Border clash: Chinese investors might not completely tighten purse strings for Indian startups

Capital infusion in Indian startups from China has been largely from strategic investors.

Money has no colour particularly for startups that survive and thrive on it irrespective of the country and region it comes from. This thought fits even better in the context of early or seed-stage startups for whom revenue is zero or negligible. They remain vulnerable to market dynamics and often dance to the tune of investors. The biggest backers for such ‘enterprising’ businesses in India have been investors largely from the US, Japan and China. Barring the first two, investments from China for Indian startups have the cat and mouse game in the backdrop played by the two Asian giants politically, militarily and economically. But would the latest skirmish between armed forces at the Galwan valley have any bearing on startup funding in India? Limited, said experts Financial Express Online spoke to.

“I don’t think this will impact startups significantly. India will remain an attractive market for Chinese investors. Sentiments will not dramatically be going to change. There will some sluggishness but fundamentally Indian ecosystem from Chinese investors’ point of view is fairly important. The reality is that border issues and startup investments are two different things,” Ankur Pahwa, Partner and National Leader, E-commerce and Consumer Internet, Ernst & Young India told Financial Express Online.

The impact, whatsoever, due to the border tussle will nonetheless add to the challenges brought up by Covid while recent government’s move to tweak the FDI policy to check investments from China might deter capital inflow amid additional approvals required from the government. This had come after China’s central bank People’s Bank of China acquired 1.75 crore shares in India’s HDFC Bank. Adding all three, the time to raise capital for startups might get stretched.

“The macro context is that in the last five years Chinese investors have become a very significant contributor of capital to startups. There is no doubt that taking action vis-a-vis their investment will impact the ecosystem quite significantly at a time when capital is going to be in demand for startups. The border impact will not be going to reflect right now. It is a very recent development to have an impact on the funding,” Arun Natarajan, Founder, Venture Intelligence told Financial Express Online.

According to a report by Gateway House: Indian Council on Global Relations, Chinese technology investors have put around $4 billion in Indian startups in five years ending March 2020. 18 out of 30 unicorns including Bigbasket, Byju’s, Flipkart, Ola, OYO, Paytm, Zomato, Swiggy, Snapdeal, Udaan, Rivigo, Quikr, PolicyBazar, MakeMyTrip, Dream11, Hike, Delhivery, and Byju’s. The biggest backers from China has been Alibaba, Tencent, Fosun, Steadview Capital, DiDi Chuxing, Shunwei Capital and more while China-based or China-linked apps and companies like TikTok, Shareit, UC Browser, Zoom Oppo, Xiaomi etc. have dominated the Indian technology space.

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“Chinese investors might keep a low profile until the current border tensions are relaxed. As a result, we might see a marginal dip in deal volume but this won’t block investments in Indian startups anyway. As much as Indian startups want Chinese money, the Chinese investors will also not withdraw focus from Indian startups because of the long term opportunity. The short term slowdown might be visible in low ticket deals at the early and mid-stages. Chinese investors in unicorns or near unicorns will remain committed. Investors look at this separately from nationalism,” a prominent Gurugram-based venture capital investor told Financial Express Online.

Among the key reasons for China’s deep penetration in Indian startup and tech ecosystem has been lack of a domestic pool of capital to back startups. Unlike China, Indian conglomerates have not been able to commit and invest billions of dollars at scale in Indian startups. Also, unlike majority VC/PE money that comes into Indian startups from investors based in the US and Europe, capital infusion from China has been largely from strategic investors such as Alibaba, Tencent, Fosun, Foxconn, Ctrip, Didi Chuxing, etc. and less from dedicated VC funds including Hillhouse Capital, CDH Investments, Ward Ferry etc. Close to two dozen Chinese tech companies and funds have backed 92 Indian startups including unicorns, according to Gateway House.

“The nature of Chinese investment is different from financial capital that typically comes from other geographies where it is PE/VC money. In China, it is strategic capital. Even smaller venture funds like Shunwei Capital are originally promoted by Xiaomi,” said Natarajan.

Moreover, Chinese money is good because investors bring a lot of strategic insights even as from market point-of-view and e-commerce, China is way ahead of India. So they have the ability to support the growth of Indian startups. However, new investors from China who don’t have exposure to India may take slightly more wait-and-watch view. “So there will be some impact as the number of investors may not expand other than who are already investing in India,” said Pahwa.

The current support at the early and seed stages in India is offered by a host of homegrown capital and early-stage VCs, seed funds along with a network of angel investors in India. However, for investments from China, possibly slowing down a bit for the short term, investors from other geographies may also relook at the scenario before investing. “Investors excluding China will also become little watchful given that nobody like uncertainty and if there are any border issues then investors will take a wait-and-watch stance,” Harish HV, independent startup consultant told Financial Express Online.