As venture funding in the Indian tech sector slows to a trickle, anxious local start-ups may have found a new backer of their dreams – Chinese investors.
Eager to invest in a market that is home to more than 12,000 start-ups and, they believe, at the tipping point for growth, a slew of Chinese investors are committing to new Indian ventures even as their American and European peers take a step back.
Their ultimate aim? To pick a winner capable of emulating the Chinese Unicorns – firms worth more than US$1 billion.
The trend started with a trickle in January last year when Hillhouse Capital invested US$50 million in the start-up CarDekho, an online automobile search engine. Soon after, press reports suggested Alibaba, owner of the South China Morning Post, and its financial-services affiliate were investing more than half a billion US dollars in Paytm, an e-commerce website that subsequently turned into a Unicorn. In August, Indian e-commerce company Snapdeal.com said it had raised US$500 million from investors including Alibaba and Foxconn.
In a recent meeting organised by the Internet And Mobile Association of India (IAMAI), and Onionfans, a Chinese company set up in Bengalore to “act as a bridge between Chinese investors and Indian start-ups”, nine Chinese investors met more than 125 Indian start-ups in the mobile and internet sectors, shortlisting 10 for funding.
According to venture capital tracker Venture Intelligence, from January 2015 to April this year, several investors including Alibaba and Tencent committed more than US$1.1 billion to Indian start-ups.
That is more a stream than a trickle, and is all the more noteworthy given that for years Chinese investment in India was stymied by unresolved border issues and a lack of business opportunities.
According to official figures, foreign direct investment from China amounted to just US$1.2 billion between 2000 and September 2015, only 0.47 per cent of the total FDI inflow.
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“We feel India’s internet sector will be the next big market after China; it is a hot area for Chinese investors,” said Eric Shu, a senior manager at Chinese venture capital firm Incapital. “In some ways India promises better potential as a market because it is better connected with the Western world and [Indians] can speak English.”
“We believe many successful internet business models in China can be replicated in India,” added Shu.
The contrasting fortunes of the two countries’ economies is also prompting the flow of Chinese money.
“While India’s GDP is still growing at around 7.4 per cent [annually], the Chinese economy is slowing down. Last year it recorded under 7 per cent growth for the first time in 30 years. A number of Chinese investors fear Chinese economic growth will start slowing down going forward and are hence looking at other hot markets. To them India’s internet market, which is very similar to the Chinese market, is emerging to be most promising,” Shu said.
Some are also enamoured by the country’s IT prowess.
“India’s huge population, rapidly developing economy, English-speaking labour force, superb information technology and IT sector outsourcing services are the elements that attract us to invest in India,” said Tao Li, the CEO of tech company Apus Group.
Small wonder then that “a lot more money is on its way”, according to Edward Li of Onionfans.
IAMAI and Onionfans say US$1 billion committed by Chinese venture capitalists will be invested in start-ups over the next three years.
Incapital, which has invested about US$1 million so far, plans to set up a US$10 million India fund in the next few months. All of that money will be invested in Indian start-ups by the end of the year, according to Shu.
Apus, which makes smartphone apps, says it is setting up a US$25 million fund for investments in local start-ups, since India is its “most important market in South Asia or even globally”.
That’s good news for a sector that is otherwise staring at a funding drought.
According to recent study by CB Insights, Indian start-ups received just US$583 million funding in the second quarter – a 60 per cent drop quarter-on-quarter and 25 per cent down year-on-year.
Consequently, many start-ups are struggling. According to press reports a dozen have shut down so far in 2016 – about the same number that folded throughout last year.
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With many struggling to stay afloat, quite a few have been acquired by other start-ups.
“The sector went through a phase of irrational funding that went bust a few months back. And now, funding has come to a state of halt,” said Sandeep Aggarwal, founder of an automobile portal, Droom, that raised an estimated US$25 million-US$35 million funding in June from undisclosed Japanese and Chinese institutional investors.
According to Aggarwal, Droom is now holding talks with another Chinese investor, Integrated Asset Management, which owns Forbes magazine.
Small wonder then that Indian entrepreneurs are queuing up to woo the Chinese. “After our first event we received requests from at least 1,000 start-ups looking for Chinese investors”, said Edward Li of Onionfans.
Indian start-up founders say the Chinese investors are not mere providers of cash.
“The local internet sector, for instance, is perched at the level where China was about five years back. So China has traversed down that path and Indian start-ups can take cues from the Chinese experience and learn about how to scale up their venture,” Anurag Jain, the founder of Cardekho, said.
Dinesh Rohira, founder of 5nance, a fintech start-up, said his firm was talking to three Chinese investors and also seeking marketing and technology help from them.
The Chinese investors are undaunted by huge challenges such as India’s still immature start-up environment and its labyrinth-like laws and regulations.
Tao Li, of Apus, said: “We are certain and confident that we will increase our investment in India going forward.”