India’s unicorns were hot. China’s tech crackdown is making them hotter

In the first week of July, Chinese regulators launched an effort to rein in the initial public offerings of Chinese firms—starting with Didi Global, which had just listed its shares in New York. The campaign spooked investors worldwide who were hoping to benefit from the on-going boom in tech companies in the world’s second-largest economy.

Already, at least five Chinese firms have reportedly pulled their planned U.S. IPOs.

The crackdown on Chinese tech companies has come at an opportune moment for India’s digital unicorns. The country’s largest online food delivery company Zomato launched a $1.25 billion IPO on the Bombay Stock Exchange last week, a development that is expected to pave the way for several other hot startups to list their shares, presenting an alternative to investors turned off by China’s new regulatory campaign. (Zomato’s shares popped more than 70% in their debut on Friday.)

Several global investors such as Tiger Global Investment Funds, BlackRock Global Funds, and JP Morgan Funds were among anchor investors in Zomato’s IPO.

”The global investors are already there in [Indian] startups, but now they are coming to the primary markets,” said Krishna Kumar Karwah, managing director at Emkay Global Financial Services Ltd.

India’s high growth potential has stoked investor interest in Indian tech IPOs as much as the fears surrounding China’s tech clampdown, Karwah said. “Global investors who want to play in the tech space are avidly interested in India,” he added.

The surge in interest will help Indian tech companies list at high valuations on the country’s stock exchanges—an unprecedented development. Traditionally, Indian tech companies have listed overseas for better access to funding.

India has lagged China in the size of its digital economy, but is rapidly catching up because of mobile phone uptake, low data fees, and government policies that support digital payments and other tech-enabling infrastructure.

China still dominates the overall unicorn list in Asia with 138 of them, more than four times the number in India, according to CB Insights. But this year alone ten Indian companies turned into unicorns by raising capital.

Indian startups raised $12.1 billion from venture capital and private equity firms in the first six months this year, beating the funding for the whole of last year by $1 billion, according to data compiled by Venture Intelligence.

“Global investors are certainly looking at Indian tech companies as an alternative to Chinese tech companies,” said Ankur Pahwa, partner and national leader of e-commerce and consumer Internet at consulting firm EY. “But the reason is not just geopolitics, but because India’s tech ecosystem is accelerating at a very significant pace,” he said. 

Many of India’s hottest unicorns have grown at two or three times their earlier speed since the pandemic’s start thanks to Indians moving online faster than expected, Pahwa says. The country now has 700 million Internet users.

Some traditional brick-and-mortar companies too are looking to enter the digital ecosystem through acquisitions—such as the Tata Group buying a majority stake in online grocery Big Basket at the end of May—making startups even buzzier. 

“The tech crackdown in China can potentially fuel more investments to Indian tech startups,” said Anshu Kapoor, president and head of investment management at Edelweiss Wealth.

Global investors in tech companies used to only have the choice of two large markets, the U.S and China, because investments in India were largely available only through private equity, he said.

“Now these Indian companies are being made available publicly,” he said. “Our tech companies have now matured…and investors will see the equivalent of an Uber or Meituan in India.”   

Many Indian tech startups are now entering a seven- or eight-year maturing cycle that is typically required for a listing, a phase that several Chinese companies have already crossed, he added.

“Many of the private equity companies that had invested in India are now wanting to exit. That is driving the number of IPOs being offered by these companies,” he said.

Public debuts offer the easiest exit route for early-stage investors in Indian tech startups, many of whom are Chinese themselves, like Ant Financial, which has invested in Zomato and digital payments company Paytm. The Indian companies are hoping to have more permanent investors through the IPOs, analysts said.

Paytm, India’s largest tech unicorn with a valuation of about $15 billion, is among the companies in the listing pipeline. Paytm filed its IPO papers with the stock market regulator Securities and Exchange Board of India on July 16. It plans to raise $2.2 billion through the offer.

Online cosmetics retailer Nykaa and the country’s largest online insurance policy aggregator, Softbank-backed Policybazaar, also are expected to file their draft IPO prospectuses shortly.

“With the Indian economy on a cyclical upturn, the India story is only about to get better,” said Vaibhav Aggarwal, chief investment officer at Motilal Oswal Securities subsidiary, Teji Mandi. “The startup ecosystem in India has a long way to go,” he said.