Anti-China Sentiment Pushing Indian Startups To Look Beyond Neighbour's Money Of the 30 Indian Unicorns, 17 are backed by Chinese investors

The outbreak of the novel coronavirus had already dented the perception of Indian consumers towards anything "Chinese', as it is widely believed—not proven—that the deadly virus affecting millions across the world originated from the wet markets of Wuhan in China. The dislike grew so much that during a discussion with Entrepreneur India during the lockdown, Kallol Banerjee, co-founder of Rebel Foods, said while Indian consumers were ordering biryani and pizza, the demand for "Chinese' food became almost nil.

One of the other irritants for India is the fact that the country's trade deficit with China is high—around $57 billion in 2019—and has remained so for many years.

And now with the Chinese troops trying to encroach Indian land around the Indo-Tibetian border leading to death of soldiers on both sides has flared up the anti-China sentiment even more. The sentiment is echoing across the world with Indians, Taiwanese and Tibetians protesting and raising slogans against Chinese premier Xi Jinping in Tokyo.

In India, kitchenware maker TTK Prestige has already announced that it will stop importing material from China, and others are looking for alternatives too. While the public opinion regarding consumption of Chinese products is already changing—case in point being Indians deleting the hugely popular Tik Tok app and moving to homegrown Chingari—the changing mood is now expected to have ramifications on the bustling Indian startup ecosystem, at least in terms of funding.

Chinese penetration in Indian startups

According to a report by data and analytics firm GlobalData, Chinese investments in Indian startups rose by 12 times over the past four years to $4.6 billion. Of the 30 Indian unicorns—startups with a valuation of $1 billion or more—17 are backed by Chinese investors. A bulk of these firms are backed by Alibaba and Tencent. These investors not only bring money to the table, but also help these startups to expand their presence globally.

"Chinese investors have been a source of a large pool of risk capital for the Indian venture ecosystem, perhaps the largest after Softbank. More than half of Indian unicorns have raised capital from Chinese investors," said Ashish Sharma, managing director (MD) and chief executive officer, InnoVen Capital India.

Fintech behemoth Paytm has raised $3.5 billion, Uber-rival Ola $3.8 billion, foodtech services company Swiggy $1.6 billion, and the Walmart-owned Flipkart $7.7 billion from Chinese investors, to name a few.

"The venture funding environment was already experiencing a slowdown on account of COVID-19 and the worsening geo-political situation with China will impact that further. The impact will be limited in the early-stage funding environment, which is quite deep with a large set of investors," Sharma added.

He believes both startups and investors from China will be affected due the new foreign direct investment (FDI) guidelines. The new FDI regulations imposed by the Indian government prevents any neighboring country sharing land borders with India from making direct investments in Indian companies, and need to seek approval. This was primarily done to prevent hostile takeovers by China of Indian companies.

Zomato, which has a market share of 50-55 per cent in food delivery space after acquiring Uber Eats earlier this year, is already facing the impact of new FDI policy. According to a The Economic Times report, Zomato's existing investor Info Edge has said the company is yet to receive $100 million of the $150 million pledged by Ant Financial before policy was announced.

"We are still evaluating, but the company has got inbound investor interest from other investors also who don't need permission," Sanjeev Bikhchandani, executive vice-chairman of Info Edge told the daily paper when asked if the government's approval is required for the investment.

Zomato,till date has raised $914.6 million from Chinese investors such as Alibaba Group and Shunwei Capital.

Looking beyond China and VC money

Pankaj Makkar, MD, Bertelsmann India Investments, thinks that Indian entrepreneurs need to change their mindset of relying on easy cash from venture capitalists.

He believes the best source of money is consumers' money. "Build a value proposition where a consumer buys your product and you make profits," he said during a webinar organised by Entrepreneur India.

Terming this as a speed breaker, Makkar said entrepreneurs should not run after cash and build more sustainable businesses even if the growth rate drops from 300 per cent to 30 per cent. Entrepreneurs with sustainable business models will continue to build valuable companies because of the large opportunity in India, according to him.

InnoVen's Sharma believes that the late-stage companies with significant Chinese shareholdings will have to reevaluate their plans.

"Most founders even with existing Chinese shareholding are looking to diversify their investor base and raise money from US or European investors," according to Sharma.

Makkar agrees. "Chinese money is not the only money entering India, money is coming from all over the world. Globally, money is extremely cheap, in fact, in negative interest rates. So I don't see that there is a challenge for good sustainable businesses to raise capital. We don't have to rely on one source of capital," he said.

He believes that if a startup has a sustainable business model then it will find other backers.

Serial entrepreneur and investor Rajesh Sawhney, speaking to CNBC Awaaz recently, said India must not let foreign companies buy its assets. "We have to build a roadmap for the next 25 years and enable conditions to make our industry competitive. We have talent, market and the ability to raise funds from other parts of the world as well."