If there were any fears that the rising protectionism targeted against India’s neighbours would inhibit the flow of Chinese investments into domestic startups, they are belied by the growing belief in the change of guard on the investment front.

Investors from the Middle Kingdom are being aggressively courted by Indian entrepreneurs, and their backers, as they search for long-term pools of private capital to back their growth as well as prop them up to survive the ongoing funding winter.

Experts foresee Hong Kong and Beijing firms taking the lead as investors in the domestic startup ecosystem in the coming year, supplanting Silicon Valley and New York-based firms that have traditionally backed some of India’s largest internet firms including Flipkart.

“We need it. We are okay for capital up to series A, maybe B. Which is why all these guys are looking out for cash,” said Siddharth Talwar, partner at venture capital firm Lightbox. “Right now, bad companies are shutting down. Tomorrow, good companies could also shut down. Not because they are bad, but because there is no capital available.”

In terms of transaction volume and value, Chinese investors continue to trail US risk capital deals. But the ‘Look East’ strategy is only expected to intensify, with many expecting it to be derigueur even beyond the next 12 months.

“I think the Chinese are planting some beachheads,” said Avnish Bajaj, Managing Director, Matrix Partners India. “India is a very unique market. Because it is English-speaking, the Americans and the Chinese are fighting over it. But the entrepreneurs are not in it to sell. And the Americans have been slow in this situation, which is why the Japanese and the Chinese have been able to move faster. The Japanese are also slow, but they are looking at it strategically.”

Strategic Chinese investors including Alibaba Group, Tencent, Foxconn and MediaTek have gained a firm foothold in the country backing some of India’s biggest tech and consumer internet firms such as payments firm Paytm and messenger app Hike. These firms are likely to remain the top fundraising options for domestic startups, say experts.

“Alibaba, Tencent and Ctrip from China are already here. When the biggest companies of a country (China) are putting money in another country (India), then the fear factor of that country (China) suddenly diminishes,” Lightbox’s Talwar said.

That theory may be tested, however, because of the increasing bitterness against Pakistan that’s provided a platform for terrorists acting against India. China is seen as a supportive of the Islamic country and some groups have called for a ban on Chinese products and involvement in India.

A wing of the ruling BJP’s ideological parent, RSS, has said it would keep a close watch on the Alibaba-backed Paytm’s Chinese connection, just as the country’s biggest digital wallet provider found a huge opportunity in India’s push for a cashless economy.

Also, there’s demonetisation. The government’s sudden decision last month to undertake the world’s biggest currency overhaul resulted in about 86% of India’s currency supply being invalidated.

“It is decisions like this that can pause any potential investment thesis, especially when you consider the impact on the country’s consumer class,” a Hong Kong-based investor said on condition of anonymity. “It’s affected everyone, and the fallout, from what we see, has been terrible so far.”

Chinese and Chinese-origin investors have poured in about $3.7 billion into Indian startups over the last three calendar years, show data sourced from VCCEdge and Tracxn. This, however, is dwarfed by the $15 billion invested by US investors in the country over the same period.

But it’s not the quantum of capital invested that should be taken into account, say industry experts. They point to the decline in the value of venture and strategic investments in 2016, given the decision of investors such as New York-based hedge fund Tiger Global Management to resize their India portfolios.

Also, Chinese investors, specifically the family offices, are increasingly being regarded as having greater value than their US counterparts. “They have a strong entrepreneurial streak and that’s a great advantage to have over purely financial backers, especially in the current landscape,” said Sandeep Aggarwal, Chief Executive of Droom, an online marketplace for used vehicles. “US investors have been here for a much, much longer period, and have sussed out the market to a much greater degree. But the deal numbers don’t always paint the right picture.”

Droom, which already counts a number of prominent Chinese-origin investors, is again in early talks with firms from the region, including Hong Kong, for fundraising.

In June, report that the family offices of two of Asia’s richest men, Alibaba Group chairman Jack Ma and executive vice chairman Joseph Tsai, were exploring investment opportunities in India as they sought to diversify their portfolios and replicate their successes outside their home market.

It is this particular asset class that the ecosystem is banking on, and which is expected to play a more prominent role next year given that they invest proprietary capital, have access to global markets and have the necessary entrepreneurial know-how to build businesses at scale.

Chinese family offices “are perceived to have a pretty hands-off approach. But at the same time, they can provide access along with money. Because of their largely benign approach, with any luck, you won’t have a SoftBank-Housing situation with these guys unless something goes terribly wrong,” said the unnamed Hong Kong-based investor.

Separately, newly formed investor pools being created, largely based out of Singapore and Luxembourg, have begun to actively scout for deals in Asia’s third-largest economy.

Online marketplace Snapdeal raised over $70 million this year from Luxembourg-based Clouse SA and Brother Fortune Apparel Pte Ltd, an investment entity that represents several wealthy Chinese individuals. “India is now a market at the brink of exploding into the next level and what you need is just funding, which may not be coming from traditional tech funds for whatever reasons,” said Parag Gupta, Executive Director at Morgan Stanley who closely tracks the technology and internet space.

While early days, parallels are being drawn with the massive increase in activity by Chinese investors in the US over the past two years. In August, The Washington Post, citing Rhodium Group research firm, reported that investment from China into Silicon Valley, excluding real estate, crossed $6 billion by the end of the first half of 2016, with more than half of that spending taking place in the past 18 months.

For Chinese investors, the “key is where the next phase of growth is,” said Matrix’s Bajaj. “And India is going through what China did 10 years ago.”

Source: ET Tech