The Indian startup ecosystem, amid the growing tensions between India and China’s relationship from the past few months, is now in rocky waters when it comes to raising capital. Needless to say, top startups of the nation such as Paytm, Zomato, BigBasket, Flipkart, and many more had previously relied on raising capital from Chinese investors to boost their growth. Now, with that option being thrown out of the equation, the future of fundraising in the startup ecosystem in India is being heavily questioned by industry leaders and analysts.
Currently, entrepreneurs and companies in India are choosing not to openly discuss this issue, however, it is quite obvious that the fear of running dry of capital has settled into the ecosystem.
Chinese investors happened to emerge as the biggest backers of India’s fast-growing digital economy by pumping a whopping $3.9 billion in Indian companies in 2019 alone. Now, in 2020, this particular relationship took its first big hit when India issued the Press Note 3 back in the month of April. It immediately changed the FDI aka Foreign Direct Policy of the nation by putting a barrier to all forms of investments from countries sharing a land border with a mandatory prior approval process.
This particular news, while definitely hurting the sentiments of China, sent shockwaves in the Indian startup ecosystem as well. It was a complete no brainer that many companies, mainly in early and growth-stage and not in late-stage bets, would be severely affected by this decision.
A founder of a unicorn, under the condition of anonymity, stated how his company has become too big to fail even though it is majorly funded by Chinese investors. He continued by saying that, it is, however, not going to be the case for early and growth-stage companies as well because for them investments from Chinese backers are still an option-value.
It wouldn’t be surprising if China, after all the events that have transpired such as the sudden change in India’s FDI policy, growing sentiments regarding boycotting Chinese goods from the nation along with the tensions at the border, chooses to allocate most of their capital outside of India. This is something that is not necessarily a good thing for the Indian startup ecosystem as it is still heavily reliant on foreign funding to grow amid the absence of home-grown pools of capital. China walking away from the table will lead to many Indian startup companies face significant near-to-medium term cash constraints for sure.
New Opportunities Sprouting Up For The Indian Startup Ecosystem
While Chinese funds might no longer flow into Indian startups as freely as it did before, it doesn’t mean the country’s entire startup ecosystem will be left absolutely crippled. Many startup entrepreneurs and industry analysts have stated that new avenues are opening up from countries such as the UK, the US, and the Middle East after the notification of the government’s Press Note 3 in April. Also, one shouldn’t forget to consider Japan as in 2019 alone, they have invested close to $10 billion in 105 Indian startups and 12 unicorns across more than 136 funding deals.
Another significant reason why it’s okay for Chinese funding to slowly start departing from India is because of the fact that it always comes with ‘riders’. A founder, under the condition of anonymity, mentioned how he happened to receive a small cheque from a Chinese fund but it happens to also count as ten diversified investors. Thus, funding from Chinas is not preferred beyond a certain limit in reputable and large companies according to many entrepreneurs and VCs.
Now, it remains to be seen what does the future of raising capital for Indian companies hold as Chinese capital is expected to remain a not-so-wise choice for at least in the medium term while anti-Chinese sentiments in the country are high. We will keep you posted on all future developments. Until then, stay tuned.