Checks on Chinese investments likely to keep Indian start-ups on tenterhooks

The gruesome India-China border clash along the Line of Actual Control (LAC) delivered a body blow to the already strangled equations between the two countries.

Not long ago, the Indian government had also announced that foreign direct investments (FDI) from countries that shared a land border with India would go through only after its approval. These factors could affect the Indian start-up ecosystem, which has been receiving Chinese investments, said investors.

It will specifically impact consumer internet and tech-enabled businesses significantly and across stages, said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India, a firm that provides growth capital and management support to small and mid-sized enterprises in the country. He added that existing investee companies may not be able to raise internal rounds from Chinese investors, which could create cash-flow issues.

There are nearly 118 Indian start-ups — companies that received funding when they were less than 10 years old — that have a total of $5.6 billion un-exited Chinese investments, as per data from Venture Intelligence, a firm that tracks private companies’ investments, financials and valuations. But with the scrutiny in place now, experts estimate that the amount of time to raise further capital from Chinese investors will get extended.

“I’ve spoken to a few (Chinese) investors who have invested in our portfolio companies as well, who are already sitting on ideas where they want to put money in, but right now they are not able to. They are sitting on capital and have decided to invest as well,” said Anuj Golecha, co-founder of Venture Catalysts, an incubator for start-ups. He added that growth-stage and late-stage start-ups will be impacted more because a majority of the Chinese capital has been invested primarily in start-ups that are in the Series A stage and above.

Unicorn investees

At least 18 of the 30 unicorns (start-ups with a valuation of over $1 billion) have a Chinese investor, according to a recent report from Gateway House. This list includes outfits such as BigBasket, Flipkart, Ola and Oyo, across different sectors. The report also said that most Indian venture capital financiers are wealthy individuals/family offices and cannot make the $100-million commitments needed to finance start-ups through their early losses.

This gives an edge to investors from other geographies to have a stronger hold in the Indian start-up ecosystem. With most Chinese investments at the higher end of the spectrum, entrepreneurs seeking big-ticket investments in India will now have to search for other means that have the capacity to bridge the funding gap.

“In the current times, the first immediate source is existing institutional investors,” said Zephyr Peacock’s Raina on the alternative sources of capital that founders can reach out to. He added that start-ups that qualify should register as micro, small or medium enterprises (MSMEs) and tap into the various schemes run by the government through public sector banks, Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD).

Start-ups could also negotiate working capital cycles to manage cash flows, stretch payment cycles and reduce the receivable period to generate more cash, Raina said.