Decision to make govt nod must for Chinese investments to hurt growth-stage Indian startups

The recent order to restrict investments from China to the government route is set to harm Indian growth-stage startups, say industry experts. While dealmaking is bound to slow down by the decision, interest of Chinese investors in the Indian tech space could also take a beating, they said.

Since Indian domestic funds mostly restrict themselves to early-stage investments, startups rely on foreign capital for those multi-million dollar cheques. Chinese companies have been one of the most active participants in this market. As per industry figures, up to $4 billion came into India from China as investments in 2019.

“This move is expected to dampen interest on both sides, investors from China and companies seeking funding from Chinese companies,” said a partner at a venture capital firm. “This could also slow down funding processes causing further delays.”

Normally, for investments in sectors which are regulated in the country, it takes between one and two weeks for government approvals. Given all such investments will need the regulatory nod, the time taken for these clearances will shoot up, in turn delaying the investment process.

Industry insiders remarked that given the tough situation Indian startups are in because of the spread of COVID-19, if they find it difficult to attract Chinese capital, it could spell doom. With Western nations grappling with their own crisis around the pandemic, how many of the investors from those countries will be in a position to make aggressive bets in India is a big question.

“If the government wants to regulate flow of capital from China, then they should incentivise Indian institutional investors and corporates to invest in startups and domestic VC funds” said Ntasha Berry, co-founder of Venture Gurukool, which helps Indian startups reach out to Chinese investors.

Many Indian unicorns have received massive rounds of funding from large Chinese investors like Tencent, Fosun and Alibaba’s Ant Financial. Paytm, Policybazaar, Oyo, Dream11, Oyo Hotels and Homes, and Udaan have all received funding from such deep-pocketed investors. Now there is uncertainty regarding how much more they can get from their existing investors. Will they be interested to participate in further rounds conducted by these players? That is the big question.

Chinese VCs disappointed

Many Chinese unicorns have also scouted for acquisition and partnership options in India, since there is a certain similarity in consumer cultures between the two countries and India offers a massive market opportunity. Further many business models in India were also built on similar experiences in China, which attracted some investors here. Now, if the government starts looking closely at all investments, some of those players might want to relocate attention to the South East Asian markets, which are more open to Chinese money.

“In fact, there is a strong chatter in the Chinese VC ecosystem around their disappointment at the move and how it could lay to waste their efforts in understanding India and how the ecosystem here is developing,” said the partner of a VC firm quoted earlier.

Chinese investments in India have largely been in the consumer internet space where they have looked for private wealth rather than technology assets. Hence the need to bring all such investments into this purview has baffled experts.

“I think there will be greater scrutiny in sectors like pharmaceuticals and infrastructure startups, where the risk of Chinese investors buying stake is more,” said a founder of an early-stage startup. “India is not home to many companies whose IP would be on the radar of the Chinese government.”

Indian startups remain hopeful

Now the industry awaits the nitty-gritties to be revealed in the amendments to the FEMA guidelines, but a couple of things are clear. First, the government will keep a close check on the amount of capital coming into India from China, and second, while certain investments will be welcome, those in sectors such as media and pharmaceuticals might get rejected.

“Given that the fund-raising attempts presently underway by various Indian companies may also be potentially impacted, it is hoped that the government will come out with clarifications, and exclude “non-sensitive” sectors as well as sectors having employment, large cap-ex potential from the ambit of this new policy,” said legal advocates Khaitan and Co. in a note released on April 18.