Indian start-ups, still reeling from the effects of a global pandemic, are now faced with a fresh challenge: the ongoing military standoff between Delhi and Beijing.
India has been on an economic offensive since June, when a border clash in the Himalayan region of Ladakh left 20 Indian soldiers dead. The two sides have since accused each other of violating the border consensus, and tensions have been rising.
Chinese companies have already invested in 18 of India’s 30 unicorns – technology companies with a valuation of over $1bn (£772m). The list spans popular food delivery apps, a taxi aggregator, a hotel chain and a company that offers e-learning programmes.
But now their fate – and that of start-ups that were hoping to attract Chinese money in the future – looks uncertain.
“Clearly one big source of capital has vanished,” Haresh Chawla, partner at True North, a private equity firm, said.
“The ecosystem is likely to see muted valuations and slower deal flows, since they [Chinese] were very active, especially in the mobile and consumer segment of the market.”
Delhi has already banned more than 200 Chinese apps, including hugely popular ones such as TikTok and PUBG. It also proscribed investment from China in highway projects and small and medium enterprises. And “boycott China” has become a loud rallying cry.
But all of this came on the heels of something bigger – in April, India introduced tighter foreign direct investment rules to prevent hostile takeovers during the pandemic.
The result has had an outsized impact on India’s capital hungry start-ups.
A decade ago, Chinese investment in India was negligible.
But data obtained by the BBC from start-up research firm Tracxn shows that 35 Chinese corporations and 85 venture capital and private equity firms have invested over $4bn in major Indian start-ups including PayTM, Snapdeal and Swiggy since 2010.
Chinese investment into India as a share of foreign direct investment has more than doubled during this period, from 5% to 11%.
India may have refused to sign up to Beijing’s multi-billion Belt and Road Initiative – a mammoth infrastructure project of overland and maritime routes, often called the modern Silk Route.
But the country “has unwittingly signed up for the virtual corridor,” Gateway House, a think tank, observed in a recent report.
“The impact is unlikely to be dramatic on early-stage investments,” Mr Chawla said. “There is enough dry powder with many VCs to shepherd firms through.”
According to him, the real pain will be felt by firms who have already raised money from companies like Alibaba, Tentcent and Baidu, as well as those hoping for more funding from Chinese firms.
Alibaba has reportedly put on hold all plans to invest in Indian companies.
“They were clearly surprised at the categorical stand taken by India, but they have limited leeway,” the founder of a unicorn with investments from Alibaba told the BBC on the condition of anonymity.
The BBC reached out to several unicorns for comment, including PayTM, Big Basket and Snapdeal, but none were willing to speak on record given the sensitivity of the issue.
Top industry players believe that the government doesn’t intend to end funding from China. Rather, it will not make it easy for Chinese companies to pick up equity in India’s tech space or consolidate their presence.
“The government will not apply a blanket ban – what it will do is create a degree of uncertainty about regulations such that start-ups themselves find it too cumbersome to solicit or take on Chinese investments beyond a point,” said Dr Jabin T Jacob, a professor of international relations at Shiv Nadar University.
Experts also say that rather than disentangling existing investments, the government will redirect focus to keeping telecom giants like Huawei at bay during India’s 5G trials.
It’s unclear what thresholds will be imposed on Chinese investment, but it’s unlikely that ownership above 10% by a single conglomerate, and 25% by a venture capital firm, will be permitted without government approval.
So, where will Indian start-ups find alternative capital?
“Given the large presence of the Chinese, it may be difficult for funds from other jurisdictions to immediately fill their shoes,” said Atul Pandey, a partner at a law firm which represents Chinese investors in India.
He said he has 12 to 14 applications from Chinese investors, which would have been cleared automatically, now pending approval.
“What the government does with these will give us more clarity on their approach to new investment,” he added.
The standoff has already spurred some uncertainty. Dealmakers say that funding rounds involving Chinese investors closed faster than those with Western companies.
And more important, Indian start-ups had hoped to emulate and learn from the mobile-first evolution of the Chinese market so they could follow the same trajectory. So the unexpected and quick decoupling with China’s tech giants has undoubtedly caught many off guard.
But strategic investors from other parts of the world will eventually return post-Covid-19, even if the Chinese don’t, experts say.
They point to the fact that India is still the largest market for internet companies with China closed off for years.
And during the coronavirus lockdown, India attracted nearly $20bn in foreign capital from Silicon Valley companies like Google and Facebook, and global private equity giants such as AIDA, KKR and General Atlantic.
But most of that money went to billionaire Mukesh Ambani’s telecoms venture, Jio Platforms, and not to fledgling start-ups.
So India may have to create domestic capital to fill the void left by China.
Estimates suggest that Indian private equity and venture capital firms are woefully dependent on global money – Indian capital only accounts for 5% of their funds, Gopal Jain, managing partner at a private equity firm, told a local TV channel.
In a post Covid-19 world, when money is scarce, this figure will have to go up to at least 30 to 40%, he reckoned.
That will determine whether India can create its next 30 unicorns without any Chinese investments.