Amidst the investment crunch in Indian startup ecosystem, suddenly when we start hearing the news about the savior- the Chinese giants. The story started with Didi Kuaidi investing in Ola to challenge its biggest competitor Uber, followed by Alibaba’s investment in two companies of the same sector Paytm and Snapdeal. The story does not end here, Tencent has already invested in Practo and Baidu is in talks for an investment in Mydala. Read: Chinese Taxi Hailing Giant Didi Kuaidi Invests in Indian Giant Ola. It is no doubt good news for the startups and founders, but at the same time the most relevant question that pops up is- Why Chinese companies are investing in Indian Startups?
“They’re playing a global game of domination on the Internet,
…Chinese companies can redeploy the U.S. startups’ technology and talent for their immediate next steps: expansion into other emerging economies such as India and Brazil. Eventually, they’ll grab a piece in the saturated American market.” Says Founder and CEO of Search Engine Ark.
What is the strategy of these companies
Alibaba already made an investment of close to $ 1 billion in Indian startups, $ 680 million in Paytm and around $ 100 million in Snapdeal. Baidu, China’s largest search engine company is said to be in talks to invest in Mydala, the online coupon, and discount marketing firm. Tencent, which owns WeChat also invested in Practo. Didi Kuaidi made an investment in Indian cab hailing company Ola.
Although these companies are expected to invest majorly in their own sectors but “ Travel, Real Estate, and Education could also turn out to be the attractive picks for the three Chinese investors. I don’t see them limiting themselves to e-commerce as other sectors also presents large market” said Mayank Khanduja (SAIF Partners) in an article published in Economic Times. Thus, a huge investment across sectors is expected from these companies in India. These companies seeks controlling share in their Indian partner firms. Like Alibaba has 40% stake in Paytm, Baidu is also eying on a majority stake in Mydala.
Collectively called BAT, Baidu, Alibaba, and Tencent have been actively investing in US also. Since 2012, BAT has made more than 50 investments in US startups of a value close to $ 2.3 billion. They are making strategic investments with revenue generation as the bottom line of course. “Mobile development in china is exploding. Baidu’s vision today is to connect people with services. Uber is an example of that.” Said Robin li, Baidu CEO as a response to its huge investment in the US-based Uber. Thus after making huge investment across sectors in the US, BAT has moved towards the next most lucrative market that is India
Source: http://www.forbes.com/sites/liyanchen/2015/05/27/why-china-just-spent-2-3-billion-on-americas-hottest-startups/
Why is BAT investing in India?
Growing numbers-No doubt India is the most attractive destination as far as startup ecosystem is concerned- 3rd Rank, Nasscom Report. Though Indian Internet penetration in 2014 is equivalent to China in 2008 and US in 1996 but India is catching up very fast and has come up as the 3rd largest smartphone market in the world and a 300 million Internet user base. This leaves India as one of the most attractive market for online companies.
Startup Investment Crunch- only 24 venture capital deals worth $ 112 million in October as against 43 deals worth $ 831 million in March, according to VCCEdge. A lot many companies are laying off employees and shutting down operations, the major reason being the lack of funds. VCs have become more cautious about the unreasonable valuations of these companies and shrank their investment plans. As a result, startups are at the receiving hand. Naturally the negotiation power of the companies goes down. It becomes the best time to hit, as the iron is hot.
Rich Companies-China has always been the biggest competitor in attracting VC’s money.
Venture Capital Investment in Asia Pacific in 2014
1
China
$ 30 billion
2
India
$ 4 billion
3
Japan
$ 0.8 billion
4
South Korea
$ 0.6 billion
5
Australia
$ 0.4 billion
“Chinese know that an assault on Silicon Valley is difficult and Europe is too small. That leaves India. The Indian Online market is the new battle ground for the war between American and Chinese.”- says Haresh Chawla- Partner, India Value Fund.
Chinese slowdown- China is aiming a growth rate of 6.5 % a year until 2020 the lowest growth forecast since 1970’s, Chinese stock market has plunged, their currency has devalued. With these factors, consumers are constantly cutting down on spending. Alibaba lost around $ 65 billion in value since it went public.
Overvaluation of firms-
As a result of FOMO (Fear Of Missing Out) on investor’s part and greed of building big war chests on founder’s part, the overall valuation of the companies has breached the limits of rationality. Now that the valuations have already sky rocketed, it is becoming even more difficult for the companies to raise follow-up rounds. Only US and China or to some extent Japan has the money to buy such over expensive companies stake. US investors are now not very keen to invest at such peaking valuations where companies have yet to prove their business models by showing some profits. In ecommerce segment US has already got their bet in form of Amazon who is locking horns with Indian ecommerce giants. Not to forget Amazon is a pioneer in innovation and has such a long experience to back their operations. Tiger Global the prominent investor in Flipkart has also made investment of $ 1 billion in Amazon few days ago.
We can conclude saying, the rich companies after exploiting all the market potential in their own countries have started looking for expanding their potential by investing in other promising market where they can lead. US being too strong and Europe being nascent in startup ecosystem they are eying India as it is showing promising numbers in terms of growth. What is happening in India has already happened in US and china 10 and 8 years before, respectively.
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