Snapdeal, Swiggy, Ola, Paytm, Flipkart, BigBasket, Zomato, Hike, Paytm Mall, Dream 11, Oyo, Byju’s, Rivigo, Delhivery, PolicyBazaar, Quikr, and MakeMyTrip. A day doesn’t go by in our lives without using the services of even one of these companies. From payment services to taxi bookings to online shopping, we rely on these companies for their stellar service, reliability and affordability. Another thing all these companies have in common are investors from China. Although these companies (many of which are unicorns) have Indian founders, they are also heavily funded by Chinese investors with deep pockets and massive influence.
Chinese investments in Indian startups is not a new phenomenon. Last year, Indian startups raised a total of $14.5 billion, of which $4 billion came from China. On taking a closer look, it was clear that 18 out of 30 Indian unicorns had investors from China. Chinese investments in India peaked in 2017 when 18 deals worth USD 1.66 Billion were made.
China’s investment game
There are two major groups of Chinese investors that are investing in Indian startups.
- Chinese VC Funds such as CDH Investments, Ward Ferry, SAIF Partners, and Hillhouse Capital are largely based in Hong Kong. They are similar to global investors like Sequoia or Softbank in the way that they look for bigger returns and not market dominance.
- Tech giants like Alibaba, Tencent and Xiaomi. These companies have investment arms that aim to build a significant presence in the Indian consumer market.
Why does China invest in Indian startups?
We identified three main reasons why Chinese investors are keen on investing in the Indian startup ecosystem:
1. The difference in currency value
Compared to the Indian Rupee, Chinese currency has a value that is almost 10 times higher. This means that Chinese investors have to invest much less in Indian startups as compared to Chinese firms. Some corporations invest in startups with similar business models, like when Alibaba invested in Paytm. This helps them trade key technologies, which adds long-term value and ultimately affects the return on investment.
Data is the new oil, and these investors know that. Chinese corporations like Alibaba, Xiaomi and Tencent have their own, ready to use ecosystems. This includes e-commerce platforms, payment gateways, messaging services, private servers, etc. This ecosystem when connected to Indian startups can result in the loss of critical data. This data can of course be used by Chinese companies in ways that benefit their ambitions. Data harvesting is something Chinese companies are notoriously famous for.
3. Enforcing market dominance
China imposes a number of restrictions for foreign companies to operate in their country. Websites like Facebook, Twitter and Google are banned in China. Apple, Microsoft and Samsung have to overcome many restrictions just to operate in the country. This ensures that homegrown companies like Alibaba and Tencent, which have deep ties with the Chinese Communist Party, become virtual monopolies. In India, these companies use capital investment as a tool to gain access to local startups and then eventually become monopolies through business consolidation.
The FDI Gamechanger
With the recent changes in India’s Foreign Direct Investment (FDI) policy and PM Narendra Modi’s call for ‘Atmanirbhar Bharat’, Chinese investors might have found themselves in a bit of a quagmire. In a recent interview, Atul Pandey, a partner at the leading law firm Khaitan & Co, said that these policy changes will spook Chinese investors, even those who are looking to invest in non-core sectors that come under automatic route such as e-commerce, fintech, digital services and logistics. Chinese investors looking to participate in the upcoming funding rounds of its portfolio companies will need to get prior approvals from the government before pumping in capital.
BigBasket, a leading online grocery service recently approached Alibaba Group to raise funds. One of its investors, K Ganesh, feels that the government must distinguish between out-and-out control by Chinese entities as opposed to minority investments by companies with no board or management control. He feels that anti-China sentiment will have an impact on Indian companies that are managed by Indian founders with Indian employees.
As of the publication of this article, the Indian startup ecosystem is waiting for a detailed notification under the Foreign Exchange Management Act (FEMA) from the Reserve Bank of India. The announcement which is expected to be made around mid-July, can have long-lasting effects on Indian startups.
The future outlook
Even as tensions rise between India and China, the dragon still holds sway over the startup ecosystem. Will India look towards other avenues like the US and Japan for funds, or try harder to become Atmanirbhar? With the Modi government encouraging Indian consumers to buy locally produced goods, India can hopefully over the course of a decade wiggle its way out of the clutches of the dragon. How all this unfolds remains to be seen, but one thing is for sure – the Chinese are not getting a free pass into India anymore.