India’s top startups including Paytm, Zomato, Udaan and BigBasket, and the wider ecosystem that counts Chinese investors among their largest backers, are likely to face further hurdles in raising capital, as the anti-China rhetoric gets amplified following the ongoing military stand-off between the two countries.
Almost all the entrepreneurs and companies that ET reached out to declined to comment on record about the ongoing border tensions, but some prominent risk capital investors are now asking their respective portfolios to diversify their cap tables.
“The conversation that is going to take place among startups is going to be about the quality of the capital that is going to come aboard, and not just the adequacy of it…The conversation of quality over quantity has reached a chorus amongst investors across all and we see this becoming a mainstay of investing,” Siddarth Pai, founding partner of 3one4 Capital, told ET.
The Bengaluru-headquartered venture capital firm, which manages assets of about Rs 800 crore, across four funds, does not count any Chinese or Chinese-origin investors in its list of Limited Partners.
Some industry insiders also feel that the impact on early and growth-stage companies will be more profound compared to late-stage bets. A founder of a unicorn company pointed out that while the exposure of his company to China may be large, that bet is now too big to fail.
“The risk is for early and growth-stage companies where these cheques are still an option-value,” he said. “Businesses that already have investors deeply invested cannot and will not back out at this point,” he added.
Chinese investors – both strategic and financial – have pumped in $3.9 billion in 2019, up from $2 billion in 2018, ET reported earlier. In the process, they have emerged as the biggest backers of the country’s fast-growing digital economy, supplanting the United States.
Investors from the Middle Kingdom are on the cap tables of 18 startup unicorns – ventures that are valued at $1 billion or more – of the 30 that have emerged from India so far.
A startup founder, however, said that even as investments from China began to slow after notification of the government’s Press Note 3 in April, more avenues have opened up, particularly from the United States, UK, and the Middle East.
“Capital from China always comes with riders and isn’t preferred beyond a certain level in high-quality companies. Founders are equally wary of raising beyond, say, 15%-20% capital pool from Chinese investors and their affiliates,” he said on the condition of anonymity, as he has received a small cheque from a Chinese fund but also counts a set of ten diversified investors.
“Chinese capital is expected to stay away, at least in the medium term, and we will step up and pump in more money if the situation requires us to do so, and in their absence. We have to align to these new geo-political scenarios,” a second investor, who counts at least two unicorns in his portfolio, said.
Last month, ET reported that Chinese venture capital investors have turned increasingly wary about India’s new foreign direct investment policy, after the government mandated that all investments from countries sharing a land border with India will require its prior approval.
“The sentiment has been impacted,” said a founder of a unicorn that has raised money from Chinese investors. “It’s becoming clearer that China would now prefer allocating capital to markets outside India, if all other factors remain the same,” he said.
The worry is that the country’s startup ecosystem, which continues to be dependent on large swathes of foreign funding given the ongoing absence of home-grown pools of capital, will face significant near-to-medium term cash constraints if investors from the world’s second-largest economy walk away.
“The entire sentiment is leaning anti-China right now. It is becoming a moral hazard for a company to accept any capital from China in this environment…The current standoff at the border does little to mitigate that,” Pai of 3one4 Capital said.