Chinese investors may line up exits amid political standoff with India

Photo by Eugene Lim on Unsplash

India could soon witness a spate of exits by Chinese corporate and pure-play investment firms that have pumped in large amounts of capital in the country’s burgeoning startup ecosystem over the last few years.

The trend, caution experts, could gather steam in the wake of the recent standoff between the two nations that has not only created uncertainty in the political arena but also left a void in the economic landscape, with investments from China coming to a screeching halt in India.

“Chinese investors who already have investments in India are watching this worrisomely, and if things don’t get better in the short to medium term, they will start searching for exits,” said Girish Vanvari, founder at Transaction Square, a tax, regulatory and business advisory firm headquartered in Mumbai.

Since 2017 through the first half of this year, Chinese firms pumped in a whopping $3.8 billion in Indian startups, according to data available with research firm Venture Intelligence. A further breakdown of the numbers shows that during the first half of this year, they invested as much as $263 million in Indian startups to grab a slice of the next big startup success story.

In February, food delivery unicorn Swiggy raised $153 million from a slew of investors including China’s Tencent, while its competitor Zomato garnered $150 million from e-commerce behemoth Alibaba in January. Also, Chaayos, a multi-city chain of tea cafes, got the backing of Chinese investors in a $22 million round earlier this year, before the COVID-19 crisis hit India.

More recently, in April and May, India’s largest online grocery retailer BigBasket and digital credit ledger Khatabook bagged $60 million each from investors such as Alibaba and Tencent as they carve out their growth story for the years ahead.

Top investments involving Chinese investors in Indian startups in H1 2020

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CompanyInvestorsAmount* ($ million)Date
SwiggyTencent, Samsung Ventures, Korea Investment Partners, Wellington Management, Naspers, Others153Feb-2020
ZomatoAlibaba150Jan-2020
BigBasketAlibaba, Mirae Asset Global Investments, CDC Group60Apr-2020
KhatabookTencent, GGV Capital, B Capital Group, DST Global, RTP Global, Sequoia Capital India, Others60May-2020
ChaayosIntegrated Capital, Think Investments, InnoVen Capital, Iconiq Capital, Tiger Global, SAIF, Others22Feb-2020

*Includes share of co-investors

Source: Venture Intelligence

Last year, the total inflow of capital from China into India stood at $830 million, while in 2018 and 2017, domestic startups garnered investments over $1.3 billion and close to $1.4 billion, respectively.

“While the border situation is alarming with unnecessary loss of lives, it’s important for both countries to take a pragmatic and long-term approach to mutual relations. I don’t see an issue with Chinese investments in the long-term with some safeguard and protection to ensure control is not with any foreign company or state, and investments are not in a strategic sector that affect India’s security or core infrastructure,” said K.Ganesh, serial entrepreneur and promoter of Portea Medical and BigBasket.

Currently, a majority of unicorns in India have the backing of Chinese firms and strategics as lead investors, and they include prominent names such as PolicyBazaar, BigBasket, Dream11.com, Hike, CitiusTech, and Lenskart.com.

Chinese investments in Indian unicorns

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CompanyChinese investorsAmount raised from Chinese investors (in $ million)Total amount raised (in $ million)Lead investor?
Ola CabsTencent, Sailing Capital4512759No
Swiggy.comTencent, Hillhouse Capital3281644No
Paytm MallAlibaba222645Yes
PolicyBazaarTencent150554Yes
Dream11.comTencent100183Yes
DelhiveryFosun Group49837No
Byjus ClassesTencent401454No
FlipkartTencent, TR Capital*N.A.7126No
PayTMAlibabaN.A.4106Yes
Snapdeal.comAlibaba, Tybourne CapitalN.A.2089No
ZomatoAlibaba, Shunwei CapitalN.A.912Yes
UdaanTencent, Hillhouse CapitalN.A.871No
BigBasketAlibaba, TR Capital*N.A.730Yes
HikeFoxconn, TencentN.A.240Yes
CitiusTechBaring Asia*880992Yes
Lenskart.comTR Capital*N.A.668No

*HK-based PE/Hedge Fund investors

Source: Venture Intelligence 

Bumpy road ahead?

“In the short term, there would be chaos and uncertainty…. there are many companies which have partly taken money from Chinese investors and were expecting further rounds of funding to be completed as per the agreements. The plans of these companies are in total disarray as they search for other sources of funding,” said Vanvari.

Take the case of Zomato, for instance. It recently made headlines for initiating talks with Singapore state investment firm Temasek Holdings to raise $100 million after changes in India’s foreign direct investment (FDI) rules stalled a previously announced investment by China’s Ant Group. Both Temasek and Ant are existing Zomato investors.

The new FDI rules, which were announced in April, mandate prior government approval for investments by entities based in countries that share a land border with India. The policy aims to curb opportunistic takeovers of domestic firms during the coronavirus pandemic.

According to experts tracking the sector, a host of startups are currently in talks to garner funding from Chinese firms and are awaiting regulatory approval. Amongst them, one transaction is being facilitated by Taihecap, earlier called TH Capital, that forayed into India earlier this year, said a person privy to the development. The information, however, could not be independently verified with the boutique investment firm.

Interestingly, it’s not the new transactions alone that are left in the lurch.

Fintech giant Paytm, of late, has faced backlash on Indian social media since Alipay has a stake in it, while Alibaba has a stake in Paytm Mall. “There are growing concerns about what kind of control these investors exercise given that they are lead investors in these companies,” said an industry executive on condition of anonymity.

However, experts also caution that this could be a temporary phase. “Chinese investments have been a significant source of late-stage investments for Indian startups. However, we think the loss of Chinese capital will have just a temporary impact,” said Vikram Chachra, partner at early-stage venture capital firm 8i Ventures.

For Chinese companies, the India journey primarily began in 2015 with Alibaba investing in Paytm and Didi Chuxing backing Ola. After that, India soon emerged among their top market outside the home turf.

Other notable Chinese investors who have been consistently writing cheques and assisting Indian startups in their growth by providing them knowledge and expertise include names such as Tencent, Fosun Group, Shunwei Capital and Hillhouse Capital, among others.

Alternate funding routes?

Even as dealmaking has been overall slow with investors pulling their purse strings amidst the COVID-19 pandemic, billionaire Mukesh Ambani’s Jio Platforms’ mega-funding rounds starting April have whetted investor appetite for prized assets in India.

“There is a global trend now to de-risk global supply chains by finding alternatives to China. It’s a long-term direction for India as well, although there is a lot of work is ahead of us,” said Chachra.

However, it is certainly not a cakewalk. If a domestic company has Chinese investors, getting capital from elsewhere is also turning out to be “difficult as investors are wary of the future of these companies in terms of value unlocking in the form of IPOs, etc.,” said Vanvari. “Many such companies are reworking their business plans and curtailing their aspirations, and some even question the sustainability of their business models minus the funding.”

The long-term impact, however, will only be evident in the months to come given the significant bilateral investment relations between the two neighbours. Recently, the Indian government announced a ban on 59 Chinese apps, including TikTok, UC Browser, and Shareit, citing security concerns.

The move is said to have derailed a $1 billion India expansion plan of China’s ByteDance, the owner of Tik Tok.  Last year, the company had recruited several senior executives to carve out its plans in India, its top growth market.

“Currently, people are reacting out of emotions, which is understandable, but what we do not need a reaction but a response that is considered, thought out and long term. This should be done at multiple levels – military, diplomatic, economic, trade and tariffs,” said Ganesh.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.