Investors Eye India As Growth In Country’s VC Funding Outpaces China’s

KOLKATA, India — Pankaj Singh is a man on a mission. Singh is a partner at India’s first fintech-focused early-stage investment firm called the Angel Yatra Network. Along with a crew of documentary filmmakers, Singh and his colleagues embarked on a nearly 7,000-mile journey across 19 different Indian cities, to engage with more than 500 Indian entrepreneurs.

In the last two months, Singh has spoken to around 80 investors from the United States, the United Kingdom, and other European countries. What he has learned is both exciting and consistent with the findings of recent studies on the Indian market.

“2021 has been a diamond year for Indian companies. The country is fast becoming a hot destination for investors from all around the world,” Singh told Zenger.

“Foreign investment funds with no mandate to invest in India previously are slowly but surely shifting their attention to the country’s unbridled potential,” he said.

In the first nine months of 2021, venture capital investors have poured around $20 billion into Indian companies, a 147 percent increase from $8 billion in 2020, according to data from market intelligence platform CB Insights. The growth in VC investments in India has now outpaced that in China, which boasts a larger market. The latter only recorded a 101 percent increase in VC investments from $34 billion in 2020 to $67 billion in 2021.

Indian companies raised $16.2 billion in the third quarter of 2021 alone, while their Chinese counterparts raised only $12 billion, according to data from Crunchbase. It is the second time in the last six quarters that India has fared better than China.

The top five equity deals in the third quarter were raised by ride-hailing company Ola Cabs ($500 million), edtech firms Unacademy ($440 million) and Eruditus ($430 million), social commerce firm Meesho ($570 million) and food delivery startup Swiggy ($450 million).

Additionally, for every dollar invested in Chinese tech firms, VC funds put in $1.50 on Indian tech start-ups during the July-September quarter, according to a study by Asian Venture Capital Journal.

One-upping the neighbors

As India gains more popularity among investors, its future seems bright. In a note released by Goldman Sachs recently, it projected that India’s public market will rise to more than $5 trillion in three years, making it the world’s fifth-largest by surpassing U.K.

“In the past two years, VC confidence in India was buoyed by marquee exits for investors. Strong startup activity in new sectors, such as Fintech, B2B and Software as a Service (SaaS), and market depth in e-commerce has increased investor appetite for India,” Madhur Singhal, managing partner and CEO of Praxis Global Alliance, told Zenger.

Recent happenings in China — a hub for VC investments in Asia, have also played a role in shaping the current situation. Its government recently cracked down on the country’s tech sector, which included the cancellation of Ant Group’s $37 billion IPO.

It also started investigating Didi Chuxing, China’s leading ride-hailing app, two days after it launched its IPO on the New York Stock Exchange. When the company announced on Dec. 2 its plans to delist from the NYSE, its share price fell sharply.

Due to this clampdown, market capitalization of some of China’s tech behemoths, including Tencent and Alibaba, has been collectively reduced by more than $1 trillion.

“China’s domestic technology industry is reeling from a regulatory crackdown that has since broadened to include other sectors … the impact of this on investor confidence will last till there is regulatory certainty. This has given a unique opportunity to Indian startups to win over foreign investors who preferred China over India previously,” said Singhal.

Cause for concern

With Increased investment into Indian companies, there has been a steady rise in the number of Indian unicorns (companies with a valuation of $1 billion or more). Around 41 companies have already made it into the unicorn club in 2021 compared to 38 in 2020.

“It’s both good and bad news. We are going to see more unicorns come into the scene. However, an indiscriminate inflow of capital can lead to people taking their eyes off the ball. Thus, one should be prepared for bumps along the way,” Karam Daulet-Singh, managing partner of Touchstone Partners, told Zenger.

One such bump can be regulatory impositions similar to those in China, being imposed in India.

“E-commerce is a ticking time bomb in India. The regulatory framework in this sector is far from settled. There could be a developing scare that could impact the workings of both the Walmart-owned Flipkart as well as Amazon,” said Daulet-Singh.

Other sectors like gaming have also come under much scrutiny from state governments. Take, for instance, the fact that Dream11, a Tiger Global Portfolio company, suspended operations in Karnataka. It did so after the state government imposed a ban on gambling.

Other states like Assam, Andhra Pradesh, Odisha, Telangana and Nagaland have also passed laws banning paid contests. Such regulatory measures are bound to have a stifling impact on the Indian gaming sector, which is the fourth largest in the world, discouraging investors from spending their money in the country.

That and the fact that some of the biggest Indian unicorns are still loss-making ventures is a major cause for concern. Zomato, which is still recording record losses every quarter, has managed to double its share price after the launch of its IPO.

Not everyone has been that lucky. Days after releasing its IPO valued at $2.46 billion, investors in Paytm, backed by Jack Ma’s Ant Group, lost around $900 million in two days.

“Steep valuation is a concern, and retail investors would need to pay attention to it. Loss-making companies will need to reduce cash burn and become capital efficient as accessing incremental capital is now not as easy as it used to be when they were privately held,” said Singhal.

If highly valued loss-making companies fail to meet the high expectations of the investors, the Indian market can find itself in a precarious position.

“Investment funds have a life cycle of 5–7 years. Once a fund is raised for a particular market it can’t be deployed anywhere else,” Santosh Pai, partner at Link Legal and honorary fellow at the Institute of Chinese Studies, told Zenger.

“So it is too early to say now that investments meant for China are coming to India. Of course, it [growth in VC investments] is an opportunity for India to benefit from more capital and a better regulatory landscape than China. Whether India capitalizes on these opportunities remains to be seen,” he said.

Edited by Kristen Butler and Sid Roy