Hopes rise in India as China tames its tech giants
9 min read 26 Sep 2021, 09:54 PM ISTBeijing’s recent regulatory actions have spooked many tech investors. Will China’s loss be India’s gain?India in July surpassed China in monthly venture capital deals for the first time since 2013, according to Preqin data, which said India received investments worth $7.9 billion in July this year
PremiumPUNE : At Connexdoor, a Mumbai-based digital platform for promoting entrepreneurship, co-founder Pankaj Singh is a busy man these days. As a partner in a fund that invests in fintech startups, he has to keep a close watch on Western investments in India’s tech ecosystem. And he has been observing a significant uptick off late.
“Tiger Global (alone) invested in more than 25 Indian startups between January and August this year (compared to investments in 18 startups in 2020),’’ said Singh, who is also a partner at Yatra Angel Network Fund, which has invested in 11 Indian fintech startups over the past two years.
Connexdoor’s proprietary research indicates that at least 104 of the 168 global investors in Indian fintechs this year were from the US and 40 were from Asia. In the past three years, US investor participation in Indian fintech startups went up by nearly 60%, with massive deals led by Tiger Global, Sequoia Capital, Ribbit Capital and others, the data indicated. Asian investor participation rose by 53%.
“Currently, the market to go to is India,’’ said Singh, who spent a few months as a student in Chinese cities prior to the pandemic. He studied Mandarin and the ‘unstructured’ ways of the middle kingdom’s capital market. “Investors are reluctant to go to China (at the moment) and are betting big on India, which is a more predictable market."
Singh is not alone. The Mandarin-speaking world of venture capital in India is abuzz with speculation of a potential shift in certain foreign investments from China towards India. Since late last year, China’s President Xi Jinping has been tightening the state’s grip on the Chinese private sector, which contributes over 60% to the gross domestic product (GDP) of the world’s second-largest economy. The ongoing game of Chinese chequers between the state and China’s powerful tech firms inevitably raise questions about whether Xi’s gambit will end up giving India an advantage in garnering greater foreign investment inflows, at least until the dust settles. India is not only a relatively more stable alternative, but the country is also home to a fast-growing digital economy, with an estimated 750 million Indians already online, which includes about 360 million online learners.
Xi’s retaliation against the “disorderly expansion of capital" has steadily expanded since the Communist Party of China (CPC) silenced Alibaba founder Jack Ma last year, fined his company over $2 billion and scuttled his Ant Financial Group’s $34 billion initial public offer (IPO) in January.
Several overseas IPOs of Chinese firms have been paused as an anti-monopoly and data security drive in Beijing targets some of the world’s biggest e-commerce, edtech, fintech and ride-hailing brands. Meanwhile in India, the IPO market has been on fire, with blockbuster listings such as that of Zomato Ltd raising as much as $1.26 billion.
Tech titans
“This crackdown (on digital economy firms) now appears to be a case of China’s tech titans becoming too powerful,’’ suggested Rebecca Fannin over an email. Fannin’s book Tech Titans of China narrates the economic and political rise of Chinese tech superpowers such as e-commerce giant Alibaba and software giant Tencent, who represent the transformation of China’s tech sector from copiers to originators that are now trying to outpace the innovation of Western Big Tech. These titans and more Chinese firms have lost over $1 trillion in valuations within months. Tencent alone lost $388 billion in market value, Bloomberg reported, as Chinese firms have disappeared from the world’s top 10 stocks. Ride-hailing giant Didi is banned from app stores and is currently reeling under a cybersecurity review.
At the same time, but unrelated to the tech sector, China’s real estate sector has sparked talks of a likely ‘contagion’ in the economy as the country’s largest property developer Evergrande grapples with a $300 billion debt crisis.
Will China’s loss be India’s gain? Insiders predict that there will be greater investment opportunities for India over the coming years but emphasize that it’s too soon to make a definitive link between the investment trends of the two disparate tech worlds. The accelerated digitization of the Indian economy post-covid and the ongoing decoupling of Sino-US ties will remain bigger factors, they say, behind the great gold rush for Indian startups and tech stocks. “Owing to these recent crackdowns, foreigners are wary of investing in Chinese companies,’’ said Rajeev Suri, a managing partner at Orios Venture Partners in Mumbai. “But it’s uncertain whether that represents a direct opportunity for India. Opportunities emerge from our own innate strengths and don’t need a fillip from China, but it does help."
“We will have the business opportunity to benefit from China’s loss, no doubt,’’ said Santosh Pai, a partner at law firm Link Legal Law India Services, whose global clients include several firms from China. “But the China effect will take a year or two to become evident. Indian edtech firms will gain acceptance in more Western countries. And American funds will invest less in China and more in India, while also diversifying to Southeast Asia and the Middle East. Sino-US tensions will remain the biggest reason for such a shift."
Invest India
Investments made in Indian startups in the first half of 2021 exceeded investments made in 2020, according to a state of Indian markets report released in August by the Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young. Indian startups attracted $17.2 billion in investments from January to July this year, the report stated, compared to $11.1 billion in the previous year. The tech centres of 8% of global unicorns are based in India, it said.
Startups have already clinched 443 deals this year. “It’s already happening in the market,’’ said Sanjay Mehta, founder of 100X.VC in Mumbai. Mehta gave an example of the Silicon Valley-based Andreessen Horowitz (a16z) fund, which is now looking at investing in India for the first time, he said. “India is being seen as a more stable economy compared to China,’’ Mehta said, “and it has a large alternative consumer base. There will be more funding opportunities in Indian fintech and edtech. We are bullish for the next five to seven years."
India in July surpassed China in monthly venture capital deals for the first time since 2013, according to Preqin data reported in the media, which said India received investments worth $7.9 billion in July this year compared to $4.8 billion investments made in China.
E-commerce giant Flipkart, for example, raised $3.6 billion in July, taking its value to $37.6 billion. Now, Ola electric mobility is reportedly busy raising $1 billion. Over two dozen new Indian unicorns were created this year. Estimates say India has created 65 unicorns. China has 170, according to data compiled by analyst-led platform Tracxn.
Several fund-raising announcements made this year would, however, also reflect deals that have been in the works for many months, much before Beijing moved to bring the Chinese tech sector under political control.
Best of times at Byju’s
Beijing has been especially hard on China’s $100 billion edtech sector. The CPC is determined to make education more affordable and inclusive. Online tutoring firms are no longer allowed to make a profit, list overseas or receive foreign investments. It is no accident then that India’s edtech sector has been booming recently. In edtech, Indian startups clocked over $2 billion in 2020 compared to $553 million in 2019, according to an IVCA-PGA Labs report released last December.
Inside India’s most valued startup, Byju’s in Bengaluru, Anita Kishore now predicts that more edtech unicorns will join the country’s current group of four. As chief strategy officer, Kishore is a global dealmaker at the $16.5 billion edtech firm that acquired nine firms this year. There’s liquidity in the market, she noted, and pointed to the “global capital flowing into the country" that will act as a “catalyst" to create more edtech unicorns or privately-held companies valued at $1 billion.
Since last year, Byju’s has raised more than any other edtech firm in India and plans to raise another $400-600 million, according to a Bloomberg report. Its IPO is expected to hit the market next year.
Kishore emphasized that covid-19 was the Indian edtech industry’s main inflection point. “Indian companies today have the opportunity to take the edtech industry to the global level," said Kishore, while adding that “the future looks promising, especially with the wide acceptance of the medium in the past one-and-a-half years." Following their path are firms such as Unacademy Group, an edtech firm that recently raised $440 million.
Chinese capitalism
A troubled Chinese entrepreneur asked Hu Xijin, the editor of Global Times in Beijing, for business advice last month. “No matter how successful they are, entrepreneurs must remain humble, firmly support the leadership of the Communist Party of China, abide by (the) laws and regulations and resolutely be a positive energy in promoting the CPC’s lines, principles, and policies," Hu wrote in the party’s mouthpiece after the conversation. Compared to the West, “capital cannot dominate the country" and it “must not influence politics" in China, he added.
Observers of China’s domestic politics believe that the economic turmoil will continue at least for the next one year. Beijing will hold its five-year change of guard for party positions at the 20th National Party Congress slated for October-November 2022. Xi has named no successor candidates, not even for his position as the party’s general secretary, although the term will technically end next year. There are signs that Xi wants to continue as the party supremo for another term and is clearing the road to power off his critics.
At the Jawaharlal Nehru University’s Centre for East Asian Studies, professor of Chinese studies Srikanth Kondapalli linked the timing of the capitalist crackdown to the intensifying factional struggles within the party in the run-up to a ‘grand finale’ in 2022. “Xi’s goal is to have his own candidates in all party positions next year," said Kondapalli. “He’s moving on from his anti-corruption campaign towards regulatory crackdowns to silence his critics in the business lobbies and in the culture industry."
Whatever the outcome of the leadership succession next year, the Chinese economy is not likely to recover easily. “Xi has potentially pushed the country towards a destabilizing succession crisis… one with profound implications for the international order and global commerce," wrote journalist Richard Mcgregor and academic Jude Blanchett in a Lowy Institute paper earlier this year.
In July, Xi declared that the $15 trillion economy has achieved the status of a “moderately prosperous society" as the party had planned. The ‘China Dream’ slogan of Xi’s early days as president is being overtaken by ‘common prosperity’ as a “key feature of Chinese-style modernization". Alibaba and Tencent have signalled acquiescence to the state by leading the donation drive, with pledges of $15.5 billion and $7.7 billion, respectively. China has announced a new stock exchange in Beijing to expand fund raising and indicated that the party promotes entrepreneurship and innovation.
“I expect this to continue because between now and November next year, Xi will drum up as much nationalist fervour as possible to consolidate his position," said Orios Venture Partners’ Suri. “The common prosperity campaign is being well received by China’s public."
Investors will avoid China until there is “clarity and transparency", reckoned 100X.VC’s Mehta. “China’s reputation is in trouble with investors worldwide. While China is underplaying the crackdown, funds are well aware that it’s getting tough to do business in China."
Chinese executives are a bit more unflustered for now, as they lie low and bide their time while waiting for the political storm to calm down. Asked about the potential for venture capital flows getting diverted away from China towards India, one executive in Beijing texted: “Nothing will happen".
Reshma Patil is the author of Strangers across the Border: Indian Encounters in Boomtown China
