Indian startup founders are wary of Chinese investors, prioritise follow-up funding over term sheet conditions

• A recent report by Innoven Capital, where founders at different stages of starting up were surveyed, showed that an investor’s ability to follow-up with more funding, was the top priority for founders.
• Having witnessed the COVID-19 pandemic, founders want investors on board who can support them during such times by willing to cash them out.
• Meanwhile, the preference for Chinese investors has gone down significantly from 29% in 2020 to 3% in 2021.

The COVID-19 pandemic came as a wake up call for Indian startups. Now, the founders have their own checklist to vet their potential investors. One of their top requirements is that the investor should not be from China. But that’s not all.

A recent report by Innoven Capital shows that an investor’s ability to follow-up with more funding, was the top priority for founders (from startups across funding stages). This emerged as a more important requirement than the conditions put down by the investor in lieu of the money offered.

The pandemic brought various startups to a rude halt for months and the cash left in their banks suddenly started narrowing. So, the founders want to know that the investors on their cap table are willing to shell out more cash during a crisis.

“This year the ability to do follow on funding has gone up and I think the reason was COVID-19. There was a complete market dislocation for at least 4-5 months. Once founders go through such a black swan event, they gain higher appreciation of having investors that have the capacity to support, when the external environment is unfavourable,” Ashish Sharma, chief executive at Innoven Capital told Business Insider.

In 2020, big investors like Lightspeed, Sequoia India, Chiratae Ventures, closed their funds during the pandemic. Bhaskar Majumdar,managing partner at Unicorn India Ventures, had told Business Insider in an earlier interview that during the pandemic, the larger pie of funds went to businesses that are already doing well or are backed by notable VCs already. “VCs are preserving cash for their portfolios,” he had said.

Another priority is that the investor should not be from China

It comes as no surprise that Chinese investors have taken the backseat in a startup founder’s preference table.

Chinese investors like Tencent, Alibaba who had so far been a favourite, are now looking at ways to exit their startup investments in India.

Chinese investors account for an estimated $4 billion into India’s tech startups which includes bets on 18 out of the country’s 30 unicorns, according to a Gateway House report which came out in March, last year. But according to the Innoven Capital report, the preference for Chinese investors has gone down significantly from 29% in 2020 to 3% in 2021.

With the Indian government’s regulations on Chinese investors and crackdown on Chinese apps in the light of the Indo-China border clash, startups have been conscious. Indian startups that are backed by Chinese investors, have been subject to backlash on social media platforms, which has deviated from their ‘Made in India’ image.

People even went on to call for a ban on products as well as uninstalling Chinese or Chinese-funded apps in India.

But the damage was done way before that. In April 2020, the change in FDI regulations said that prior approval of the Indian government will now be required for FDI into India (direct or indirect) by an entity of a country which shares a land border with India, i.e., China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.

“It's about the added layer of red tape that startup founders don't want to go through. Typically, a founder starts raising money six months prior to the set cash runway. A fund takes 3-4 months to finalise a deal and sign a term sheet, if after that a deal has to go for approval and you aren't 100% sure about it being approved, the founder will obviously be jittery,” Roma Priya, founder of Burgeon Law told Business Insider.

This has resulted in funding from Chinese investors in India fall from $3.5 billion in 2019 to $1.05 billion in 2020, according to data analysis firm Venture Intelligence.

“With respect to reduced interest in Chinese investors, it’s a function of regulatory guidelines as well as negative consumer sentiment driven by geopolitical issues. Indian founders can access a wide range of capital pools to fill the gap from lack of Chinese investors and It’s not been an issue for most strong companies,” said Sharma.

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