A look at investment trends over the past few years clearly shows that Japanese investors have made huge inroads into Indian private equity and venture capital markets. They are currently some of the biggest deal makers in the Indian startup ecosystem.
Japan and India have always had good, long-standing bilateral relations. This has resulted in increased overall foreign direct investment (FDI) from Japan. While overall FDI, including investments in startups, in the financial year 2018-19 stood at just US$1.6 billion, this increased to US$3.2 billion in 2019-20. According to latest data, 12 Indian unicorns with a combined value of over US$59 billion have received Japanese investment.
According to a report in 2019 by Inc42’s DataLabs, Japanese investors have funded as many as 105 Indian startups, spread across 157 deals between 2014 and the first half of 2019. It is to be noted that the overall funding of US$12 billion that startups in Japan received in the same period is much less than the estimated US$51 billion in funding that Japanese investors invested into Indian startups. The amount raised by Japanese startups during the same period is US$2 billion less than SoftBank’s investment in the Indian startup ecosystem alone. A major milestone towards intensifying the foothold of Japanese investors in India was the launch of the Indo-Japan Emerging Technology and Innovation AIF in 2019. This fund-of-funds plans to raise US$150 million from Japanese investors for investment in over 200 Indian companies specializing in such areas as artificial intelligence (AI), fintech, healthcare, consumer, education, robotics, automation and B2B software.
Covid-19 may provide an opportunity for Japanese investors to strengthen their position in Indian private equity and venture capital markets, mainly due to recent changes in India’s FDI policy. Press Note 3 of 17 April 2020, issued by the Department for Promotion of Industry and Internal Trade states that FDI from any person or entity located in a country sharing a land border with India would be subject to the government route. Prior to this, similar restrictions had been placed only on FDI from Bangladesh or Pakistan, but now any form of FDI from China (including Hong Kong) would only be permitted through the government route. This is a huge turn-around from the generally liberalizing moves the government has been making in recent years in the area of FDI.
These amendments to foreign investment policies could result in a major setback to Indian startups in attracting Chinese investment. For instance, in January 2020 Zomato concluded a US$150 million funding round with Alibaba’s Ant Financial, but reports indicate that the company has so far received only US$50 million. However, there is a noticeable difference in the methods of investment used by Chinese and Japanese investors. Unlike the Chinese, who have aggressively invested mostly through companies such as Alibaba Group, Tencent and Didi Chuxing, the Japanese have taken their time and slowly penetrated the Indian market through both investment funds and companies.
A potential decline of investments from China may lead to more Indian startups trying to attract Japanese funding. Although Japanese investors are known to be risk-averse and prefer investing in rounds beyond growth stage funding, funds such as Beenext, Incubate India Fund and Rebright Partners have slowly moved towards investing in early stage investment rounds as well.
Despite the onset of the covid-19 pandemic, this year the National Association of Software and Service Companies (NASSCOM) organized a virtual pitching session for 20 chosen startups to attract investments from the Japanese Venture Capital Network (JVCN). This was a follow-up event to the 2019 NASSCOM-JVCN collaboration in which startups from India presented a live pitch session in Tokyo for more than 30 Japanese VC funds. One major reason for the reluctance of Japanese investors to invest in their domestic market is the difference between the startup ecosystem in Japan and those elsewhere that encourage private and independent innovation.
The growing involvement of Japanese investors in the Indian startup ecosystem underlines their interest to participate in the Indian consumer market story. The Japanese have sought attractive startups globally because of the limited demand for venture or seed funding in the Japanese startup ecosystem with its preference for IPOs over late-stage funding. However, covid-19 has also impacted the Japanese economy, with the country entering recession again. It remains to be seen whether this will impact Japanese investment or whether the land of the rising sun will continue to shine brightly on India.
Nisha Mallik is a partner and Niranjana Menon is an associate at Samvad Partners.
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