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Startups

Indian startups court Japan to fill funding gap and skirt China

Pandemic and problems with Beijing prompt founders to find investors elsewhere

Indian startups are seeking stronger ties with Japanese investors, who have mixed results in India.   © Reuters

TOKYO -- Indian startups are stepping up efforts to tap Japan Inc. for investment as the coronavirus pandemic and souring ties with China squeeze the industry.

Much of India remains under lockdown as the country struggles to contain the coronavirus outbreak, while a recent law restricting Chinese investment into the country threatens to choke off a major source of funding.

Among efforts to woo Japanese investors is a series of online pitches organized by India's National Association of Software and Service Companies, an industry body known as NASSCOM. The latest pitch featured early-stage startups in the transportation sector.

"Japan, by any stretch of the imagination, is one of the top candidates [to enter India]," said Rakesh Mishra, founder of electric powertrain startup Entuple E-Mobility, during his presentation. After the pitch, viewers were allowed to submit questions and request individual meetings.

NASSCOM organized its first pitch event in Tokyo last year as a sign of growing ties between the two countries. Strengthening those ties has taken on a new urgency as the coronavirus outbreak and resulting lockdowns squeeze Indian startups.

Companies are also unnerved by growing tensions between New Delhi and Beijing, as China has emerged as a key investor in recent years.

In April, the Indian government said companies from countries that share a border with India will be required to seek approval to invest in the country. The move was officially aimed at protecting companies from "opportunistic takeovers" amid the economic turmoil caused by the pandemic. But it also comes amid unease over China's growing presence in India's tech industry.

"In the last 12 to 18 months, a lot of Chinese VCs or Chinese companies went to throw money at Indian companies, and that has inflated a lot of deals," said Chua Kee Lock, CEO of venture capital firm Vertex Holdings. He said the decline in Chinese investment due to the new regulations means startup valuations in India will be hit harder than in other countries.

DeepTek, a Pune-based medical startup, raised several million dollars in funding from local investors and Japanese medical imaging company Nobori in May.

"At this juncture, I won't be interacting with any Chinese investors," said co-founder Ajit Patil, while noting that Chinese companies tend to invest in larger startups.

The effect of anti-China sentiment is already being felt across the industry. Indian startups have raised $17.9 billion this year, according to figures compiled up to June 15 by Indian research firm Tracxn. But that figure included $13.7 billion raised by Reliance Jio Platforms, the telecoms business of billionaire Mukesh Ambani. Factoring out that megadeal, the remaining $4.2 billion puts the pace of fundraising far behind last year's $15.1 billion.

Most of the investment in Reliance Jio Platforms came from U.S. investors, such as Facebook and private equity companies KKR and Silver Lake. But Japan is also emerging as another key player, especially for young startups, as a growing number of companies look outside their home market for innovation.

Last August, Toppan Printing joined a $15 million funding round for Medikabazaar, an online shopping site for hospitals. The deal marked Toppan's first investment in an Indian startup. It plans to partner with Medikabazaar to step up efforts to supply medical equipment to local hospitals.

"Many parts of Southeast Asia and India are ahead of Japan in going digital," said Hiroshi Eguchi, who leads strategic investments at Toppan. "India is also attractive as a market."

Shoemaker Asics also announced its first Indian startup investment in March: an undisclosed sum in Pulse Active Stations Network, which runs kiosks that measure health data.

It is unclear whether Japanese investors will be able to match the risk appetite of Chinese investors. Chinese internet giants such as Alibaba Group Holding and private equity funds have poured capital into some of the country's most highly valued startups such as payments company Paytm, food delivery app Swiggy and ride-hailing company Ola, the local rival of U.S.-based Uber.

Eighteen of India's 30 unicorns -- private companies with a valuation of at least $1 billion -- have a Chinese investor, according to Gateway House, a Mumbai-based think tank.

So far, the only Japanese investor that has shown the same level of risk appetite has been SoftBank Group's $100 billion Vision Fund. But its dealmaking activity has plunged after it recorded sizable losses for the year ended March. SoftBank said it continues to invest but has suspended plans to raise a second fund.

Japanese companies have a rocky history of investing in India. Two major deals more than a decade ago -- Daiichi Sankyo's 500 billion yen (around $5.1 billion at the time) acquisition of pharmaceutical company Ranbaxy Laboratories in 2008 and NTT Docomo's 250 billion yen investment in a telecoms business of Tata in 2009 -- led to bitter legal disputes and are widely regarded as cautionary tales.

"There are many companies that make large acquisitions," Takeshi Ebihara, general partner at venture capital firm Rebright Partners, said during the NASSCOM event. "But a better approach may be to find success through various investments."

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