Indian unicorns bridle as New Delhi looks a Chinese gift horse in the mouth

As the coronavirus continues to ravage the globe, Indian unicorns hungry for investment are running into a problem " Chinese capital is drying up.

And given the fact that many of India's billion-dollar firms have already introduced cost-cutting measures such as lay-offs, pay cuts and operational freezes, that is a development that could prove costly in the coming months.

More than half of India's unicorns (it has between 30 and 32, depending on the method of evaluation) rely on Chinese investment, among them the digital payments platform Paytm, food-delivery firm Zomato, grocery retailer Bigbasket and gaming app Dream11.

All of these will be affected by New Delhi's new policy on Foreign Direct Investment (FDI), announced in mid-April, which requires any investment from a neighbouring country to be approved by the government. The move, according to the Ministry of Commerce and Industry, is to prevent "opportunistic" takeovers and acquisitions.

While India shares land borders with Pakistan, Bangladesh, Myanmar, Nepal, Bhutan and Afghanistan, the investment coming from these countries is negligible. Instead, the policy appears to be aimed squarely at China, the fastest-growing source of FDI in India over the past five years. It is worded in a way that would also curb Chinese investments channelled through intermediaries in places like Hong Kong, Singapore and Mauritius.

Senior executives of multiple Indian unicorns have said it severely limits their ability to raise funds, given the fact that China has for some time been their biggest source of capital.

Eighteen of India's unicorns count Chinese venture capitalists as shareholders, according to the think tank Gateway House, and more than US$4 billion of Chinese money has been pumped into Indian start-ups to date.

Indian Prime Minister Narendra Modi. Photo: AP

In total, Indian unicorns have raised more than US$21 billion in capital, though most are yet to generate profits. Some are now warning they could lose their coveted unicorn status if there were to be fresh valuations.

"It's like a shakeout taking place in slow motion. We're going to find it very hard to raise money, whether from Chinese investors or anyone else," said a senior executive of an e-commerce Indian unicorn.

"Chinese money was relatively easier to acquire because of higher risk appetite. A lot of our early cheques came from Chinese investors. Because China is almost 10 years ahead of India in so many digital businesses, they tend to see how these could pan out and can bet accordingly," he said.

Chinese investors participated in 54 rounds of funding for Indian start-ups in 2019, twice as many as in 2017, according to the data-management firm Tracxn.

The notable Chinese presence in the Indian start-up ecosystem includes Alibaba's share in Paytm and food deliverer Zomato, and Tencent's investment in car-hailing app Ola and the educational-tech firm Byju's. Alibaba, the owner of the South China Morning Post, and Tencent alone have invested in more than 90 Indian start-ups.

Rohan Agarwal, director at the start-up advisory firm Redseer, said companies that prioritised growth over profitability would be forced to change their business strategy.

Alibaba and Tencent alone have invested in more than 90 Indian start-ups. Photo: Reuters

Even before the virus outbreak, there had been increasing pressure on unicorns to post profits rather than rely on extra investment, he said. The pandemic had just exacerbated the matter.

Leaders of at least four Indian unicorns told This Week in Asia on the record that the current environment had made it extremely difficult for their firms to find fresh capital, though some insisted they were not looking for immediate investment and some refused to comment.

"The pandemic has delayed our fundraising efforts as well as our business goals. So yes, it is challenging, but we continue to work towards them," said Mohit Sardana, COO of the Food Delivery arm at Zomato, which last week laid off 13 per cent of its workforce, or about 520 employees.

Industry experts said a few major deals with Chinese venture capitalists that had been on the verge of being signed off this year were terminated abruptly due to the uncertainties.

Rohit Kapoor, the CEO of hospitality giant OYO India and South Asia, said his industry was among the worst affected sectors and would take time to recover.

"The funding environment has turned south and will be tough for the majority of companies," said Kapoor. "With some signs of recovery in the hospitality industry in China post-coronavirus, we're hopeful that the situation will begin to improve globally once everything is under control."

Having experienced rocketing growth in recent years, most Indian start-ups are now struggling to come to terms with what has been a two-month-long lockdown, one of the world's strictest, even though the country is finally beginning to limp back to some sort of normality.

It has not helped that India's metropolitan areas are both the nerve centres of the unicorns' business operations and the epicentre of Covid-19 infections.

With the number of infections nationwide nearing 150,000 and deaths crossing 4,500, the health crisis shows no sign of ending. In other words, now is not the best time for India to be looking a gift horse in the mouth.

"At a macro level, the challenge with India is there is significant demand and latent opportunity. [But] there is a huge lack of capital to seize that opportunity and China comes and plays that role beautifully," said Abhay Singhal, co-founder and CEO of InMobi, a mobile advertising and discovery platform regarded as India's first unicorn. "First, Softbank [a Japanese investment firm] played that role and fuelled the ecosystem and then China came in."

However, Singhal said he had concerns over Chinese investment too.

"I have been bothered about the significant inflow of capital from China and Chinese organisations taking the lion's share of ownership, whether it's in payments, fintech or ed-tech," he said.

Singhal said governments needed protective mechanisms to prevent hostile takeovers in unsettling times such as these.

This article originally appeared on the South China Morning Post (SCMP).

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