Japanese, Chinese investors are the most sought after in India: report

Near half of the early and growth stage startups are actively engaged in conversations with Japanese and Chinese investors for fund raise, in a trend that highlights the increasing importance of these deep-pocketed investors in the country’s funding landscape. The two most important criterion founders use to choose a lead investor are strategic fit (26%) and the ability to do follow-on funding (25%), which could very well apply to these investors which include the likes of SoftBank, Tencent Holdings, and Fosun International.

These are some of the findings of venture debt and specialty lending firm InnoVen Capital's 4th Annual Startup Outlook Report 2019, released on Feb 28. The startup outlook report is based on a survey of a 100 startup leaders.

Industry insiders say Japanese and Chinese investors bring a lot more than just capital to a firm and hence are sought after by Indian promoters, particularly those whose business models need large cash coffers to scale and global expertise.

Money is one part of what these investors have, says Anil Joshi, founder and managing partner at Unicorn India Ventures, a Mumbai-based venture capital firm. “These investors come with a very strategic understanding of the business, they bring capital and wisdom, which is what founders are finding interesting,” he says.

“They help open doors; help scale a business and speed up growth. They have seen certain business models find success in other markets, so have the muscle to replicate them here. In short, they can put more dollars, can hold on to an investment for long and can bring best minds to help the business.”

While there was a significant improvement in fund raising environment in 2018 and 74% respondents had a favourable experience (v/s 54% in 2017), 46% respondents now believe that fund raising environment in 2019 will be more challenging. While the report doesn’t give a reason for the tempered sentiments, Joshi says there is a bit of uncertainty regarding the country’s political scenario as Lok Sabha elections are just around the corner.

“Investors are not worried too much but there is uncertainty on the political front. So liquidity can be a challenge for a few months. Overall, there is a liquidity crunch as well in the market due to issues such as IL&FS,” says Joshi. Nearly half the assets of IL&FS, a debt-laden infrastructure financier, have been put up for sale.

In the meantime, blockchain, augmented reality (AR)/virtual reality (VR) are the most over-hyped sectors, whilst agri-tech and logistics were identified as the most under-hyped sectors, according to the report.

While both growth and profitability are important, a significant majority of founders (85%) highlighted growth over profitability as their primary focus for 2019. This was a significant increase over last year, when only 56% of respondents prioritised growth over profitability. Most respondents said that they were targeting profitability over the next two years, with consumer-branded players and enterprise tech leading the pack

Expansion into new markets and fund raising were identified as the two top priorities by a majority of respondents. Ecommerce companies also identified improving unit economics among top two priorities, while early-stage companies identified product market fit among the top two priorities. Talent management and meeting growth aspirations were identified as the top challenges by a majority of respondents.

Over the last several years, startups have led the way in generating employment in the country and this trend is expected to continue. 70% of respondents plan to hire more in 2019 than they did in 2018, with logistics, enterprise tech and content/media startups being most bullish on the pace of hiring. 72% of founders were open to having a professional CEO running their business in the future at the right stage of maturity.

“Staring a company is not an issue but scaling is becoming a challenge, which then affects fund raise. Most founders are beginning to understand this and are open to handover the company to a professional CEO,” says Joshi, adding that he is seeing this trend in his portfolio firms as two of them are looking to hire professional CEOs.

Only 34% of respondents rated the government’s efforts to support the startup ecosystem as either good or excellent. While most founders were appreciative of government’s efforts, a majority of them feel that the government needs to do more. A favourable tax policy and a stable regulatory regime were identified as the two most important areas. 80% of ecommerce startups identified the need for a stable and predictable regulatory regime as the key area of concern.