Desi Unicorns in a Dragon-hold | Start-ups – Cover Story News


The Indian start-up story has caught the fancy of global investors over the past few years owing to their sheer numbers and potential in a largely untapped market. In 2019 alone, India added 1,300 technology start-ups, taking the country’s total to close to 9,300, says IT industry body Nasscom. India is now the third-largest start-up ecosystem in the world, which explains why one country across the border has pumped in over $6 billion into the sector over the past few years. According to data analytics firm GlobalData, Chinese investments in Indian start-ups have grown 12 times over the past four years to $4.6 billion (Rs 34,500 crore) in 2019, from $381 million (Rs 2,857 crore) in 2016, with a majority of unicorns (start-ups that command $1 billion or around Rs 7,500 crore in valuation) being backed by corporates and pure-play investment firms from China.

The domination is underlined by the fact that 18 out of 30 unicorn Indian start-ups are funded by Chinese investment firms such as the Alibaba Group. Alibaba and its affiliate Ant Financial, along with others, invested over $2.6 billion in four Indian unicorns — Paytm, Snapdeal, BigBasket and Zomato — while Tencent and others invested more than $2.4 billion in five unicorns — Ola, Swiggy, Hike, Dream11 and Byju’s.

Steadview Capital and Tencent Holdings have invested $300 million in Flipkart (now owned by Walmart). Alibaba and SAIF Partners have invested around $400 million in One97 Communications, which owns digital payments platform Paytm. Alibaba and FIH Mobile, a Foxconn Tech subsidiary, have $700 million in investment in Snapdeal.

Graphic by Tanmoy Chakraborty (Source: Gateway House)

A study by Gateway House, a Mumbai-based think-tank, has identified over 75 Indian start-ups where Chinese investors have put in money, spread across e-commerce, fintech, media and social media, aggregation services and logistics.

The need to look beyond their own home market has also driven this move by the Chinese. “At present, China’s market for start-ups is several times that of India’s, so that in itself is a huge opportunity for these investors,” says Sasha Mirchandani, founder & MD at Kae Capital and co-founder of Mumbai Angels, India’s first angel investment group. “However, at some point, they are going to slow down, so they need to look at future markets.” For Indian entrepreneurs looking for what Mirchandani calls “clean capital”, Chinese investment firms are an appropriate choice.

Most Indian V-C financiers are wealthy individuals/ family offices and cannot make the $100 million commitments needed to finance start-ups through their early losses, says Amit Bhandari, a fellow at Gateway House. For instance, Paytm incurred a loss of Rs 3,690 crore in fiscal 2019 while Flipkart lost Rs 3,837 crore over the year. “That leaves western and Chinese investors as the dominant players in the Indian start-up space. Global giants like Sequoia (US), Softbank (Japan) and Naspers (South Africa) back virtually every large Indian start-up. They are all big investors in China’s new-economy companies, have experience of that intensely competitive market, and seek to repeat their success in India,” he says.

Bhandari says the apparent stranglehold Chinese investment companies have on the Indian start-up ecosystem could lead to certain “systemic risks”. “Alibaba/ Tencent will be in a position like Google — they can decide which firm will succeed or fail by using their own technologies to control user access, ” he says. In April, the government amended the Foreign Exchange Management Act (FEMA) to curb investment from countries such as China and Pakistan. With this move, any Indian start-up looking to raise money from funds or individual investors in these countries will now have to take additional approvals from the nodal ministry. This came close on the heels of the government tweaking the FDI policy by mandating its clearance for all foreign inflows from countries with which it shares its borders. This was prompted by China’s alleged attempt to acquire distressed assets in India foll­owing the Covid-19 induced lockdown.

But those in the business think the fear of China controlling the start-up space is unwarranted. Any move to stall such investments into start-ups will be counter-productive, they caution. “What other options does a simple, hardworking entrepreneur who wants to raise money have?” asks Mirchandani. “They can’t go to the government. Now, you can’t allow them to get hurt because of jingoistic calls to keep such investments out.” His firm, he says, has worked with what he called “some fantastic Chinese investors” in the past.

While China’s overarching presence in the start-ups space is likely to become a hot topic of debate going forward, any attempts to throttle such funds will hurt India’s own aspiring entrepreneurs (making investments costlier), especially as no immediate alternative sources of such large-scale funding are visible on the horizon.

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