The first time iXigo founder Aloke Bajpai pitched to Fosun Kinzon Capital, the venture capital arm of Chinese conglomerate Fosun, it was through an interpreter. He was uncomfortable with the language barrier—a major factor that impedes the intermingling of the startup ecosystems of the two neighbouring countries—but was convinced that access to the new Big Brother, China, was extremely important for his online travel search startup.
“Right from the early discussions with the investor we got to know what kind of business models and product innovations worked in the Chinese market. We have had very interesting discussions with early- and growth-stage entrepreneurs introduced to us by Fosun in the travel domain in terms of monetisation strategies and tonnes of marketing channels they use. The kind of social products and apps they use for generating commerce is eye-opening,” said Bajpai, who raised $15 million from Fosun and Sequoia Capital this year.
For Indian entrepreneurs like Bajpai, the opening up of the Chinese ecosystem with help from Chinese investors is turning out to be a game-changer in terms of knowledge-sharing, not just sourcing capital.
Beginning 2016, Chinese companies have poured in $2.37 billion in Indian companies, according to research firm Tracxn. Much of the investments from Chinese companies such as Tencent, Alibaba and CTrip into large Indian internet companies startups such as Flipkart, Paytm and MakeMyTrip have been strategic in nature.
However, the big change over the past year has been the gradual shift from strategic to pure financial, returns-focussed investments from Chinese venture capital firms. This was prompted primarily by the slowing Chinese economy and a paucity of investment opportunities there. The few investment options still available in China are relatively more expensive.
Interest from Chinese investors wanting to replicate in India success stories from back home is growing. Chinese investors and Indian entrepreneurs are schmoozing more often at cross-border networking events as much for exchanging knowledge as for scouting opportunities.
Chinese delegations are visiting India more frequently. In the past year, dozens of new Chinese venture firms including K2VC, Ping An Ventures and Legend Capital have visited India multiple times scouting for opportunities with Indian startups that carry the promise of successes already seen in China.
India today is where China was 10 years ago and, hence, there is a huge learning curve. Indian entrepreneurs want to be strategically leveraging in multiple areas where Chinese entrepreneurs are ahead and have already seen successes and failures.
“The huge change now is that a lot of Indian entrepreneurs talk of Chinese examples. They are no longer saying I am building the Amazon of India. They say they are building the Alibaba of India. Often, people point out, ‘O, this happened in China.’ That is an interesting shift,” said Tej Kapoor, executive director at Fosun India Management, which is reportedly armed with a $200-million fund to invest in 10-12 startups over the next two years.
There are multiple slivers of similarity between China and India that make the former a much better market to look up to than the United States. These include cultural similarities, consumer spending behaviour and income levels, as well as problems such as fraud that can be solved with technology.
The United States is fundamentally a very different market on all these counts. The biggest potential learning for Indian entrepreneurs from China is on handling scale.
“If you want to handle the scale of 1.25 billion people, there is no way you can look at the US; you need to look at China,” said an executive at Cyber Carrier, a China-focussed investment firm that has set up a $50-million fund focussed on India.
The firm, which has invested in MyDermacy and Zoomcar, screens startups to see is there are similar Chinese equivalents, or else works with the founders to see how their business models can be tweaked.
Young Indian founders having global ambitions of reaching such scale are banking on investor-networks to chat up Chinese entrepreneurs who have been there, done that, as well as to open up business opportunities.
For Delhi-based MyDermacy, which is a curated marketplace for dermatologists, preparing questions for Chinese variants of his startup, getting these translated to Chinese and receiving the responses in English—all through their investor’s help—is a regular exercise.
“Interacting with these startups has given us the opportunity to proactively face some of the issues that we could have faced because of the scale we are achieving now. Tomorrow, when we go to the Southeast Asia and Middle East markets, it will be good to know how scale works,” said Ankit Khurana, founder at MyDermacy that recently raised money from Chinese venture capital firm Cyber Carrier.
“Companies in China have 25 million daily active users—we wonder how that is possible and how companies manage their servers to handle those volumes. That is the learning for us,” said Arpita Kapoor, chief executive of gaming company Mech Mocha that recently raised $5 million from Shunwei Capital, an investment firm founded by Xiaomi founder Lei Jun and Accel Partners.
“The only reason we chose a Chinese investor was to get answers on potential business problems no one in India could give informed answers on,” said Kapoor. Mech Mocha plans to bring global games to India in addition to developing its own and help was needed on aspects such as how many developers to sign up in a year and handling any problems that might arise related to intellectual property.
The purpose was to learn from the successes and failures of gaming companies in China. Between 2010 and 2016, several of the gaming companies in China launched casual games without an emphasis on monetization. When the number of users surged, these companies sought to be in more complex markets but were unable to rapidly evolve their games.
Yixuan Geng of Shunwei Capital, which made its debut investment in India in used-car marketplace Truebil this year, explained what it means to scout for parallel success stories among Indian entrepreneurs. “We are looking for proven business models in China in very local talented teams,” he said.
Yixuan said he saw in Mech Mocha’s founding team capabilities of building a business similar to what China’s Nasdaq listed mobile gaming company iDream-Sky could achieve.
iDreamSky develops its own games but also brings global games to the Chinese market, a model that has worked well for it. “In Mech Mocha, we saw a young team that is capable of striking connections with global gaming studios to bring their games to India,” said Yixuan.
As yet, there is more interest than money coming in from Chinese venture capital firms since many of the investors remain cautious and prudent because of their limited understanding of the India market.
Unlike Fosun, which has set up a team in India, many of the other investors including Shunwei are not yet keen on doing so. Chinese investors rely on friendships with Indian venture capitalists and cross connection with other Chinese investors already on the ground for their due diligence on Indian startups.
“Being patient is the key word for investing in India,” said Jason Wang, a Chinese entrepreneur who founded Gurgaon-based investment firm and accelerator ZDream Ventures.
It states this on its website: “The final dream come true via a new model for startups to bloom: Indian startups + Chinese Jugaad.” ZDream, which in January acquired startup intelligence platform Xeler8, also provides consulting and research on young Indian firms to Chinese investors, and hosts demo days in India every month with Chinese investors and Indian startups, among other things.
“The main challenge lies in identifying good startups and figuring out a fair deal since most startups here are overfunded. One has to understand the limitations of each business vertical keeping in view that (poor) infrastructure is a constraint to several business models,” said Wang, who has invested in Gurgaon-based companies Milk Basket and Iamwire and plans to write cheques under $1 million dollars for local startups.
There are, however, some flipsides to merely copying business models from China, as has been the case with entrepreneurs trying to ape successful models from the United States.
It is up to Indian entrepreneurs to spot the differences in the two markets and tweak their strategies accordingly.
“The average spend here is more than five times lower and customers are much less evolved from the content consumption and social media contribution point as compared to middle-class Chinese customers, and, hence, the Indian market is much harder to monetise,” said iXigo’s Bajpai, talking of the specifics of his business.
Even so, the Chinese are here to stay and the connect is only getting stronger. “Notice the small things. Now if you go to five-star hotels, there is always a Chinese section. What does that tell you?” quipped Fosun’s Kapoor.