April, 2020. Back in India, Peifu Hsieh, a Chinese venture capitalist (VC)-turned-entrepreneur who co-founded fintech startup Karbon Card, based out of Bengaluru and Shanghai last November, had his share of American dream. Peifu worked with American VC fund Kleiner Perkins for a few years before returning to India in 2017.
Ma’s American hero is also Peifu’s. Rating Forrest Gump as one of his favourite movies, Peifu parrots Gump’s famous one-liner: Life is like a box of chocolates. You never know what you’re gonna get. The 40-year-old smiles, takes a swig of filter coffee and digs into a dosa. “Dosa is the most value-for-money for breakfast,” he effuses on a WhatsApp video call, explaining his venture. Karbon Card issues credit cards to startup founders the fledgling venture raised $2 million in seed funding from a clutch of angel investors, including Kunal Shah, founder of fintech firm Cred, and Pine Labs CEO Amrish Rau, in March. “India has fundamentally changed over the last few years,” he says, commenting on the recent Facebook-Jio deal. “US investors will now find India more appealing.”
In April, India unveiled what might turn out to be a box of bitter chocolates for Chinese investors. The new FDI (foreign direct investment) rule makes prior approval of government mandatory for foreign investments from countries that share a border with India. That China is responsible for letting loose the coronavirus has resulted in several countries, India included, seeing justification in attempting to exclude it from global trade dynamics. There’s also the ostensible threat of opportunistic takeovers of Indian companies whose valuations might have taken a beating due to Covid-19.
The big bet from American Big Tech—Google, Facebook, Microsoft and Amazon—on India comes at a time when a new geopolitical and financial landscape is taking shape in a post-Covid world. “The American big boys can give a tough fight to Chinese heavyweights in India,” reckons Vikram Gupta, founder of IvyCap Ventures. The reasons are not too hard to fathom. India is likely to be relatively better placed once the world comes out of the battering of the pandemic. Though the initial big bets from the US and Japanese investors are going to be placed on established companies and startups with proven business models, over the next few years, they will trickle down to deals closed at the level of early startups.
For Chinese funds, the new FDI rule adds an extra hurdle. “It might be frustrating for them and prolong the process of deal closure,” adds Gupta. In all, it looks like its advantage America as it looks to place more bets outside China, Gupta contends.
Yet, the new law on paper may do little to alter the ground reality of Chinese money fuelling the Indian startup ecosystem. Reason: The fundamental difference in the nature and mindset of Chinese and American investors. Mahendra Swarup, founder of Venture Gurukool, explains. Americans, he underlines, are strategic investors. They will invest in companies and ventures that are either established or have a sizeable market share. The Chinese, on the other hand, are financial investors, who spot early opportunities and build the entire ecosystem.
Out of 30 unicorns—ones with a valuation of $1 billion and above—18 are heavily backed by Chinese funds (see box). Though America has an upper hand when it comes to FDI in India—$28.3 billion versus $6.2 billion by Chinese by the end of last year—the game shifts heavily in favour of the investors from dragon land when it comes to startups. The Chinese, Swarup underscores, have a better understanding of Indian conditions. As for takeover concerns and apprehensions about the Chinese intention, Swarup wants critics to look at the track record of how investors across the Great Wall have behaved in India. “Alibaba could have stopped Paytm from getting SoftBank (from Japan) on board. But it never happened,” he says. Though the government might be justified in coming up with the new rules, there is no reason to be apprehensive about Chinese investors. “They have built the startup ecosystem in the country. The Chinese handsets players, unlike Apple, have invested heavily in India,” he adds.
In a recent report on Chinese investment in India, Gateway House underlined the inherent threat. “Chinese FDI into India is small at $6.2 billion, but its impact is already outsized, given the increasing penetration of tech in India,” the report points out. The report outlines three reasons for China’s tech dominance in India. First, there are no major Indian venture investors for Indian startups. “China has taken early advantage of this gap,” it highlights, underscoring the point by highlighting how Alibaba’s investment in Paytm in 2015 paid off barely a year later after demonetisation. Paytm, the report stresses, benefited from Alibaba’s superior fintech experience, which it applied to India seamlessly, making it a dominant player.
Second, China provides the patient capital needed to support the Indian startups, which like any other, are loss-making. “The trade-off for market share is worthwhile,” the note points out. Third, for China, the huge Indian market has both retail and strategic value. Therefore, companies like Alibaba and Tencent have different considerations and horizons for their investments. In contrast, Western venture money is mostly through funds like Sequoia and SoftBank.
The fear of Chinese hostile takeovers in India, and across the world, might be exaggerated. According to a recent report by US-based research firm Rhodium Group, the virus outbreak brought China’s outbound investment to a halt earlier this year. Since 2016, China’s outbound investment has been on a downward trajectory. Outflows dropped precipitously in 2017 and 2018 after Beijing restricted irrational outflows, the report points out. In addition to domestic regulators, Chinese investors also were confronted with greater regulatory and political scrutiny abroad, as economies tightened investment screening regimes due to concerns about China’s compatibility with their democratic market economies. “This slowdown is visible across all available data sources and has changed the narrative of the inevitable rise of China as a global investor,” a Rhodium Group report outlines.
Meanwhile in Gurugram, Haryana, a top Chinese VC explains why India would need more Chinese money over the next few years. “America and Japan,” he says requesting not to be identified, “will become more insular.” Both these countries will look at investing more in their respective homelands to reduce their dependence on China. Add to it the fact that they have been badly battered by the pandemic from which China has started to recover, and India has been doing better than other countries in its fight. “So where is the money going to come from? It’s China,” he says. “They always look for quick money, and would thus bet on known names.”
Peifu, for his part, reckons that stakes are high for both American and Chinese investors, as none can afford to lose the Indian market. Will then life for the Chinese investor and entrepreneur be like a box of chocolates? “Am looking forward to the future,” he signs off, much like the hero in Forrest Gump who used to swear by his mother’s advice: My Mama always said you’ve got to put the past behind you before you can move on.
First Published: May 13, 2020, 13:53
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