Money from Chinese tech firms is deciding India’s next unicorn, say venture capitalists

The backing of a Chinese tech giant often enables an Indian start-up to put rivals out of business, say delegates at the Asia Private Equity Forum

PUBLISHED : Monday, 22 January, 2018, 7:00am
UPDATED : Monday, 22 January, 2018, 7:00am

Capital from Chinese technology firms is deciding the winners in India’s tech start-up market, according to venture capitalists.

Indian companies chosen by tech giants such as Tencent Holdings and Alibaba Group Holding have received vast amounts of capital, enabling them to put rivals out of business by building their own ecosystem and developing new products.

Chinese investors have been using this “winner-takes-all” strategy in India for the past few years, having seen it pay off for late stage start-ups in China and the US, said Karthik Reddy, co-founder and managing director of Mumbai-based Blume Ventures.

For example Ola, India’s equivalent of Uber, with the backing by Tencent and SoftBank was able to shut down its rival TaxiForSure – part of Blume Ventures’ portfolio – in 2016, a year after it bought the competitor for US$200 million.

“Nobody can contend with that capital,” said Reddy, at the Asia Private Equity Forum on Wednesday.

In the last 18 months, Chinese companies have poured around US$2.37 billion into Indian start-ups, according to data research firm Tracxn.

South Africa-based Naspers, an early-stage investor in Tencent, and Japan’s SoftBank, an early investor in Alibaba, have been actively ploughing money into India and are seen as close partners of the two Chinese companies in which they are still major shareholders. Alibaba owns the South China Morning Post.

SoftBank, along with Alibaba, took a seat as a major shareholder on the board of Paytm, India’s largest digital payments start-up, after the Japanese investor poured in US$1.4 billion – the largest single transaction for funding in the country’s technology sector – last May.

The money is set to help Paytm expand its user base and start to offer financial services products, mirroring the growth strategy of Ant Financial, Alibaba’s payment affiliate.

Last year, Naspers invested US$80 million in Indian food delivery platform Swiggy, and US$71 million in Flipkart, India’s largest e-commerce start-up.

The winner-takes-all tactic will pay off in the long run, said Richard Ji, managing partner of All-Stars Investment, a major shareholder of Chinese phone maker Xiaomi, at Wednesday’s forum.

The fund was the biggest investor in Xiaomi’s latest round of fundraising, valuing the unicorn at US$45 billion in late 2014. Xiaomi was reportedly considering an initial public offering this year, with a valuation of US$100 billion, making it the most expensive unicorn in the world.

“Capital can make a significant difference in China’s late stage [start-up] market,” Ji said.

Since 2014, there has been a lot of consolidation in the fiercely competitive sector. Examples include the mergers between taxi-hailing app Didi and Uber China, and online classifieds sites and Ganji.

For late stage start-ups, how much capital they can get determines whether or not they will survive. Investors with deep pockets can also provide start-ups with strategic resources and help them grow, Ji said.

Smaller investors in India, such as Blume Ventures, tend to put money into early stage start-ups to avoid competition, according to Hu Jianlong, founder of a Beijing-based tech news outlet with a focus on China and India.

Capital from Chinese tech companies is good for Indian start-ups, Hu said, as it brings the resources needed to build a sustainable supply chain or find business partners.

“Eventually that decides who the winners are,” said Reddy.