-backed edtech start-ups]. It’s a great responsibility for us to ensure that neighborhood coaching centers are able to retain their hyper- local student community and migrate their classes online,” he says. “Honestly, the classroom experience is a much more enriching and interactive one than live online classes.”

Classplus has seen the number of users on its platform quadruple in the last six months, which has necessitated increased spending on manpower and technology.

Inflection point

It is likely 2020 will come to be regarded as an inflection point for the industry. For example, earlier this the month, live tutoring platform Vedantu became only the third start-up to raise more than $100 million in a single funding round. The others are Byju’s and Unacademy.

As for what the future might hold, industry observers suggest looking to China where $100 million- plus checks are fairly common in online education. That said, the two ecosystems are not easily comparable. Given lower income levels and a wider diversity of languages, it’s debatable whether an Indian edtech start-up could ever target the country’s entire addressable market of students seeking online educational services.

Nevertheless, the leading players now have sufficient users and brand recognition to build defensible positions. Industry consolidation, though inevitable, is expected to be delayed as start- ups tinker with their product offerings to find the winning formula. Increased revenues have naturally extended their cash runways.

“In China, many online tutoring platforms that are now profitable offer classes for 30 students or more,” says Liu Fang, a China-based associate director at Deloitte. “One-on-one education remains difficult while there are also start-ups offering language, niche and well-rounded education services. Industry leaders have also tried to diminish the halo of star tutors and standardized learning materials to ensure easier retention of staff.”

In India, many edtech start-ups offer classes to large student cohorts. There can be more than 200 students participating in a class with a single tutor.

Liu adds that TAL Education, one of China’s longtime market leaders, switched from video-based lessons to live tuition in 2016. Not only is customer retention low for video, it is difficult to achieve exponential growth in revenue due to low prices, though this format remains a good customer acquisition tool. Similarly, Byju’s began to offer live tutoring classes for the first time in its nine-year history last month. This is already a feature of the Unacademy and Vedantu offerings.

Malpani believes that, in the long run, start-ups must move away from a cookie cutter approach if they are to make an impact on educational outcomes. This will likely involve smaller class sizes and flexible pricing. “They are mercenaries,” he notes. “Everyone says the same thing about improving learning, but they haven’t walked the talk. India needs mission-oriented institutions like Montessori with a technology component.”

However, the COVID-19 pandemic has laid bare the country’s poor educational infrastructure. Standardization is a pipe dream, given how spending varies by state. That said, it is only in the last three years that a majority of India has come online. The proliferation of low-cost internet plans and affordable smart phones means millions can now access internet services that were previously unreachable.

“Imagine a student hailing from a family of farmers or where the father has a low-income job. They cannot afford a laptop even if it costs just INR30,000 ($400). Smart phone affordability has improved penetration a lot,” explains Testbook’s Kumar. “We shifted our approach from a desktop-first to a mobile-first approach 18 months back.”

Finding the formula

It implies immense room for growth, but start-ups must recognize the challenges related to pricing and computer literacy to truly serve India’s hinterlands. They might also need to go offline to reach and convert such users – as some of their Chinese peers have done.

“They could eventually become national brands as online education leaders. Will they need to have an offline presence to achieve this? Yes, definitely,” says KPMG’s Ramaswamy. “But that alone is not reason enough for creating a branch network. At that age, kids need counseling and face-to-face tutoring. Even for regular fulfillment, they might need brick-and-mortar centers eventually.”

Start-ups have at least a year to experiment given uncertainty over the continued spread of COVID- 19 and what this means for in-class education. Rustogi of Classplus observes that “the worst is far from over,” but draws some positives from the opportunity it presents for online specialists. “We’ve hardly scratched the surface of the problem,” he says. “There is no reason for us to stop dreaming and stop building.”

Dong Bei Ho Niao (东北候鳥-) – An Elderly Couple Migrates South For The Winter

With assistance from Tang Zi Yi.

SHENZHEN (China) — Dressed in a black frock with polka dots, Liu Gui Zheng, 67, the wife of a farmer, is clearly a leader. When she walks too far ahead, she barks an order telling her husband Yan Zheng Ke and their 77-year-old compatriot Xu Chang You to hurry up. Talking to herself while window shopping in a mall in Shenzhen, she spots a pink top on sale for ¥6.

“What do you think of this?” she asks. “No, I already have something like it.”

“What?” asks her husband. Preoccupied by a health drink offered by a saleswoman, he turns to his wife but she has already walked on. He follows her, hands folded behind his back, staring wide-eyed in wonder at the glitzy interior of the mall.

Their gait, their dialect, their rugged features and the loud volume of their conversations marks them out as dongbei – people from the northeast. In China, derided somewhat like hillbillies by fellow citizens – they are known for angry outbursts, crass mannerisms but equally happy to share dumplings and Tsingtao beer after an introduction – Dongbei Chinese were once considered model citizens as the heavy industries run by state-owned enterprises in the northeast – the “rust belt” as it’s known – powered the economy.

Now, Beijing admires the enterprise of the south instead.

Right now, the Zhengs are enjoying a life of retirement. They ride for free on the metro and look like tourists in their own country.

They go sightseeing through Shenzhen in the mornings. Gui, almost like a toddler, touches everything she sees. At lunch, she returns home while her husband picks up their granddaughter who studies at a primary school in Hong Kong.

Back home, temperatures fall as low as -20° in Jianchang, a small town in Liaoning less than 500km west of the North Korean border, during the winter; elderly Chinese like the Zhengs migrate like snowbirds, a phrase popular on the internet in China, as they seek to be close to their children who have migrated earlier in the quest for better opportunities.

The spring in the south is so alluring, however, that the children have no plans to go back and reports in local media indicate the northeast is littered with ghost towns populated by older people. At 39.2, Liaoning has the oldest median age in the country.

“I used to come here for vacation like 40 days at a stretch,” said Liu. “For the past two years, my husband began to join me. I go back home to collect my pension and to visit my brothers and sisters.”

“It’s like spring here all the time… the economy is booming.”

People like Gui and her husband sojourn in Hainan and other warm provinces but they are not always welcome. A popular thread on Zhihu, a public answering forum similar to Quora, showed a list of videos where elderly dongbei Chinese were captured on video stealing mangoes, beans, watermelon, coconuts and much more.

The animosity goes both ways too.

“We speak Mandarin but they speak some strange dialect. We don’t understand them,” complained Zheng Ke. “People here, they hold mantou (steamed bun) in one hand and dou jia (soy milk) in another. If we eat food, we sit on the table. – it’s square, stable, serious and formal.”

Disenchantment with the northeast in political circles also picked up a notch in recent years. Former Liaoning governor Bo Xilai was one of current president Xi Jinping’s rivals in 2012 but a scandal following the death of British businessman Neil Heywood unearthed massive corruption marking a controversial period in China’s contemporary history. Bo’s wife regularly jetted into England and lived at luxury flats in Oxford even as farmers reported failing harvests on the mainland.

Zhao Benshan was yet another personality from the region who fell from grace that year. Not a year went by without the popular actor from Tieling performed at the annual Chinese New Year Spring Gala but he was abruptly removed from the roster the following year. He is also suspected to have been entrapped by vice-president Wang Qishan’s anti-corruption drive that analysts say helped Xi solidify control.

“It was a rich area – dongbei people had jobs, security, education – the iron rice bowl – under the old regime,” explained Ye Jiabin, a cultural anthropology scholar at the Chinese University of Hong Kong.

“Liberalization in the 1990s hit them hard. Many of them miss the golden age of communism and criticize the excesses of capitalism but now things are different.”

“Now, they even buy houses and travel to the south during the winter.”

More than just the result of political headwinds, however, the change in attitude occurred as well due to shifting ideological goals among the Chinese. Won over by the wealth creation opportunities afforded by economic liberalisation, the socialistic outlook espoused by the Dongbei area once cherished as the “eldest son” by former premier Mao Zedong waned in popularity.

Shenzhen epitomizes the change as much as any other city in the south. It was a city that barely housed three-quarters of a million in the 1980s but its population exploded in the past decade. Makerspaces, startups and tech behemoths like Tencent are a far cry from the farmyards that the Zhengs call home.

“Why do you think young Chinese people are migrating? To get away from their parents,” joked Mary Ann O’Donnell, the co-founder of Handshake 302, an artspace in Shenzhen. Since 1995, O’Donnell has lived in Shenzhen and she pointed out that these elderly dongbei tourists would not even have been allowed to come to the south in the past. Even the fact that their children can now migrate without repercussion is a sign of the changing times that has left the elderly seemingly stranded back in the 20th century.

“Up until 1992, people could not leave because of Hukou (a household registration system brought in to restrict migration to urban centres),” she said.

“People who came to Shenzhen in the 1980s and 1990s, if they came and worked here, they left the system.” It would have meant losing access to public services.

“Everything changed after 2000.”

Like the elderly in any other country, the Zhengs and their friend are naturally biased in favour of the place they call home – they proudly talk about the beauty of the Songhua river and how Liaoning’s three treasures (ginseng, minx fur and sennegrass) can help one battle the coldest winters. The northeast, formerly known as Manchuria in the West, has known Japanese rule and its people pride at the role they have played as a bulwark for Chinese civilization against external threats.

But now the Zhengs concede they understand why their children want to stay in the south.

“In the village [in the north], they can only own a small parcel of land, making a living earning just a few cents (every day),” explained Xu, who had been otherwise quiet during the whole exchange.

“It’s impossible to make a living off the land so it’s better to come here for work. They can only blame themselves if they didn’t study well at school and move out.”

Walking gingerly, the three held hands as they climbed onto the steps on the escalators. Theirs is a community bound by shared heritage but they hope the old-fashioned values that dongbei people are well-known for would not be lost in the drive towards modernity. They hope that their children would eventually be welcomed by the southerners.

“We came here from different places and regions for the same mission,” said Liu. “Dongbei people are stubborn but we are also generous, courageous and compassionate.”

“Old people like us have experienced all kinds of life – happy times and tough times. Now, young people are enjoying the good times. Young people should feel at home wherever they go.”

A Chinese Girl Learns Russian & Begins To Forget It

This was an assignment for Covering China taught by Initium editor Zhang Jieping. We were asked to write about the life experiences of a classmate.

“If you come to a Chinese family as a guest, they will not let you do anything – you sit, eat and watch TV,” Yin Li remarked.

“But when I visited my Russian friend’s grandmother, they asked me to help. They treated me like a member of their family.”

As I had lunch with Li, who calls herself ‘Olivia’, in a courtyard in May Hall, a century-old Edwardian structure, in Hong Kong, cross-cultural experiences now seem to be the norm.

But Olivia had to go out of her way to find Bekhet Lilia online back when she was studying Russian at Hunan Normal University.

Singing the Chinese translation of Moscow Nights as a child had sparked her interest in the language so she chose to study the language at university even if it was offered at only one institution in the province.

She followed that up with a course in Russian literature at the University of International Business and Economics in Beijing. Even though, she managed to work at the Kazakhstan embassy in the Chinese capital, it was not easy to maintain an online friendship with someone from a different country.

Her friend, however, bears little resemblance to that person now.

“After we met, she came to Changsha,” Li continued.

“She married an Egyptian man and became a Muslim.” After marrying a paediatrician, a pensive Olivia told me how her friend changed as she began to wear a niqab and unfriended most of the people she knew on Facebook.

Her friendship with Bekhet might have faded and she fears so might her Russian – the language that forged a common tongue for two girls from two different countries.

Just a few weeks back, Olivia blurted out a question in Russian when she meant to speak in English. On the instant messaging platform WeChat, she tells her friends she has a hard time keeping track of the languages in her head. Sometimes, the words escape unbidden. At other times, they elude her.

China and Russia are similarly grappling with a changing world order.

Communist allies over the Cold War, the two countries have always respected each other in the face of Western hostility. With autocratic regimes often in power, the two countries share a unique bond.

In many parts of northeastern China, village elders still speak reverentially in fluent Russian of Lenin’s words that inspired millions. There are even schools in China where Russian is the medium of instruction. Back in 2016, Li was thrilled when she obtained an opportunity to move to Moscow in 2016 to work at a government institute attached to the embassy of China.

“The Russian countryside is so similar to what I saw in Yueyang,” Li said. “But I felt depressed in Russia. Even if I go back now, I’m sure Moscow will not have changed much.”

Despite living in a spacious apartment in Moscow, Li said she was lonely. The institute’s efforts to promote Chinese culture were not gaining headway and she was not certain of her career prospects. Her partner was back home as well.

That’s when she decided that she needed to be proficient in a new skill – journalism – and get better at a different language – English.

It’s no secret that as China liberalised, many of Li’s compatriots have shunned socialist philosophy and turned to the West for direction. Instead of studying in institutions in Russia or former Soviet Union states, they are now increasingly headed to Western countries. In last year’s Open Doors report issued by the Institute of International Education, the number of Chinese students studying in the United States rose by a third over the previous year to 350,755 in the latest data available. Chinese students have consistently outnumbered every other international student cohort for many years.

Instead, it’s now Russia that finds its people, and sphere of influence, being won by Chinese interests.

Recently, Chinese troops were spotted in Central Asia. The state’s ambitious Belt and Road Initiative has branched towards Eastern Europe with the Polar Silk Road initiative as the country seeks to develop newer shipping lanes.

Now, Russians are flocking to China to find work as English teachers, models, dancers and some even work as prostitutes. In Moscow, the authorities are seeking to attract Chinese citizens who have tired of well-trod cities like Milan and Paris in a phenomenon called “Red tourism “.

Instead of learning Russian, Chinese youth seek to learn English to increase their prospects of connecting with the outside world – English has generally adopted as the world’s common tongue. From hip-hop to popular television shows, Chinese millennials are increasingly influenced by Western developments so that they can be part of the global conversation, much to the chagrin of the Chinese government.

In many ways, it brings the story full circle for Olivia. It was actually a volunteer American teacher in junior school, one of the first foreigners she met, who piqued her curiosity about life outside China.

“I was a very good student in English and could speak it really well… but not now!” she said with a laugh.