China has invested a lot less in Indian startups than you think it did

On the face of it, many of India’s bright new companies have benefited from Chinese involvement.

Chinese investments in Indian startups grew 12-fold between 2016 and 2019. By then, Jack Ma’s Alibaba and its fintech affiliate Ant Financial had invested in at least six Indian startups, five of which became unicorns – billion-dollar private companies – and Tencent had backed a further 12, of which seven achieved unicorn status. At the time, at least 18 of India’s 30 unicorns were backed by Chinese investors.

However, in 2020, cracks started appearing in the investment relationship between the frenemies, and since then Indian startups have largely moved away from Chinese venture capital.

What changed?

In April 2020, India amended its foreign direct investment policy to curb opportunistic takeovers of domestic companies. China called the new rule discriminatory, and investment sentiment soured. For almost nine months, India did not clear any FDI applications from China.

Relations between the two nations worsened further after a violent border clash in July 2020, which led to Indian authorities banning hundreds of Chinese apps, citing national security concerns.

“I have not seen typical venture capital investors in China do any new deals, although some of them have exited previous investments and achieved good returns,” Ntasha Berry, co-founder of Venture Gurukool Capability Fund, told Chinese daily Global Times in August. “Until the political situation improves, I do not see new investment happening.”

Despite these serious political issues, Indian startups did not suffer from a funding crunch. It turns out China’s headline-grabbing investments in India’s startup ecosystem are still tiny in the grand scheme of things.

Fewer investments

Over the years, India has captured the fancy of several marquee foreign investors – Tiger Global, Japan’s Softbank and South Africa’s Naspers. Chinese investors have also jumped in. The third-largest tech unicorn ecosystem after the United States and China, India’s young demographic, untapped internet audience, burgeoning startup sector, and more, has long made it a desirable investment destination for all. And after this year’s string of initial public offerings – Zomato, Nykaa and Paytm – there appear to be viable exit routes, too.

However, China’s total investment has been unremarkable. It comprised only around 5% of the $148 billion private equity/venture capital funding India attracted between 2014 and 2019. In the last five years, Chinese firms invested in far fewer Indian companies than their American or Indian counterparts, data from Tracxn show.

Moreover, the majority of investments by Chinese investors were in startups that had already figured out product-to-market fit, had raised significant funding, and had often already become market leaders, suggesting that they would have grown with or without Chinese hand-holding.

Going forward, between government clampdowns and calls to #BoycottChina from the public, Indian startups will hesitate to embrace Chinese funding.

“When you combine increased regulatory scrutiny, longer timelines for investment, and in some cases, optics with respect to their own customer base, I think it is fair to say Indian startups will tread more cautiously for some time,” Rakesh Mohan Joshi, professor and chairperson at the Indian Institute of Foreign Trade, told Entrepreneur magazine.

Even without Chinese money, total funding for Indian startups has had a record-breaking year, thanks to foreign venture capitals and a small but growing local industry.

Some of the credit for the recent boom goes to the tumult in the Chinese tech landscape. Foreign investors are tapering down China commitments and diverting funds to India – now seen as a more stable investing environment, of the two countries.

India’s gain

Since November 2020, the Chinese Communist Party has made several moves that have crippled the country’s tech ecosystem, including quashing Ant Group’s $37-billion initial public offering and instructing the conglomerate to restructure, forcing Alipay to break up, announcing a probe into ride-hailing giant Didi Chuxing two days after its IPO that caused its share price to plummet 40%, cracking down on gaming that shaved $60 billion off Tencent’s value and dealing several blows to the ed-tech industry.

That regulatory blowout cost China’s digital economy – the sector that makes up 40% of the country’s gross domestic product – $1.5 trillion. An inflated real estate sector and a burgeoning energy crisis are not helping either.

Indian startups are gaining. For every dollar invested in Chinese tech in the quarter ending in September, $1.50 went into India, according to the Asian Venture Capital Journal.

Japanese investing giant SoftBank’s CEO Masayoshi Son turned “cautious” on China while building the India portfolio, funnelling funds into social e-commerce firm Meesho, food-delivery company Swiggy, and others. New York-based Tiger Global, which has been investing in Chinese internet stocks since 2002, has amped up Indian investment activity, too. It backed 25 Indian startups in the first eight months of 2021, up from 11 in 2019 and 2020.

To sustain this momentum, India may need to fix flaws like knee-jerk policy reactions, weak data privacy laws and overvalued startups, among other things. There is no room for complacency.

This article first appeared on Quartz.