Non-Chinese Investors Flock To India, As Chinese Money Pales
Anti-Chinese sentiment followed by border clashes in LAC and implementation of FDI norms has left Chinese startup investors in a tight spot, but investors from elsewhere in the world are making big bets on India
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Even a cursory glance at the business headlines during the past few months will point to the growing trend of foreign investors pumping cash in Indian companies. The Indian Prime Minister Narendra Modi recently, while speaking at US India Strategic Partnership Forum (USISPF), claimed that the country has received over $20 billion foreign direct investment (FDI) this year.
When it comes to the Indian startup ecosystem, which is burgeoning in recent times and has more than two dozen unicorns, has always had foreign investors play an epoch-making role for a company's future. From the nascent stage of Indian startup ecosystem, foreign investors, particularly Chinese investors, have shown a massive interest after understanding the market potential. However, in current times, there has been a gradual shift in terms of the source of investment.
Why is foreign investment coming?
Whether it be a Chinese or non-Chinese investors, India because of its young population has gradually become a technology-hungry country. From online cab services to selling of used products, ideas have taught Indians to live hassle-free lives thus inspiring others to wear the entrepreneurial hat.
"India has a mature and active entrepreneurial and investor ecosystem. Foreign investors have been in India for a long time and have obviously increased their presence, given the size of the market and plethora of investment opportunities," said Surya Mantha, senior partner of Unitus Ventures.
According to Siddharth Pai of 3One4 Capital, India is one of the largest untapped market in the world with strong fundamentals such as high smartphone numbers, deep Internet and 4G penetration, per capita income of over $2,000 at purchasing power parity along with liberal FDI policy, which have made India an attractive proposition for global investors as a growth destination.
An official report in October suggests that India received the highest ever FDI amounting to $35.73 billion for the first five months of a financial year during April-August 2020. The amount is 13 per cent higher than that in the same period in the last year.
Apart from these, foreign investors not only inject cash but also bring a lot of experience, guidance and global expansion plans for these startups to the tables.
Blow to Chinese and its repercussion
It is the Chinese investors such as Tiger Global, Tencent, Alibaba which with their huge investment has made the world take cognisance of India as a modern world country. The top five most-valued startups in the country such as Paytm, Swiggy, Oyo, Ola Cabs and Byju's are backed by Chinese investors. Alibaba and Tiger global have invested the most among Chinese investors in Indian unicorns.
However, the years old mechanism changed in the wake of the COVID-19 pandemic. Though the origin of the virus is yet to be identified, China faced most of the wrath. Simmering border tension on Line of Actual Control (LAC) and implementation of new FDI policy to prevent hostile takeovers of Indian companies by Chinese has further aggravated business relations between both the countries.
According to T.C Meenakshisundaram, founder and managing director of Chiratae Ventures, potential of Indian startups that are Series C and above in funding will be impacted due to the ongoing anti-Chinese sentiments. He said that though Chinese used to write big cheques and large capital was always available, the "rationality' in the business goes away. However, now the companies are stressing more on the unit economics and building sustainable and profitable businesses.
Pai said startups with Chinese investors even during these tough times managed to raise capital from alternate sources and foreign investors indicating filling up of the "lacuna' left by the Chinese.
He added that already stressed investors' concerns were further exemplified after the halt of ANT Financial's IPO and now they seek a stable regime with high growth potential and a government in favour of foreign investment—which works in the favour of India.
FDI norms/digitization/COVID-19 tailwind for non-Chinese investors
In the past few months, due to the strict scrutiny on the Chinese investors, many non-Chinese investors from Japan, Singapore, US and from West Asia have placed their bets on Indian startups even when the economy of the country is in shambles—two quarters of GDP degrowth which technically qualifies as recession. Investors include tech-heavy giants such as Facebook, Google infusing millions in Reliance Industries-led ventures, to first-time investors in the country such as Joyance Partners betting on Oga Fit, to even individuals such as Stephen Pagliuca, and other silicon valley angels.
Meenakshisundaram highlights that western investors entering India was a natural progression as the country continues to enjoy a large Internet user base which is expected to touch a 1 billion mark in next 5-7 years.
Sanjay Swami, managing partner at Prime Venture Partners, said despite the short-time hiccups, India is an attractive market with new areas of opportunity continuing to emerge, especially because of long-term buyer and user behavior transformations due to the pandemic.
"While fintech has been the first beneficiary of this, several other domains—notably healthcare, education, logistics—are also benefiting from the accelerated move to digitization," he added.
All the eight unicorns that India produced in this pandemic year is digitally simplifying Indian lives.
According to Pai though there has been an economic decline, it has not affected all sectors wherein startups operate. Services and the digital economy continues to thrive in the country as the need to go online is being appreciated across sectors.
"COVID-19 accelerated digitisation in an unprecedented fashion and startups are at the forefront of this change. Investors are aware of this and their investments fall into these sunrise sectors and areas that are poised to grow in spite of the current macro environment," he added.
Echoing the same, Ishpreet Singh of Stride Ventures said the startup ecosystem is at the forefront of the digital adoption in India, which has been further propelled due to the pandemic. However, he claims that COVID-19 is not the sole driver luring the interest of foreign investors.
Digital indicators such as the record-breaking 2 billion UPI transactions in October and quick recoveries of e-commerce sites to pre-COVID sales only proves that India has accepted digitization with open arms.
"While COVID has presented investors with deals offering great value, the Indian market is an attractive one notwithstanding COVID," he concluded.
Indian investors' stand
Harping on its amiable FDI policy, the Indian government without missing the opportunities on global platforms has tried to attract foreign investors to invest in the country. If the current trend continues, the Indian startup ecosystem will witness more foreign investors with more zeros in the cheques.
When asked if this trend threatens indigenous investors, Swamy said as they are involved in early-stage investment they consider their relationship with the founders matters more than just a cheque. According to him, foreign investors are likely to invest in a follow up round and there will be a complementary synergistic relationship between Indian and foreign investors.
Mantha said arrival of global investors opens up more investment opportunities for their portfolio companies.
"We always welcome more capital into the ecosystem. In India, there is no lack of great ideas and businesses that can profitably use more capital," he added.
Pai said Indian capital is a "minnow' in its own country and blames several policies such as "angel tax" to restrictions on Indian institutional from investing in VC funds and startups as these discriminate against Indian capital. He hopes to see Indian investors playing a bigger role in funding Indian innovation.
However, he said foreign capital is not the enemy and India being a capital-scarce country requires immense capital to fully develop. He said it is high time to create a level-playing field for Indian and foreign capital so that the Indian startup ecosystem as a whole can grow and contribute actively to India's economic development.