What’s stopping Chinese investors from funding more Indian startups?

Photo credit: englishme community.

“Bureaucracy rocks!” That was the first lesson Tuck Lye Koh, founding partner and CEO of China’s venture capital firm Shunwei, learned about India.

An Indian entrepreneur taught him that when Koh first came to India scouting for investment opportunities a year ago. “His [the entrepreneur’s] answer to most of the problems in his venture that needed to be ironed out was a plethora of “contacts” he has in the government. He told me  about a lot of things around how to grow his venture. Some of them will attract regulatory permission. And he said “no problem, I will get it done.””

For an investor bringing in huge sums of money in the Indian startup scene, several other concerns precede the issue of bureaucracy. Chinese investment in India has been meagre in the last few years. Between 2000 and March 2016 investment from China in Indian startups added up to just over US$1.35 billion, accounting for about 0.5 percent of the total foreign direct investment inflow into India. The amount increased to US$2.3 billion between June and August this year. Still, the investment from China is widely behind investments from Mauritius and Singapore, which together accounted for US$140 billion during the same three-month period.

“Chinese investors started exploring India actively for opportunities only about two years ago. Increasing the amount of investment here will take time, as the market study is also important,” says Hon Yin Lee, managing director, Asia Pacific TMT investment banking group at Citi.

What takes a week in China takes 30 days in India.

The reason why Chinese investment in India has been slow comes down to India’s skepticism towards Chinese products: they’re often perceived to be of low quality. Chinese telecom hardware companies like Huawei and ZTE were also scrutinized for alleged espionage and other national security concerns. With recent territorial conflicts with China, the “Boycott Chinese goods” slogan has gained momentum.

But that may be set to change. There has been a surge in investments from China after the Indian government eased certain trade restrictions on Chinese companies and offered favorable tax rates.

With the double whammy of economic slowdown in China due to slowing industrial profits and persistent currency weakness, investors are increasingly turning to India to deploy capital for growth. Why: India has a huge addressable market when it comes to technology and tech-based products. The internet penetration in India is still at 27 percent but it’s growing fast. The country has just about 150 million smartphone users.

Image by Tech in Asia’s Andre Gunawan.

Alibaba comes calling

The trend of Chinese businesses making investments here started in 2015 with Alibaba investing in Indian unicorns such as Snapdeal and Paytm. “Most of the investments being made here are on big startups, those that have shown scale and growth. Seed funding for new startups is still low from China,” says Lee.

Lee observes that, while the two markets are generally similar, micro-level differences act as a culture shock for many in China. This is why Chinese investors want to play it safe.

So what are these differences?

Bloated cost structures

Unequal spending power