Context

Investment firms with a reputation for tracking and hunting unicorns — startups with billion-dollar-plus valuations are shifting their attention to India from China. While this cannot be good for China, the question remains over whether or not it is good for India either.

China’s crackdown on tech industry

• Beijing has decided to crack down on the tech industry, wiping out $1.5 trillion in market value.
•  The crackdown began with the abrupt suspension of the much-anticipated initial public offering (IPO) of Ant Group last November.
•  China’s regulators stopped the ride-hailing company, Didi Chuxing, from accepting new users, as soon as it went public on the New York Stock Exchange.
• There have been sweeping industry-wide changes, from anti-monopoly legislation to new rules governing data collection and use.
• All of this has investors spooked.

How India can benefit from China’s crackdown on the tech industry?

• Due to China’s crackdown, for the first time since 2013, the value of venture deals in India surpassed that of China.
• Converging factors in India: If this keeps up, India will experience a veritable blessing of unicorns, thanks not only to the fact that the money fleeing China needs refuge, but to many converging forces within India itself.
• India is the world’s second largest digital market.
• The use of the United Payment Interface has made digital payments easier in a society that was — and still is — so tied to cash.
• The pandemic lockdowns have driven an unusually large proportion of that digital population to spend an unusually large amount of time and spend money online.
• This means that in a very short time, the need to serve this digital population has exploded.
• The Chinese crackdown could not have come at a more opportune time.
• Many startups are in a hurry to capitalise on the boom with many investors looking to capitalise them.

Concern: the risk of tech-bubble

• When investors rush in to seek refuge because they are fleeing risk elsewhere, even if the refuge looks promising, they can contribute to a self-reinforcing cycle that ends up destroying the refuge.
• Eager to get a piece of the action, each investor may over-value a company, far exceeding what is justifiable based on market fundamentals.
• The stampede builds and soon you have the makings of a tech bubble.

Way forward for investors

• Instead of reflexively chasing the next shiny startup in India, investors ought to ask a few questions.
• Do the startups and the markets they serve have the capacity to scale up and do they justify sticking with them for a long period?
• Has the Indian initial public offerings market really proven itself?
• Are there enough large corporations that might buy these startups?
• Can the under-investment in essentials, such as education, health and job market readiness, clog the talent pipeline?
• Can the Indian government be trusted not to borrow a page from the government it would like to emulate — the Chinese state — and attempt a crackdown of its own?

Consider the question “Indian tech start-ups are dealing with the gush of capital owing to the convergence of certain factors. Examine these factors and also the concerns with such influx of capital.”

Conclusion

India desperately needs patient capital, skilled talent and appropriate technology to solve the country’s numerous fundamental problems laid bare by the pandemic. The last thing India can afford is a bubble that bursts and for all three to take flight and seek refuge in yet another country because no one wants to pick up the pieces of a popped bubble.

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Back2Basics: IPO

• An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.
• An IPO allows a company to raise capital from public investors.
• The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors.
• Meanwhile, it also allows public investors to participate in the offering.

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