When Madhusudan Ekambaram, the co-founder of Bangalore-based KrazyBee, travelled to China for funding in 2016, it seemed clear he was going the wrong way. At the time, fundraising journeys almost always pointed Indian entrepreneurs West – he headed East.
“The decision took many by surprise,” he recalled.
Less than three years later, the landscape is markedly different. Ekambaram has raised US$13 million in investments from China, and no longer needs to defend his sense of direction.
“Now, everybody is aware of Chinese investors, and more and more Indian start-ups have gone to China,” Ekambaram said. “That has become a norm.”
Once known as the source of “dumb money” – investments that could hurt, instead of help, tech start-ups in the long-run – Chinese investors now have found many happy recipients. In India, start-ups from fintech to e-commerce to transport have all rolled out the red carpet for Chinese investors, not only for their capital but also for their successful track records in similar markets.
The same trend can be seen in Southeast Asia, a region with twice the population of the United States and one of the world’s fastest-growing economies. High-profile investments include Alibaba pouring US$1 billion in 2016 for Singapore-based online retailer Lazada Group. Didi Chuxing – together with Japan’s SoftBank – tied the knot with car-hailing peer Grab at a price of US$2 billion last year.
Those newly formed partnerships have indicated Chinese investors have reached the point that they are able to compete head by head with Western venture capitalists hunting for the next Facebook or Google in emerging economies.
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While Western venture capital firms still dominate the investment of India’s tech world, statistics show the influence of Chinese money is on the rise. Last year, at least 23 deals signed by Indian tech start-ups involved Chinese investors, according to market research firm Venture Intelligence. By contrast, the figure was only eight in 2015.
Among the list of Chinese investees are India’s most valuable tech companies. Flipkart, Amazon’s chief competitor in the country, has accepted investment from Chinese social media giant Tencent, as has Ola, India’s answer to Uber. And Paytm, a leading digital wallet and online retail platform in India, has welcomed Alibaba on board, receiving US$45 million last week as the latest in a series of investments from the Chinese internet heavyweight. Alibaba is also owner of the S outh China Morning Post.
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This is in sharp contrast to Silicon Valley, where Chinese venture capitalists have often received a cold shoulder. The difference in attitudes is so obvious that when a group of Chinese investors visited India last year, “they were actually surprised by the warm acceptance”, said Steven Liu, a businessman in Bangalore who organised the tour. “In Silicon Valley, Chinese investors have been left out of conversations when it comes to investing in the best companies. But that’s not the case in India,” Liu said.
Capital game
For many Indian start-ups, Chinese investors hold a resource that is a lifeline for their business.
“If you say which Indian start-up is going to win, you are basically asking how deep their pockets are,” said Santosh Pai, a cross-border investment lawyer with Link Legal India Law Services in New Delhi.
As he explained, once a start-up advances, it will require new funding to fuel further expansion. “Most Indian venture capital funds do not have enough money to keep making follow-up investments. This kind of continuous investment can be sustained only from Chinese investors,” Pai said.
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Raising money has been particularly hard since late 2015, when a valuation bubble burst in India. Zomato, a food delivery start-up backed by Sequoia Capital, for example, lost US$80 million in valuation in five months that year, according to informational portal Crunchbase. As stories like this hampered the confidence of Western investors, Chinese investors, favouring long-term market leadership over short-term financial returns, served as white knights to cash-stressed companies.
Even for the financially strong, Chinese investment remains appealing. Market observers say Indian start-ups chosen by Chinese investors have received vast amounts of capital, enabling them to put rivals out of business by placing themselves in the centre of everything.
The latest example came from Paytm, the digital payment and retail service provider backed by Alibaba and SoftBank. The company recently acquired Little and Nearbuy, two popular Groupon-like apps in India, a move described by analysts as expanding the territory in which its e-wallet will be used. The investment is also expected to allow Paytm’s e-commerce arm to cross-sell deals on the two apps, further strengthening its presence in the Indian market.
“Clearly Chinese investors have become an influencer in deciding who is the big winner in India and making them even bigger,” said Karthik Reddy, a managing partner of Mumbai-based Blume Ventures.
“It is basically a capital game,” he said.
Similarity and leadership
But money is not the only reason Chinese investors turn heads in India. Many say they value the similarities between the neighbouring countries – the only two economies in the world with a 1.3 billion strong population, vast amounts of land and fast-changing societies.
“India is like China 10 years ago. Chinese investors would understand our space way better than American venture capitalists,” said Mandeep Manocha, founder of Cashify, which sells second-hand phones, tablets and other electronics online.
Manocha said e-commerce for used phones has already flourished among cost-sensitive Chinese consumers, while such business models are visually non-existent in the US. To tap into Chinese know-how, the New Delhi-based start-up signed a deal with Shunwei Capital last year.
Other Indian entrepreneurs are impressed by China’s rising profile in the global tech community. “In the fintech industry, I feel Chinese investors have more experience [than Western investors] because there are more than 5,000 fintech companies in China,” said Ekambaram of KrazyBee, India’s first student credit platform. “Chinese investors must have learned a lot by interacting with such a big number of companies.”
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Experience is crucial for fintech businesses – controlling risks while pursuing growth is a delicate balance. Setting the bar too low threatens a company’s long-term success, but holding the safety belt too tight might turn away customers.
With Lexin Fintech, a Shenzhen-based fintech company and an investor of KrazyBee, sending its team to help develop a secure risk-management model, “we do not have to learn things the hard way,” Ekambaram said.
By taking a ride on a proven model, the number of active users on the Indian microloan platform has tripled in two years to reach one million. Meanwhile, its operation has expanded to 15 cities, up from one in 2016.
A bumpy journey
Some Indian founders regret having missed the trend, including Kunal Shah, founder of Freecharge, who sold his company before Chinese investors flocked to India.
Shah successfully raised funding from established Western venture firms and later sold his start-up for US$400 million, but he told This Week in Asia that he “should have had a Chinese investor”.
“When you have a Chinese investor, they will tell you how companies in Asia are using mobile phones to do different things, including e-commerce, gaming and others. I don’t think you can learn too much from Western markets for India. All the learning for Indian founders will come from China.”
To welcome future Chinese business partners, Shah is now learning Mandarin.
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But neither the road to Chinese capital nor everyday interactions with Chinese investors is trouble-free. Indian entrepreneurs and venture capitalists cite language barriers and cultural differences as major challenges. Some industry players complain Chinese investors tend to speak among themselves in Mandarin, instead of engaging in an open discussion in English, while others blame Chinese investors who are unaware of India’s complex legal system and expect too much too soon. The sparse presence of Chinese investors on Indian soil worsens the trust problem.
But it is a problem that may not last long. Ekambaram remembers how hard it used to be to communicate with Chinese investors on policy compliance merely two years ago. They would get upset by endless paperwork and even grew suspicious regarding the purpose of document signing, he said.
Luckily, those concerns have faded over time. “I think it is getting much easier now,” he said. “With China doing more deals, they have started to understand India better than before.” ■
