At the start of the Covid-19 pandemic , as India’s case numbers surged, some analysts saw dark days ahead for the country’s booming start-up sector, predicting investor cash would dry up. The doomsters, though, were wrong. Indian start-ups have been on a fundraising roll, helped by venture capitalists scouting for emerging-market alternatives to China where a corporate crackdown has spooked investors. Investors globally have poured more than US$30 billion into tech start-ups in the first 11 months of 2021, more than double the US$13.1 record set in 2019, according to deal-tracker Venture Capital Intelligence, and there are still December’s numbers to come. “This year has been a watershed one,” said Pranav Pai, founding partner and chief investment officer at 3one4 Capital, a Bangalore-based early-stage venture-capital firm. “Globally, investors are very happy, having made serious profits this year,” he said. India has also seen the birth of 42 unicorns (start-ups valued at over US$1 billion) in 2021. That is close to four a month, compared to the seven that emerged throughout 2020 and six the previous year, market researcher CB Insights pointed out. It brings India’s total unicorn count to 72, the third most after the United States and China. While India’s tech and finance start-up scene grew rapidly over the past decade, there are several reasons why 2021 has been a breakout fundraising year. India was long a second choice for investors after China. But now it is benefiting from China’s corporate regulatory curbs that are prompting some investors to pivot to different geographies. “What happened to Didi, that is a very scary, dramatic policy reversal,” said an Indian investment fund head, who spoke on condition of anonymity. What’s behind the success of Indian tech CEOs in Silicon Valley? He was referring to the Chinese ride-hailing firm’s sudden announcement recently that it would delist in New York and go public in Hong Kong amid Beijing’s cybersecurity worries. There has also been the tide of cash released by central banks globally to keep economies afloat during Covid-19, some of which has washed up in India. Another lure for investors has been the vast commercial possibilities from India’s underpenetrated consumer market of 1.36 billion people. (India’s population is expected to overtake China’s by 2030). India has 825 million internet users, which means more than 500 million are still to come online. “There’s such a lot of growth headroom,” said Arun Natarajan, Venture Intelligence’s founder-and-managing director. While the coronavirus has sharply accelerated Indians’ use of online platforms for everything from ordering meals and shopping to making payments, many internet customers are inexperienced and still coming to grips with e-commerce . The average Indian per-capita income, estimated at US$2,000, also has a long way to catch up to China’s US$10,000 per capita earnings. Even so, Indian consulting firm RedSeer forecasts India’s digital consumer economy, covering sectors from retail and education to food and pharmacy services, will balloon into an US$800-billion market by 2030 from an US$85 billion to US$90 billion market in 2020. IPO boost But by far one of the biggest boosts to India’s start-up ecosystem has been a string of IPOs, including the blockbuster listing by online food-delivery platform Zomato, backed by China’s Ant Group , that raised US$1.3 billion, with Goldman Sachs forecasting in a September report that as many as 150 private firms could list over three years. Zomato was India’s first home-grown unicorn to go public successfully. Already in 2021, Indian companies have raised a record US$15 billion via IPOs. It used to be that firms needed to show several years of profits before listing. But the regulator changed the rules to allow loss-making companies to list, making Indian start-ups much more attractive to investors. (Indian start-ups, like their peers elsewhere, are loss-making). Start-up investors were uncertain about how they could exit. Now, with the IPOs, there’s a clear exit path Santosh Pai “Start-up investors were uncertain about how they could exit. Now, with the IPOs, there’s a clear exit path,” said corporate lawyer Santosh Pai, a partner with New Dehli-based law firm Link Legal who has extensive experience in India and China. “India is now a full-service investment destination,” he said. India has lost out on funding in the past year from China sources but capital from elsewhere has more than plugged the gap. Chinese giants like Alibaba , ByteDance and Tencent made nearly US$4 billion in venture investments in start-ups, the online ecosystem and apps in the five years to March 2020, according to India think tank Gateway House. In 2020, 18 of India’s then 30 unicorns were Chinese-funded. Gateway House noted that China invested in Indian start-ups when there were no Indian investors. It also provided the “patient capital” required to support Indian start-ups during their loss-making phase. But when relations nosedived between India and China in 2020 as a result of their border military stand-off that began in June of last year, India’s government curbed Chinese investment in India’s technology industry. “I haven’t seen typical VC investors in China do any new deals, although some of them have exited previous investments and achieved good returns. Until the political situation improves, I don’t see new investment happening,” Ntasha S, a co-founder of Venture Gurukool Capability Fund, told China’s state-run Global Times in August. The Chinese are missed not so much for their money but for their ‘third world’ expertise,” said one Indian fund manager. “They bring a lot of ‘value-added’ experience with their investments. The Chinese start-up experience is more relevant to the Indian situation than the Western model,” he added. Catching up In raw numbers, China is still well ahead in venture capital funding. But for the first time, India surpassed China in venture capital funding growth during the first three quarters of the 2021 calendar year. Venture capital investors sank US$20 billion into Indian companies during the first nine months of 2021, up 147 per cent from the same period in the previous year, tech intelligence firm CB Insights reported. That compared to 101 per cent growth in China where capital investments increased to US$67 billion, CB data showed. One of the Indian start-ups’ biggest cheerleaders is SoftBank’s Masayoshi Son. The billionaire tech investor said recently that a decade ago he had planned to put US$5 billion into India but ended up investing over US$15 billion, of which he invested US$3 billion in the last year. SoftBank has said if it finds the “right opportunities at the right valuation” it could invest US$5 billion to US$10 billion in 2022, according to Bloomberg. ‘There’s a lesson here’: Paytm rout reality check for India’s ‘casino’ IPOs Are India’s start-up valuations in bubble territory? The central banks’ cash tsunami has spurred investors toward ever-riskier assets and driven up valuations in India as elsewhere. The disastrous US$2.5 billion IPO by Indian payments giant Paytm , backed by SoftBank, Ant and Alibaba, gave the market a nasty shock as investors judged the valuation excessive. (Paytm’s shares are trading around 25 per cent below their issue price). Shares of Star Health and Alliance Insurance Co, backed by billionaire Rakesh Jhunjhuwala, which raised US$848 billion, had a rocky start this week, with no trading debut “pop”, unlike the nearly 20 per cent first-day gains seen by most Indian big IPOs. More lacklustre listings would cast a pall over start-up valuations and IPOs. A number of global investment houses have also been starting to get jittery about the rocketing Indian share market which is up 25 per cent this year. Even India’s central bank is waving a red flag over what it calls the “spectacular gains” by Indian shares that have “raised concerns over overstretched valuations”. Market risks are rising with a more hawkish US Federal Reserve expected to tighten interest rates to combat no longer “transitory” inflation. It could be that once the rate-hiking cycle starts and safer investments become more attractive, fund flows could weaken and investors will become more cautious about swollen start-up valuations, unproven business models and profitability prospects. There could be a valuation “correction”, analysts said. Still, “the Indian market has deepened for all of the start-ups”, said 3one4 Capital’s Pai, adding that India was likely to be “a much larger part of global fund allocations going forward”.