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Despite Series B drain from China due to coronavirus hit, Indian investors remain optimistic

Overall deal activity in India has been robust over the last two months with Indian startups raising USD 1.3 billion.

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Executives at Beijing-based venture capital firm CDH Investments had planned to invest in four to five Indian startups as soon as they came back after their Lunar New Year break in the first week of February. Little did they know that the lightning-fast spread of novel coronavirus which has so far cost the lives of over 2,700 people with confirmed cases touching 78,959 in China, would force them to be grounded and delay their prospective investment at least by a quarter.

“Since business travel has completely stopped from China, the investment front is slowing down. About four to five deals in India that were in advanced stages in January have been delayed,” Ritwik Ghosh, vice president, investment department at CDH Investments told KrASIA. He believes there is going to be a three-month gap. The Chinese VC firm has backed Indian startups such as food-tech giant Zomato, logistics service XpressBee, and social e-commerce startup Glowroad.

“Even if the talks resume by March-end, the numbers that investors and companies were working with would be three months old. Companies will need to do the numbers again for the investment committee report,” he explained.

The cross-border deal activity in the first two months of 2020 has been flat compared to the same period last year. According to the data sourced from research firm Venture Intelligence, there were four early to growth-stage investments from China worth USD 24 million in Indian startups in January last year. In comparison, there were two such deals this year totaling mere USD 4 million.

Venture Intelligence data updated till February 27 this year, shows Chinese VCs have invested USD 28 million across six funding rounds. Similarly, investors from Singapore closed three deals worth USD 3 million over the last two months, as compared to eight deals totaling USD 11 million in the corresponding period in 2019. South Korean investors, in the same time period, scored two deals amounting to USD 14 million, as compared to two deals worth USD 15 million last year.

However, the actual impact on cross-border funding in Indian startups due to the halted travel between India and other Asian countries including China, Singapore, Japan, and South Korea would be clear in the coming months.

“The impact of any slowdown owing to the virus outbreak…in January-February would likely reflect in the numbers only in the months ahead,” Arun Natarajan, founder, Venture Intelligence told KrASIA.“Our expectation is that, as long as the virus outbreak and related impact dies down in the next couple of months, the strong investment activity into Indian companies that we have witnessed from other Asian investors will continue.”

The investors KrASIA spoke to acknowledged that there is a muted activity from Chinese investors, who have been one of the most active investors since 2014.

“It (the coronavirus situation) would slow down the funding process, but whether it is going to be a through-the-year slowdown or whether it will recover quickly, we will have to wait and watch. The duration (of the travel ban) will decide whether they will be missing out on deals,” Hari Krishnan, fund manager at Astarc Ventures, a Mumbai-based early-stage venture capital (VC) fund told KrASIA.

The crux of the problem

The outbreak of COVID-19 in China which has subsequently spread globally has forced the Indian government to impose travel restrictions on people coming to India, mainly from China. Thus currently it is impossible for Chinese investors to fly down to meet founders. Although meetings are happening over video conferencing, they can’t bring in the same value as face to face meetings do.

According to Natarajan, the impact of the coronavirus outbreak on funding and M&A activity in the Indian market will begin to affect cross-border deals if travel-related issues linger for a long time.

Usually, when investors put their money in a startup that is in its early-to-growth stage funding round, the VC mainly takes a bet on the founder, her ability to execute the idea, and the smarts to drive the company in the long run. Thus it’s imperative for VCs to meet startup founders in person. In contrast, startups raising late-stage funding have already gone through thorough due diligence by early investors, which makes it easier for new VCs to come on board.

Chinese VCs have “largely been investing in Series B, occasionally Series A, but not Series C,” said Krishnan from Astarc Ventures.“Series B, which has been their large focus area, needs more time and analysis, because, it is a bet on founders.”

Infographic created by Marline Luo

“There is not much work that can be done remotely and investors need a lot more face time with founders unless they are co-investing,” he said. “And I think people also want the comfort of meeting in person.”

Even as the deals get delayed for a quarter or so, the larger Chinese investor community is unlikely to lose out on good startups. “There are only a few series B investors in India. If Chinese VCs do not invest in them (Series B rounds), then who else would,” said Krishnan. “Because of that, I do not think they would miss out on deals as long as it persists only for a quarter.”

“There would be some delay but the activity will continue to go on,” he added.

Anil Joshi, managing partner at Unicorn Ventures, which backs early-stage startups, said that India is a big market and there are a lot of companies for Chinese investors to explore.

“One or two companies won’t matter. And even if a round gets closed, they can always come a bit later with a higher number,” Joshi said. “If it is a strategic or big pocketed investor, startup founders will be more than happy to make room for them, so overall I do not see much problem.”

What’s keeping Chinese deals afloat in India?

Even as Chinese investors stay put, Unicorn Ventures’ Joshi believes there are two kinds of cross-border deals that can still be done remotely.

“One, where you are already an existing investor and some up round is happening. And second, where you are just co-investing. I don’t think they need much diligence here, they will just follow-through,” he said. “Those deals will certainly happen.”

“The problem is, if the banks are closed, they won’t be able to wire money,” he added. “But as thing things improve, that will not be a problem.”

For instance, CDH has done a lot of deals with American venture capital firm Accel in the past. So if there are deals, where Accel is leading the round, and CDH is co-investing, then it would not require as much face time and things can be managed remotely. But Krishnan cautioned that wherever Chinese investors were leading the round, “the startup will have to have a plan B.”

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Unicorn Venture’s Joshi added that “wherever there is a fresh connection, people will have to wait.”

Natarajan said there are deals that are already being discussed, and meetings that were supposed to happen in-person are either moving to remote calls or in some cases, entrepreneurs are flying out to do the meetings with the investors.

Last week, Ganesh Krishnan, partner at Bengaluru-based venture builder platform Growthstory, which has supported startups like hyperlocal delivery service BigBasket, health tech platform Portea, and home services app HouseJoy, tweeted that a founder of one of its portfolio company was flying to the US at the cost of the VC, which was in early stages of discussion with the startups and whose proposed visit to India was canceled.

“Meanwhile, many Series A funds in India have made relationships with a bunch of Chinese investors. So the dialog will continue to happen through the combination of audio and video calls. Chinese funds also have diligence partners in India. They have already worked with few diligence partners so far, so they will engage with them remotely,” said Astarc’s Krishnan.

According to Natarajan, one of the aspects that lends confidence to the Asian investor community is the fact that several Asian investors – including SoftBank -have recently made senior-level hires in India and strengthened their local offices.

The silver lining

Overall deal activity in the South Asian nation has remained robust over the last two months. As per Venture Intelligence, there were 79 deals from January 1 till Feb 27 in the Indian startup ecosystem worth USD 1.3 billion.

“On the ground, the overall deal activity continues to be strong,” said Krishnan. “Early-stage funds and large Series A funds that are doing early-stage deals continue to be active.”

CDH’s Ghosh said, “The Indian funding ecosystem has been localized since Sequoia, Matrix, and Accel have been long enough in India. Hence, deal activity is still robust. However, the Chinese (VC) ecosystem has slowed down.”

The most active investors in India this year to date, as per Venture Intelligence, include Sequoia Capital, Tiger Global, Matrix Partners, Chiratae Ventures, Accel, Omidyar, and Steadview Capital. Meanwhile, Indian startups that have been relying on Chinese funding to execute their growth plan will be impacted as they may now have to wait for three to six months for the deal to be closed. Joshi believes that the absence of face to face interaction would certainly bring a kind of break in the deal activity, but it will be “a short phenomenon.”

“As things ease-out, funding will pick up. I do not think it will make a significant impact on the life of entrepreneurs if there is a bit of delay,” he said. “But it might impact people who were on the verge of closing a round. They will probably feel the impact, and they will have to wait until things ease-out.”