While clear winners or market leaders are finding takers, whenever there are China funds on the cap table, the struggle to lead an investment round has been higher for business ideas that lack a clear market winner or proven economics, five investors told ET.
It is a double whammy for businesses in sectors such as social commerce, video, and the content space, sectors that have disproportionate investments from China, require deep pocketed investors and ones that had gained from replicating trends in China.
“Younger startups with China money are under greater scrutiny. What seemed like a knee jerk reaction four months back, doesn’t seem short-term now. It’s an unfortunate scenario,” said an investor with high exposure to China funds as co-investors.
According to industry tracker Tracxn, about 150 companies have raised capital from China-based investors since 2018, of which 68 companies have raised less than $10 million, while 91 firms have raised under $30 million.
Shunwei Capital, Tencent, Fosun RZ Capital, Morningstar and Xiaomi have been the most active dealmakers since 2018, the data showed.
Incoming investors also get rattled when existing investors do not back a new funding round.
Three startups with Chinese capital told ET that they were looking at ways to get discounted secondary exits for their China-based investors, in a bid to cut their exposure and raise capital after concluding those transactions.
“Eighteen months back, having these investors were leverage for a startup. Now, they only raise questions. While there are multiple global funds from South Korea, Japan, UAE and US that have significantly increased their interest in India, the cap-table is becoming a deal-breaker,” a founder, who has two Chinese investors with an overall exposure of 15-18% in his business, said.
Shunwei Capital has backed businesses including Chalo, KUKU FM, LoanTap, ShareChat, Sim Sim and Truebil. Tencent has backed Doubtnut, Niyo, Pratilipi, while Fosun has invested in Headfone, Kissht, Loca, and Trell, according to Tracxn data.
In April, India put in place a regulation requiring investments from countries sharing a land border with it to require prior government approval, rather than automatically earlier.
Previously, investors would typically bankroll their portfolio amid a crisis, like the Covid-19 pandemic, or get deep-pocketed Chinese funds as backers. “It’s very clear. China money won’t come for 2-3 years,” the person quoted earlier in the story said.
Ashish Sharma, managing director of venture debt firm InnoVen Capital, said, “Frankly, it’s wait-and-watch from both sides… Chinese investors need more confidence in the regulatory framework. At the same time, especially for consumer companies, exposure to a China investor can have a negative impact on the brand, nudging founders to diversify their investor base.”
Several investors and founders also expressed similar opinions to ET.
Last month, ET reported that over a hundred investment applications, primarily from Chinese origin investors, have since been stuck in regulatory quagmire, as the government continued to maintain strict curbs on capital flows from Beijing and Hong Kong.
After the publication of Press Note 3 on April 22, there were expectations that the government would create a fast-track channel to clear investment proposals. That has, however, yet to happen.
An approval can now take up to three months, according to government officials.
“What seems like an approval, has been implemented like a ban,” said the founder of a social media, early stage startup.
For businesses with a clean slate though, access to capital is ample.
Blue-chip Silicon Valley-based funds such as Sequoia Capital, Accel Partners, SAIF Partners and Lightspeed Ventures have raised large corpuses and set up dedicated seed-stage funds for such startups.
In September, a Parliamentary panel called for the abolition of long-term capital gains (LTCG) tax on all investments in startups made through collective investment vehicles such as angel funds, alternative investment funds, and through Limited Liability Partnerships.
“As Indian capital moves up, that’s where the parliamentary committee recommendations become very important. We hope the recommendations come out very fast, because those recommendations have been in the offing for a long time, and fundamentally, a country like India needs to pony up its own capital,” said Sudhir Seth, managing director of venture capital fund Chiratae. “India does not lack capital.”
Separately, newly formed startups are taking measures to hedge themselves from the regulations by incorporating their businesses in Singapore, the United States, the United Kingdom, the Netherlands, and the United Arab Emirates.
These markets have stable regulations, subsidized tax rates, conducive public listing norms and increased global investor interest.
“This has only accelerated in the last six months,” said the founder of an early stage startup who set up his company in Singapore in March.