TOKYO -- India's venture capital industry is racing to raise funds from investors as they seek to exploit the opportunity left by a slowdown in startup deals in China.
Local venture capital firm Chiratae Ventures, which backs popular consumer related companies like online baby products retailer FirstCry, is aiming to raise its biggest fund worth $275 million. It is among 84 venture capital funds raising $7.5 billion, a record high, according to data provider Preqin. Private equity funds, which had invested in traditional sectors like real estate and infrastructure, are also increasingly jostling to buy stakes in startups.
Securing risk capital will be crucial as India looks to catch up with China in churning out unicorns, or private companies worth $1 billion or more. China, which briefly overtook the U.S. last year as the world’s biggest destination of startup investment, has seen a sharp decline this year. Deal value fell to $9.3 billion in the second quarter of this year, compared to $40.9 billion a year ago.
India has room to fill the gap. The country boasts the world’s second largest population, one of the largest pools of engineers and one of the most affordable data communications.
Yet with major bottlenecks like the lack of big initial public offerings of technology companies, Indian startups received $4.8 billion in the first half of 2019, only a quarter of China.
“People are more cautious about China and may be looking for alternative markets,” said Sandeep Singhal, co-founder of Nexus Venture Partners, which is nearing the close of its fifth fund worth $450 million. “But you will only see a major shift of [investors] towards the India market once we see more successful exits.”
Advocates say Walmart’s $16 billion acquisition of e-commerce company Flipkart last year marked a turning point. One of Flipkart’s biggest investors before the Walmart acquisition, U.S. based Tiger Global Management, closed a $3.75 billion global fund late last year.
SoftBank Group’s near $100 billion Vision Fund, which also profited from the sale of Flipkart, has been on a spending spree in India. It was part of the $413 million funding round for Delhivery in March, and led a $220 million investment in online grocery company Grofers in May.
Local venture capitalists say a major challenge for Indian tech startups has been securing funding while battling foreign giants like Google and Facebook, whose services are blocked in China. Some companies have started to navigate the trend by chasing growth in industries or locations that require intense localization like education and financial services. Byju’s, India's largest online education startup, on Wednesday raised $150 million from Qatar Investment Authority and other investors.
Startups like Byju's have also been bolstered by the launch of mobile network operator Reliance Jio in 2015, which slashed data prices and fueled the growth of online services beyond major cities.
“It has become much easier for a good idea to catch momentum,” said Teruhide Sato, founder and managing partner at Beenext, a venture capital firm that invests across India and Southeast Asia.
Other startups have attracted investment by expanding overseas. The trend has been driven by Indian hotel unicorn Oyo, which quickly became one of the top hotel operators in China by number of rooms and is now seeking a foothold in Western markets.
Chiratae Ventures plans to open an office in the U.S. by the end of this year to support its portfolio companies expanding business there. “Many of our companies are going global,” said Chairman Sudhir Sethi. “We need presence outside [India] to help companies build connectivity with local investors.”
While some local venture capital firms are starting to establish a track record, analysts say the industry is still young and does not have the strong government support seen in China. A lack of local and experienced venture capital firms in Bangalore was cited as why the Indian city is less attractive than Beijing and Shanghai, according to the Startup Genome’s Global Startup Ecosystem report.
Another hurdle is a requirement to be profitable before listing on the Indian stock market, according to Arun Natarajan, founder of Indian research company Venture Intelligence.
"Regulators have began relaxing the rules, but it will take time before institutional and retail investors here become receptive for companies which are not yet profitable," he said.
“You need to have regular, consistent exits,” said Claudia Zeisberger, Professor of Entrepreneurship & Family Enterprise at INSEAD. “That is what institutional investors will measure China and India by in the years to come.”
China’s squeeze in startup funding may also prove to be a temporary cooling down. The country has over five million college graduates joining the workforce annually “looking to work in young, exciting companies” as well as “an incredible domestic market to test new products very quickly,” Zeisberger.
Kiran Sharma in New Delhi contributed to this story
