Another Indian ‘China syndrome’
Beijing’s decision to crack down on its tech start-ups has opened a window of opportunity for domestic start-ups, but it could close soon too
The Chinese government is imposing severe restrictions on their tech companies — whether it is on data security, marketing practices or floating an IPO. Should this be music to the ears of Indian start-ups and home-grown private equity (PE) funds?
Ask Indian start-ups and the answer is a resounding “yes”. But ask the domestic PES whether they see a shift in allocation of money by their institutional investors and high net worth individuals (HNIS) from China to India and the answer is a resounding “no”.
But caution about investing in China is clearly visible. At the macro-level, the yawning gap in PE investments between India and China has narrowed (see chart).
Indian edtech start-ups have been major beneficiaries because global funds that had made big bets on Chinese edtech companies want to hedge their investments. That is because a few weeks ago in a crackdown on its $100-billion sector, the Chinese government has decreed that companies offering private tutoring and online education cannot go public, raise foreign capital or make profits if they offer online school curricula. That could put investments of funds such as Tiger Global and Temasek, which have large exposures in this sector, in trouble. So they say they are looking at upping their exposure in India — the second-highest growth market for edtech.
Japanese giant Softbank has more trouble — 44 per cent of the value of its investments till March this year came from Chinese tech companies. So it has taken a call to stop fresh investments in China for a while. It has exposure not only in edtech companies but also in Alibaba, Bytedance and car-hailing company Didi.
No surprise that all three global investors are pushing their game in India. In the first week of August, all three of them put money in edtech firm Unacademy to raise $440 million (this round was led by Temasek), pushing its valuation to over $3.4 billion. Then, Softbank was back again with its partners to invest $650 million in Eruditus, which offers executive-level courses, taking the company’s valuation from $700 million to $3.2 billion in a year.
“With China, which is the largest beneficiary of FDI, no longer so attractive, global investors are cautious. That is seriously an advantage for us and also helps us in getting better valuations,” says Ashwin Damera, co-founder of Eruditus.
Even Singapore wealth fund Temasek has put in $120 million again recently in upgrad, bringing it closer to the unicorn mark. Explaining the potential advantages of the China developments, Ronnie Screwvala, co-founder, says: “There are now two real scale markets in the world (after China is ruled out). US companies need Indian companies to deliver the Asian market more than Indian companies need US companies to deliver their home market. So there is scope for two or three top global edtech companies to come from India. That is the real opportunity.”
For instance, Byju’s, in which Tiger Global has picked up stakes, completed a fund raise of $340 million in July this year, which saw it valuation zoom to $16.5 billion, leaving Chinese edtech giants such as Yuanfudao (which in October 2020 had claimed a valuation of $15.5 billion) behind. Says Byju Raveendran, co-founder: “We were earlier the largest edtech player outside of China. That has changed now”.
But while the action in the edtech space is visible, the attractiveness of India in relation to China, where there is a sense of caution, is clearly visible. What is more interesting is that out of the top 10 deals in Asia Pacific in the June 2021 quarter, according to KPMG, three were from India. Together, Byju’s, Swiggy and Sharechat rustled up $2.8 billion against $3.1 billion by four Chinese companies in the same list.
But domestic PE players say this surge is temporary; in the long term, it will only benefit foreign investment in China as they put in checks and balances. For one, big institutional investors or HNIS who put their money in new PE funds are not forsaking China; they are just taking a pause until such time as the air is cleared. Says Parth Gandhi, founder of domestic PE company, Bombay Capital: “We have seen increasing interest from large institutional LPS [limited partners or investors] investing in Indian GPS [general partners or those who manage start-ups]. But I have not heard of LPS overtly discuss shifting allocations from China to India.”
The reason is simple. Returns on capital employed in China are far more attractive than in India. Says a top executive of a leading domestic PE fund: “There is no comparison between the return that you get in China and that in India, both in terms of cash delivered to investors and absolute returns, which is virtually 5X more in China.”
Opinion is also divided among domestic PE players and start-ups on whether closing the tap of investments by Chinese tech companies such as Tencent or Alibaba, which have put in over $4 billion in Indian start-ups, will have an adverse impact on the availability of funds in India. “We are not seeing Chinese investors getting replaced by other global players, except for companies that have reached the size of going for an IPO,” says a senior executive of a domestic PE player.
Damera of Eruditus disagrees. Returns in investing in US Gsecs are very low, he says, so there is a lot of liquidity in the market, and PE funds provide better returns. “Today you will see most global PE fund coming up with larger follow-up funds, so there is no cash problem at all because Alibaba or Tencent are not investing.”
In other words, the Chinese government’s decision to scrutinise its tech companies could well be a short window for Indian starts-ups to make the best of a good opportunity.