China-India tech investments: A running start

Shunwei Capital Partners, a Chinese VC firm launched by Xiaomi founder Lei Jun in 2011, took its time venturing into India’s technology ecosystem. But when it finally entered the market last year Shunwei didn’t take half measures. Since its debut investment in the country – a $3 million Series A round for used car trading platform Truebil in February 2017 – the GP has announced six more deals, ranging from mobile game developer Mech Mocha to local language chat platform Sharechat. 

Though the individual commitments are small, Shunwei is confident that its investments will pay off in India’s ongoing digital transformation. “India is now at a very important stage of transition from feature phones to smart phones, very much like China around 10 years ago,” says Tuck Lye Koh, who co-founded the firm with Lei. “That will present many opportunities for start-ups to create enormous value.”

Though its aggressive deal-making Shunwei hopes to set the pace for Chinese GPs, which are slowly increasing their involvement in India. China’s technology giants are showing greater enthusiasm as well, best exemplified by a wave of commitments over the past two years from the likes of Tencent Holdings and Alibaba Group that have been welcomed by the local investor community. 

Whether through financial or strategic channels, Chinese investors have the potential to introduce a new dynamic to India’s technology sector, and observers see it as only a matter of time before more groups on both sides follow their peers into the market. However, success in China is no guarantor of success in India, and investors of all kinds will need to make sure their strategies are calibrated properly.

“Mistakes get made when investors in general try copy and paste templates from one market to another – you have to be pretty first principles in India, because it is a unique and complex market,” says Bejul Somaia, a partner at Lightspeed India Partners. “We do often chat with our China partners about what they’re seeing there and what might be relevant to this market, but it’s equally important for us to determine whether, given what we know about India, things will play out the same way.”

Strategic surge

Until last year, Chinese exposure to India’s technology scene was small. Between 2011 and 2014, AVCJ Research’s records show only one investment in an Indian technology company with Chinese participation: a $10 million commitment to online retailer Fashion & You led by Intel Capital and Norwest Venture Partners, to which US-listed Chinese e-commerce player Vipshop contributed. 

Activity has grown in subsequent years both in terms of deal volume and overall value – the three transactions in 2015 included a $500 million commitment to Ola with participants including Didi Chuxing, and 2016 saw five deals including Tencent Holdings joining a $175 million round for messaging app Hike. But the tech sector really took off in 2017, with 21 deals announced involving Chinese investors. 

Shunwei’s seven transactions were a significant contributor to this total, alongside financial investors such as Cyber Carrier, which has also participated in several early-stage funding rounds. At the other end of the curve, larger growth capital rounds were fewer in number but held far and away the dominant share of the $3 billion committed to Indian technology firms in deals involving Chinese investors. 

Tencent was involved in the biggest of these transactions, joining Microsoft and eBay in a $1.5 billion investment in Flipkart and leading a $1.1 billion commitment to Ola. It also participated in a $55 million round for online healthcare platform Practo and last month led a $115 million investment in music streaming app Gaana. Alibaba Group also took part in a $200 million round for payments player Paytm in 2017 and later paid INR2.8 billion ($41 million) for a stake in the company’s e-commerce marketplace held by Reliance Capital. Xiaomi invested alongside Shunwei several times last year as well. 

All of these Chinese tech giants had invested in India prior to 2017, but last year saw a notable acceleration in their activity. Local market participants identify several reasons for this, notably the desire to reach a new set of customers and an urge to avoid being outflanked by global rivals, particularly Amazon.

“My suspicion is that there was too much happening within China, compared to India – they didn’t see the scale here that they were seeing with literally dozens of unicorns in China,” says Karthik Reddy, co-founder and managing partner at Blume Ventures. “But with Amazon’s big burst into India, it was inevitable that the others would come and look deeper, and that was the beginning of the cycle that has seen these strategics become more bullish about India.”

The uptick in Chinese strategic activity is a welcome development for India’s venture capital investors, which by and large see these players as filling an important niche in the market for growth capital beyond Series A and B stages. These new players, with considerable reserves of capital and industry expertise, can help local investors find exits and liberate some of the capital tied up in early-stage investments. Since they tend to focus on proven businesses rather than taking early-stage risks, competition for investments is minimal.

Being relevant

This optimism comes with some important caveats, however. Like all strategic investors, Chinese technology companies tend to back companies that are aligned with their own interests. Because of this, the benefits of their investment activity is not spread evenly: early-stage funds that were smart or lucky enough to invest in start-ups that meet the tech giants’ needs will find easy exits, while those in other areas will see little change. Over the long term this could lead to significant distortions in the market.

“These strategics will usually play in areas that they’re familiar with,” says Piyush Kharbanda, executive director at Vertex Ventures, the VC arm of Singapore’s Temasek Holdings. “What that means is that areas that are not of strategic value to them, that are not core, might not get early-stage funding that they might otherwise have received because investors don’t see a long-term exit opportunity.”

Vertex is one example of a firm that so far expects the Chinese tech investors to have limited impact on its investment strategy. The GP focuses on enterprise technology start-ups, which will likely hold little attraction for the consumer technology firms that have deployed the most capital in India so far.

Even a company that seems to have obvious strategic alignments with a Chinese investor may fail to attract attention. Xiaomi has made several investments in India, but all but one of these were early-stage rounds alongside Shunwei (the exception was a $25 million round for music streaming service Hungama in 2016), and all were for software companies rather than its core competency of hardware. Market observers say this reflects the company’s ability to tackle the Indian market on its own without tying up with a local partner.

“There are certain products available in China that could be introduced to India in the same way, especially things like hardware. For example, Xiaomi should be able to sell their phones pretty much anywhere,” says Anand Prasanna, a managing partner at Iron Pillar Capital. “But if you’re running e-commerce, payments or anything else that has a large operational interface on the ground then you need someone who can understand local realities and be extremely nimble in the business.”

This is a significant contrast with the biggest American technology firms such as Amazon, Google and Facebook, which have tended to burn cash while trying for purely organic expansion in India. Chinese companies have tended to follow the example of Tencent, which initially tried to promote its own WeChat app. When WeChat failed to gain traction in India, the company shifted to backing homegrown alternative Hike instead. Hike has since entered the cashless payments space, with an approach that it has admitted was influenced by that of WeChat.

Tencent’s experience illustrates both the challenges and the opportunities for Chinese strategic players in India. While local consumers differ significantly from their Chinese counterparts in terms of taste, the countries are similar enough in population size and economic development that local players are likely to look up to Tencent or Alibaba as peers that have already addressed some of the same problems that they are facing. A Chinese firm can also present itself as a partner helping the local players resist the pressure of the US giants.

“The Chinese investors have a bold play in dictating this today, because outside of Amazon, to my knowledge there is nobody else that has the same kind of strategic, long-term intent in the country as the big Chinese players do,” says Blume’s Reddy. “The minute a company reaches a valuation of $100-200 million, we begin to see the first rounds from interested Chinese strategics, and now even financials in some cases.”

Though strategic players are contributing the bulk of capital committed in India so far, Chinese financial investors are expected to become more active as well. In addition to Shunwei and Cyber Carrier, which focus on early-stage investments, Fosun Kinzon Capital is arguably the most notable firm to target the country, having established a co-investment arrangement with Iron Pillar last year. Fosun wa also one of the few Chinese financial investors to contribute to a large growth round in 2017, taking part in a $130 million round for logistics firm Delhivery alongside The Carlyle Group and Tiger Global Management.

“Most Chinese investors who come here are willing to put a small part of their assets into India, as long as they understand the sector. That’s extremely important,” says Iron Pillar’s Prasanna. “They might come in and say, ‘I only want new media and gaming. Those are two things I understand, and if I look back to China eight or nine years ago, those are the kinds of things that exploded. So I want to look at that space in India this time around.’”

This is the approach that Shunwei has taken, seeking to leverage both its connection to Xiaomi and its hands-on experience with early-stage technology in China to bring value to its Indian portfolio companies. Rather than backing business models that closely match those of its Chinese investees, however, the firm has focused on start-ups that are aligned with the unique needs of the Indian market such as Sharechat and Truebil.

Gently does it

Shunwei’s investments in India last year also represent a slightly more conservative turn for the firm than it has taken in its home market, which the firm feels is more appropriate while it finds its feet in the country. “Since our founding in 2011 we have focused mostly on Series A and B rounds in China, and made a few opportunistic growth stage investments,” says Koh. “India is a relatively new market for us, so we will start with a smaller check size, and then decide whether we need to change our investment strategy in the future.”

This early-stage focus could bring Shunwei into closer competition with its Indian peers than the growth capital-oriented strategic investors, but the firm so far has mostly invested alongside Indian GPs rather than against them. Local VCs feel future Chinese investors are likely to follow Shunwei and Fosun’s lead and look for opportunities where they can invest in partnership with Indian firms that know the market and may offer better insight into a local entrepreneur’s abilities.

Taking LP positions in an India-focused fund is another way for Chinese investors, both strategic and financial, to gain familiarity with the local ecosystem on the way toward launching their own investments. In many cases these relationships have led to co-investment, as with Iron Pillar and Fosun Kinzon, and they may even help create exit opportunities for GPs.

“There have been times when our Chinese LPs came over and looked though our pipeline, and since many of our LPs have operating businesses in China the conversation pretty quickly turned to, why don’t I just buy this company?” Prasanna says. In one recent case a large Chinese healthcare technology developer expressed interest in a similar Indian peer in which Iron Pillar was considering an investment.

“In that case we said that we could invest in the company, possibly bring in the Chinese LP as a co-investor, and then in the next three years all the VCs could exit to them,” he says. “We might invest at $50 million valuation in that deal, and potentially will be able to sell at a $200-300 million valuation.”   

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• Topics
• Greater China
• South Asia
• Technology
• Consumer
• Early-stage
• Expansion
• China
• India
• TMT
• Alibaba Group
• Tencent
• Shunwei Capital Partners
• Blume Ventures
• Fosun Group