VC investments from China down by 66% in 2020, startups to feel the heat

Venture capital investments dropped nearly 66 per cent between January and September 2020 to $909 million from $2.695 billion from January to September 2019. The number of deals dropped to 30 from 35, year on year.

A major chunk of the investments falls under venture capital, which is defined as investments in companies less than 10 years old. According to Venture Intelligence data, of the 30 deals reported from January to September 2020, 24 of them fall under VC amounting to $216 million. During the same period last year, 30 of 35 deals were in VCs worth $446 million.

For Chinese investors, the key bets were NBFC, wealth management, banking, food delivery, e-commerce among others.

China, which was ranked third on the PE/VC investments by country of investors, in 2019 fell to the sixth position in 2020.

Arun Natarajan, founder of Venture Intelligence says the drop has been catalysed by the changes in FDI rules which are getting accentuated by the border tensions. He feels that investments - especially from mainland China-based investors - are likely to further slow down owing to these factors.

Start-ups will feel the pinch considering that Chinese investors are not only seen as alternative to US-based funds but also bring additional value as strategic investors who bring more relevant Asian- and local language-linked experience, he said. It may be noted, PE/VC investors operating in India have expressed serious concerns over the modification in FDI norms, which brings all foreign investments from China under government scrutiny.

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Under the new rules, "any ‘entity’ or ‘beneficial owner’ or ‘citizen’ of a country (read China) having borders with India, who wants to invest in India, has to go through the government route and cannot avail of the automatic route allowed to others for up to 100 per cent investment in certain sectors or up to the relevant percentage cap in others."

VCs and global PEs say many of them raise money directly or indirectly from Chinese investors for a portion of their funds. They also raise money from funds of funds (global funds which pool in funds and provide finance to other PE funds), which in turn are financed, amongst others, by Chinese investors, many of whom are based in Hong Kong and Singapore.