The Fall of Chinese Investments in Indian Startups
Li Jian, a power broker in the Indo-Chinese tech relationship, moved to India in 2007, after graduating from Peking University, majoring in Indian Languages and Culture. He spent five years as head of public affairs at Huawei in Delhi and then founded an investment consulting service called Draphant. He became a major investor in Entrackr, an Indian media startup, in 2017.
Following Chinese giant Alibaba's investments in Indian startups, Entrackr began organizing “guided knowledge exchange” tours to China. Between 2017 and 2019, it took over 200 people from India to China. Li adopted an Indian name Amit, after the Bollywood superstar Amitabh Bachchan, and acted as liaison partner for Chinese delegations visiting India. Gurugram, where Li's company is based, began developing a Chinese startup subculture.
When Li returned in January 2020 to celebrate Chinese New Year with his family
in Guli, China, he was sure that his startup Draphant was poised to capitalize
on Chinese investments in India. What happened next came as a shock. In
January, the COVID hit India, and in June, a border clash worsened the bilateral
relationship between China and India. The Indian government declared that all Chinese
investments in Indian companies would have to be reviewed by the state before
they could proceed. It was followed by a three-phase ban of over 250 Chinese-owned
apps,
wiping out most of the Chinese internet market that had blossomed. Entrackr was compelled to turn to
external funding sources, including Paytm, raising USD 500,000 in February 2021, to
keep it afloat.
Chinese dawn in Indian startups
Tencent joined in 2016, leading a USD 175 million round in Hike Messenger, India's answer to Whatsapp. Hike gave up on messaging in January 2021. In 2019, Tencent invested USD 100 million in India’s first gaming app to enter the unicorn club, Dream11.
Xiaomi made its first investment in an Indian company by pouring USD 25-million in Hungama Digital Media Entertainment. It also invested in Marsplay, Oye Rickshaw and ZestMoney.
Paytm’s valuation
almost tripled to USD 8.3 billion in two years and its success attracted
smaller players and venture capitalists, like Morningside and Shunwei
Capital, a sister concern of Xiaomi. In
2017, Shunwei Capital invested in ShareChat and the next year, it led to a USD 50
million investment in Meesho. It has since invested over USD 100 million in Indian
startups, including in podcasting company KuKu FM and Indian alternative to Whatsapp, Koo.
The last Chinese investment in an Indian startup was in April 2020, by Legend Capital in the interactive online tutoring unicorn Vedantu, with a contribution of USD 10 million.
There has been a 12x growth of
Chinese investments in Indian startups from 2016 to 2019. A report titled “Chinese Investments in India” by Gateway House estimates that the total value of Chinese investments
in Indian startups during 2015 - 2020 is approximately USD 4 billion. 18 Indian
unicorns including Flipkart, Dream11, Delhivery and Rivigo are backed by
Chinese investments.
The economic rationale behind these investments is many. First, with the saturation in the Chinese domestic market, India is viewed as one of the last emerging markets with untapped potential. Moreover, Indian markets suffer from a lack of capital due to which investments are welcome in the system. Third, there is immense creativity and ideas that are offered by the Indian engineering institutes and the skills of young techies. And finally, these investments in India give China a competitive edge against the U.S.
China takes a back seat
Over the last two decades, India has received a cumulative USD 456.91 billion in FDI, with over 72% of it coming from five countries: the US, Singapore, Japan, Netherlands and Mauritius— China is not one.
The proportion of China’s FDI in India during the same period constituted a mere USD 2.34 billion or 0.51% of the total inflows. However, post-2014, Chinese investments shot up considerably across startups. But the preference for Chinese investors has gone down significantly from 29% in 2020 to 3% in 2021. The change in FDI regulations since 2020, resulted in funding from Chinese investors in India falling from USD 3.5 billion in 2019 to USD 1.05 billion in 2020.
After almost a nine-month freeze, the Indian government
started clearing the Chinese FDI proposals in early 2021, for the ‘smaller cases’, while the larger proposals
are to be dealt with later after a careful analysis. The Chinese gap may be filled by investments from other markets such
as the US, UK, and Japan.
Thus, India startup funds topped China in July 2021, the first time since 2013, after China stepped up a regulatory clampdown on its tech companies. Indian startups raised nearly USD 8 billion in July, while funding to Chinese firms dropped to about USD 5 billion, according to a Bloomberg report. Indian startups have raised a record USD 17 billion during January-June 2021, a surge from about USD 12 billion raised in full-year 2020 and USD 14 billion in 2013.
Though Chinese startups raised about USD 49 billion in the first six months of 2021, funding has slowed since the December quarter of 2020. From a peak of USD 27.7 billion raised in Q4 2020, Chinese startup funding dropped by 18% t0 USD 22.8 billion in Q2 of 2021, while India funding rose by 62% t0 USD 6.3 billion from USD 3.9 billion in the same period. India has seen 36 new unicorns in 2021, while China has added about 15. India raised nearly USD 20.76 billion across 583 deals as of August 20.
© Ramachandran
