Indian startups: Startups tap new investors amid uncertainty on China FDI

2021-03-04 03:00:58

BENGALURU: Amid scrutiny of Chinese capital, Indian startups which have raised funds from Chinese investors in the past are now tapping new investors that do not pose immediate geo-political risks.
These startups, according to over half-a-dozen founders and investors, are also ensuring no participation from the existing Chinese investors to avoid waiting for approvals, which they suspect may take unrealistically long for a startup.
There are at least half-a-dozen early stage startups, including Cashify, a reseller platform, that are raising fresh capital without participation from their existing Chinese investors.
In fact, some of them have also begun discussions with their existing Chinese investors to offer them secondary exits, industry sources said. In a secondary exit, existing investors sell their shares to new players.
Last April, the government had changed FDI rules to keep tabs on Chinese capital in Indian companies. Apart from the early-to-mid-stage startups, strategic investors such as Alibaba and Tencent own shares in large internet firms like Paytm, Bigbasket, Zomato, Policybazaar, Swiggy, Udaan and Byju’s, among others.

Cashify, where Chinese investors such as Shunwei Capital, CDH Investments, Morningside hold over 30-32% stake, has raised over $15 million from one single investor-Olympus Capital- with no participation from Chinese investors.
Sources aware of the matter said another growth-stage fin-tech firm is in the process of closing a new financing round where a prominent Chinese investor is expected to exit the investment.
Besides this, Koo, the Indian alternative to Twitter, is in the final stages of closing the exit of Shunwei from its parent firm while lending startup KreditBee recently closed a $75 million funding where Shunwei has sold parts of their stake.
“Founders are telling these investors they need to raise new capital to grow and Chinese investors have agreed to not participate in the rounds as they don’t know how long it will take for a series-A to series C funding to be cleared, leave alone large strategic ones like an Alibaba or Tencent. This is especially true for startups who deal with sensitive data of Indian users,” an investor aware of the discussions said.
While some startups can afford to give a secondary exit at their scale of operations, the ones which are raising capital for growth and expansion are in talks with new investors following mutual agreement between entrepreneurs and their existing Chinese investors to not take new money from them.
“Olympus was ready to put in the capital we needed. All we knew was we can’t raise money from Chinese investors. We told our existing investors the same and that there is an external investor willing to write the full cheque and everyone was okay with it,” said Mandeep Manocha, co-founder and CEO, Cashify.
Another founder of a New Delhi-based startup, with existing Chinese investors in his firm, said he has begun talks to raise for a new round from Indian and other investors.
“We waited for a while, but it will take longer (for China investment approvals), and startups can’t wait forever as capital is critical to scale up. We can’t give exit to them right now so we will have to raise without them,” this founder added.
Other investors and entrepreneurs echoed this sentiment as there is little clarity over Chinese investments in Indian startups. Last month, TOI reported that the government has started clearing select investments on a case-by-case basis.
“We don’t know what’s the threshold being considered to define strategic–whether its 10% or 25%. There is no clarity yet though it has been raised with the government over the past few months,” the investor mentioned above added.
Entrepreneurs and investors added these startups are also going to miss out on the operational expertise Chinese investors have to offer, besides the capital, from their experience of backing similar firms in China.

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