The Unicorn Package: More Than Chinese Money, Indian Startups Will Miss The Perks That Come With It

Indian Unicorns Chinese Investment — DKODING Studio

The call to boycott Chinese products has recently caught up in India after the violent standoff between the armies of the two countries. With the Indian government garnering support from many major international powers, the startup ecosystem is anticipating rough times ahead.

Over the last year, Chinese investors have pumped a whopping $3.9 billion into Indian Startups. 18 out of 30 Indian unicorns currently rely on Chinese seed money. Many big names on the street, including Flipkart, Swiggy, Snapdeal, Paytm, Ola, Bigbasket, Oyo, MakeMyTrip, and Byju’s, have received a significant amount of investment from China.

18 out of 30 Indian unicorns currently rely on Chinese seed money.

With the enormous size of Chinese money in Indian startups, an emotional backlash against China is likely to impact the Indian startups significantly.

The Dragon’s Share of Investment

Indian Unicorns with Chinese Investors

I guess companies where Chinese investors have large stakes would face highest scrutiny through Govt approval route

Secondly all such unicorns are bleeding blood; they would struggle if the Chinese investments are denied

Tough times! pic.twitter.com/ROtmXiEm2T
— Rajesh Sawhney (@rajeshsawhney) April 21, 2020

How Chinese Money Continues to Shine?

India’s massive internet users and the absence of any significant investment source for startups attract Chinese investors to India. Most startups in India, like Paytm, Ola, Zomato, and Swiggy, are reporting heavy losses, and they look for pressure-free funding. Chinese investors assure minimal pressure on the companies’ management. Hence, they become the first choice for Indian entrepreneurs.

Watch: Chinese Investment in Indian Startups

Furthermore, being young and emerging enterprises, startups love expertise. Chinese investors like Alibaba and Tencent bring experience and learning to the table. Chinese companies who are ruling the mammoth domestic market for long have much to share with Indian startups. Especially the e-commerce platforms have been benefited the most out of it.

Santosh Pai, a partner at Link Legal India Law Services, says, “Ask any founder of an Indian startup he will tell you that Chinese money comes with a lot of value-added experience and learnings from China. Other markets simply don’t have the scale. The learnings that come from China have a very valuable place in the rule book or a playbook of Indian founders.”

The damage started much before the border standoff

In April, the Indian government amended the FDI rules to check opportunistic takeovers/acquisitions of Indian companies. Now Chinese investors need to take the approval first before raising investment in any Indian companies.

This tweak in the FDI rules has a massive bearing on the Indian startup ecosystem that is severely dependent on Chinese funding.

Govt of India reviews Foreign Direct Investment policy for curbing opportunistic takeovers/acquisitions of Indian companies due to #COVID19. A non-resident entity can invest in India, subject to FDI Policy except in those sectors/activities which are prohibited:Govt of India(1/3)
— ANI (@ANI) April 18, 2020

Major Chinese investors are to be impacted by this new regulation as well. Private equity and venture investors may not be able to effectively exercise call options, rights of the first offer, anti-dilution, or ratchet provisions.

Any fresh inflow of Chinese FDI into India now seems unlikely as well.

Off-shore route

Whether it is the Indian government’s anti-Chinese stand or Indian public’s emotional outburst, Chinese investors have an escape. Much of the investment coming to India from China is routed through tax havens like Singapore, Hong Kong, Mauritius, etc. One major instance is Alibaba’s money in Paytm is routed through Alibaba Singapore Holdings Pvt. Ltd. On Indian government records, Paytm has received money from Singapore that doesn’t share a border with India. Hence, Alibaba doesn’t have to report to the Indian government if any increment in investment happens.

Watch: Existing Chinese Investments

The side-effect and the way out

With the Indian sentiment leaning against China, it has become a moral hazard for the Indian startups to receive funding from Chinese investors. The startups that are at an embryonic stage and require funding without many questions asked are likely to be tactically failed in the coming times.

The absence of the Indian investment ecosystem is expected to magnify the problems for the Indian startups.

As Chinese investment has become susceptible in the current environment, Indian startups now need to look beyond Chinese money. Amidst the pandemic, Jio Platforms raised non-Chinese $15.2 Billion in 11 deals. Indian startups need to reach out to American investors to fill the vacuum left by Chinese investors. Another way-out is changing the views of Indian family offices towards startups. A robust ecosystem with entrepreneurs willing to play out of their comfort zone can make a long-lasting difference.