The fate of startup funding in India amidst geopolitical clashes

A startup runs on innovation that challenges the status quo and reinvents how things are done traditionally. Over the years, we have seen "started from a garage" startups change the business landscape. These marvellous feats of innovations and a teams' will to seize every opportunity might seem naive on the surface but there is a lot more brewing here.

Gone are the days when businesses in India could chalk out their future course of action without considering the impact of external discord. The world today has turned into an uncertain place for industries to operate and markets to function smoothly, making it imperative for us to comprehend how geopolitical events influence the environment in which businesses run. 

Geopolitics, an umbrella term that describes how the geography of a country (its size, position, etc.) affects its power relationships with other countries, is believed to have a significant impact on businesses, wherein their success or failure is largely dependent on external forces - economic, social and political. The startup ecosystem of India, that runs on the wheels of funding, has a crucial role to play here, more because it is heavily reliant on foreign investments. 

The crux of the matter

According to the research organization, Tracxn, Indian startups raised $14.5 billion in the year 2019, breaking their previous record of $10.6 billion in 2018. The firm GlobalData reveals that startup companies in India raised a capital of $4.6 billion from Chinese investors, reflecting a growth of 12 times since the year 2016 where the investment amount was $381 million.    

This data clearly indicates that Chinese investment companies comprise a huge chunk of the net funding received by startup companies in India. 

Amidst the military standoff between India and China, major startups like Zomato, Paytm and BigBasket, that count on Chinese investors amongst others, are in the state of a dilemma, anticipating the hurdles they might face in raising capitals. The situation especially heated up when India, in April this year, amended its policy on foreign direct investments (FDI) from countries that share a land border with India. 

In accordance with this change, the said countries will have to seek approval from the government of India on the deals they make in the country. With China being the only significant neighbour for trade flows, the intention was clear and perspicuous. An axe, thus, hovered above the necks of numerous Indian companies that reeked of Chinese investments, threatening to cut the strings that kept them afloat with funding. Consequently, the growth plans of such organizations seemed to crumble. 

Where India boasted of the presence of 1000 Chinese companies, the financial state of nearly 18 of the major 30 unicorns (startups valued at over USD 1 billion or above) with some component of Chinese investments was jeopardized. Apart from these top startup companies, there were countless other big and small Indian companies who had either received funding from China or were looking at doing so in the coming year. 

The current crisis

According to the data shared by the World Investment Report 2020 compiled by the UNCTAD, India ranked amongst the top 10 recipients of FDI in 2019, securing the 9th place with inflows of $51 billion throughout the year in comparison to that of $42 billion of FDI received in the year 2018. China, in this regard, has been an active investor in the country for the past few years.  

As per the data shared by GlobalData, a data and analytics firm, the majority of unicorns in India are currently financed by both pure-play investment firms and corporates from China, with significant contributions by Alibaba and Tencent. Along with others, Alibaba and Ant Financial, its affiliate, have invested about $2.6 billion in Paytm, BigBasket, Snapdeal and Zomato, four Indian unicorns. On the other hand, Tencent with others has invested over $2.5 billion in Swiggy, Ola, Dream11, Hike and BYJU’s. 

Along with these, other noteworthy investors from China that actively participate in startup funding in India include Didi Chuxing, Shunwei Capital, Meituan-Dianping, Fosun, Hillhouse Capital Group, China-Eurasia Economic Cooperation Fund and China Lodging Group. 

The silver lining

But the situation isn’t all that bad. Even after significant contributions from Chinese investors and a considerable growth in the yearly figures, India secured the 31st rank among destinations of FDI from China. In short, of all the foreign direct investment inflows to India, the investments by China have only been 0.52 per cent. 

To put things in perspective, the total FDI investment of China ranges from $6.2 billion – $8 billion between the years 2014 and 2019. This amounts for 4.2 per cent – 5.4 per cent of the total $148 billion that India attracted via Private Equity/ Venture Capital during the same time. This data is a clear indication of the fact that a temporary pause of investments from China would not disrupt the availability of funds to companies in India. 

In addition, the majority of investments made by Chinese investors have come only after the said Indian companies had established a product-market fit, attracted multiple rounds of capital and in quite some places had taken charge of leadership position in their categories. Therefore, it wouldn’t be wrong to say that these companies would have had a chance to attract capital from alternate sources.  

Nevertheless, the recent change in FDI adopted by the country is seemingly temporary and the long-term impact of the same can only be realised in the future, given that the two countries share significant bilateral investment relations. 

What needs to be done

You must now be wondering what the chaos is all about if China doesn’t have a major role to play in Indian investments. 

Here’s the catch. China has dug a trench with its supply chain in the manufacturing and services industry of India. And this is a major cause of concern. For instance, the pharmaceutical industry of India is largely dependent on the raw materials’ supply from China. In clearer words, even though India is the world’s third-largest producer of drugs (by volume), it imports 70% of its raw materials from China. 

A similar case comes into the picture when we look at the smartphone industry. Where the industry is visibly dominated by Chinese brands, data from IDC, a market research firm, reveals that four out of the five smartphone brands that are sold in India are Chinese. The same data goes to say that about 76% of the 32.5 million smartphones, delivered to India in the first quarter of 2020, were Chinese.   

In such a scenario, India must take some steps to ensure that its dependency on China reduces with time. The ‘Atmanirbhar Bharat’ initiative launched by the government of India is an excellent method to make India self-reliant. Developing alternate sources of supply, capitalizing on the opportunities presented by the current crisis and creating a self-sustaining network are a few other remedies that can be implemented in phases to deal with the crisis at hand. 

Issues like this, the status of startup funding in India amidst the prevailing geopolitical tensions between India and China, are vital for B-School students. It is of utmost importance for them to understand the significance of such geopolitical events as they might come in handy when devising strategies for companies, whatever be their size, location or sector. Corporates have a crucial impact on territories and thus have a critical role to play in geopolitics.