Early Stage Startup Ecosystem in India – A New Hot Bed for Chinese Investors

Early Stage Startup Ecosystem in India - A New Hot Bed for Chinese Investors

Early Stage Startup Ecosystem in India – A New Hot Bed for Chinese Investors

Indian technology economy is experiencing an influx of investments coming from its neighbouring nation, China. The story started with Alibaba’s investment in Snapdeal and Paytm followed by Tencent backing Practo, Didi Kuaidi fueling Ola and other similar investments. Conversations have already started happening around why are these companies backing Indian technology firms.

It is of common knowledge that the unicorns in India – Flipkart, Paytm, Inmobi, OlaCabs, Snapdeal and the likes have a suite of foreign VCs who invested in them while they were scaling up. The country still holds a lucrative playfield for many more technology companies to come at par with these giants. A recent report by Industry body NASSCOM showed approximately 125% growth in startup investments in India in 2015 as against in 2014.

With the Government’s Make In India & Start Up In India campaigns, several state bodies are working for creating funds and norms to boost the startups in their respective areas. If the growing technology penetration wasn’t an enough reason to make the investors optimistic about startups in the country, the Government’s support would be an added advantage.

In the light of all these positive factors, on one hand more Chinese companies like Xiaomi, Oppo, OnePlus have gotten the encouragement to enter India, and on the other the investors from China are seeing Indian companies as a potential investment arena.

 (From L to R: Jing Wu - InterSumer, David Yuan- Redpoint, Li Tao - Apus Group, Feng Deng - Northern Light Venture Capital, Yan Dan - SIG

(From L to R: Jing Wu – QiMing, David Yuan- Redpoint China, Li Tao – Apus Group, Feng Deng – Northern Light Venture Capital, Yan Dan – SIG)

To further build this connection, and create a bridge between Chinese investors and Indian startups, China based APUS group organised a startup demo day in Gurgaon where technology startups pitched in front of a group of investors. These investment firms included Northern Light Venture Capital , Redpoint Ventures, Chengwei Capital, SIG and QiMing Venture Partners.

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This presented us an opportunity to directly ask why did they think Indian startups hold a great potential. To this, APUS Group’s Chief Li Tao He quoted, “Initiatives like Make in India represent India’s progressive attitude and have made it easier for investors like us to support innovation and disruptive business ideas in India which is a crucial market for us. As an emerging country, India’s market potential is great and we would like to extend our assistant to the early stage startups for which we have created a fund of Rs 300 crore.

He added that his own firm aims to have 80 million users in India by end of 2016, as they also try to strengthen their presence by evaluating more partnership opportunities with Indian firms.

Which Startups are Attracting Money from China?

As of now, the trend shows a mix of strategic and pure play investments in India coming from China. eCommerce company Alibaba backed Indian eCommerce firms Snapdeal and Paytm, Cab company Didi Kuaidi invested in Ola Cabs, and now Baidu is rumoured to back Mydala. So what kind of startups are these investors looking to invest in.

A discussion with the panel brought out that these investors are very particular about the quality of technology, team and culture. David Yuan of Redpoint Ventures stated that investing in a product that has a universal appeal is always the best. He also believes strongly in the role of a team, stating that “In China, it is very difficult to replace the founder/founders of a company”, for they are synonymous with the brand. Narrowing the answer further, Feng Deng from Northern Light Venture Capital said that tech-innovation startups in sectors like Finance, Education and Digital Content carry immense potential and could be the major game changers, hinting at his interest areas.

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How Chinese Corporates are Bringing About this Change?

Baidu, Alibaba and Tencent, three of the biggest Chinese technology firms are now being touted as BAT in the digital media. BAT is being discussed in the context of their active interest in investing in Indian firms. Even though now Chinese VCs like Redpoint, Qiming and others are keen on entering India, even they are being led by their investee company the APUS Group.

In a highly competitive market ruled by deep-pocketed VCs, does pure-play corporate investments make sense? Or is there enough space for all kinds to exist side by side? To this, Li Tao answered “VCs have an important effect on the development of the whole market. VC investments can greatly promote the innovation and development of the local market. Business investments such as APUS’ in the Indian market, also has big value, for example APUS will share its leading technology and ideas in the global market, and the Chinese market experience and judgment to India local enterprises, which VCs rarely do, in addition, APUS has 510 million users globally, will also help India enterprises to quickly get the first user base, so that it can keep ahead in the competition.”

This is an indication that Chinese corporates are starting a wave which will let the VC firms to enter into the country as well.

What Lies Ahead for Indian Startups?

Northern Light VC’s Feng Deng states that the number of startups, incubators, accelerators etc. has greatly increased in the last 10 years, and the quality of enterprises and enterprises has improved too. The Government is more supportive than earlier, thus making India more investor friendly than earlier.

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Additionally, Redpoint’s David Yuan concurs and adds that “To get into IPO, a Chinese company has two options to choose from: A-share listing & Red chip listing. There are two methods in Red Chip listing – a) direct offshore listing and b) Variable Interest Entity (VIE). To go around the Government restrictions or to circumvent them, the VIE structure in widely used by Chinese and foreign companies. While India will see a significant growth because of the relaxed structure.“

As of now, India has only a few Internet companies which are publicly listed – InfoEdge, Makemytrip and JustDial to name some. While many more are preparing for an IPO in the coming months. Currently VC fundings are happening both an early and later stages of startups. Besides Silicon Valley based firms, other foreign investment companies like DST Global and Softbank are also very active.

Nonetheless, several funded startups are feeling a financial crunch as they scaled operations faster than their accounts. This has led to people questioning if the ‘Indian Startup Bubble’ is finally bursting? To give some food for thought, Li Tao concluded by saying “Every market has a bubble; the bubble can promote the development and innovation of the market. A beer with bubble will be more delicious. What Chinese market has experienced, will also happen in India, the difference lies in when will it happen. In China, the market returned to a rational state, and we believe that the market in India will also see the same.”

Disclosure: Apus Group is an investor at iamwire

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