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Chinese investors who have written small cheques in early- to mid-stage Indian tech companies are exploring a quick exit and have started talks with portfolio founders, co-investors and bankers amid the growing anti-China sentiment, people in the know said.
The venture capital and individual investors exploring exits currently own about 4-5% in Indian companies, with some holding less than 2%.
Their presence in the capitalisation table of Indian companies will only hurt business optics including future rounds, and not result in any significant long-term benefit during exit even years later, these investors told ET.
“New rounds are out of the question, I’m trying to find ways to exit money deployed as well,” said a Chinese high net-worth individual who has backed four technology startups in the last four months.
The government on Monday banned 59 Chinese mobile applications, including TikTok, WeChat, Helo and Shareit, citing threats to the country’s “sovereignty and security”. Along with changed FDI rules for Chinese capital introduced recently, this has made investors skittish about their future investments here. Chinese follow-on investments, too, are expected to become more complex, ET reported earlier.
Founders are looking to limit or cut their exposure to China, a venture capitalist said, even if that comes at the cost of giving these investors an immediate secondary exit.
“Since the revised FDI norms came about, in any investor conversation, I first ask them if they are okay buying out a 1% China investor stake, and then begin discussions around a primary round,” said the founder of a growth-stage company.
Chinese investments in India’s tech ecosystem almost doubled to $3.9 billion in 2019 across stages, including in Paytm, Ola, Zomato, ShareChat, Delhivery and Doubtnut. “Chinese investors who typically have smaller exposure to India are not able to make investments. In the last two months, there has been no investment from China in local startups,” said the founder of a homegrown social media app.
Some funds and corporates that have seen fin-tech, social commerce and content businesses play out in China had believed that they could leverage their learning and replicate that success in India while making a premium on those deals.
“A lot of Chinese funds like ours invest with the bet that we would either make it a strategic play or get in early and sell to a large Chinese strategic (like Tencent or Alibaba). At this point, all those bets are off,” said an investor who did not want to be quoted by name.
Investors said India was pegged as a source of growth for China funds, given its positive macro indicators like smartphone reach, GST implementation and the Aadhaar database. Along with China’s slowing economic growth rate, these factors had made India an attractive investment destination.
More than a dozen new China-domiciled large corporates, venture funds and family offices were looking to expand their presence in India over the last six months.
These included Boyu Capital, Kunlun Capital, Horizons, Legend Capital, ZhenFund, SOSV, XVC Capital, CDH Investments, BAce Capital, Qiming Venture Partners, Morningside Ventures, Fosun and Kuaishou.
Corporates including Jingdong, Kuaishou, Ping An, and YY.com, as well as big tech companies such as Tencent, Alipay, Didi Chuxing, Meituan Dianping, and Xiaomi were also actively looking to expand.
Those plans are now on hold indefinitely, investors said.
“Till there is a meaningful de-escalation between the two countries at the highest levels, neither Indian companies would prefer to take Chinese capital nor would Chinese investors want to commit a lot more capital,” said Ashish Sharma, managing director at Temasek-backed venture debt firm InnoVen Capital.
Indian startups are also seeking advice on whether they should pursue Chinese investors going forward.
“Even Indian companies are very reluctant to raise capital from Chinese investors in this environment, as they are sensitive to customer backlash and adverse impact on their brands,” Sharma added.