Cross-border funds are important for start-ups

The role of cross-border activity and funding should not be ignored in this evolution. The initial boost to the startup ecosystem in India was provided by the reverse-migration of the talented diaspora from Silicon Valley to India. TiE, a not-for-profit community of entrepreneurs set up in the Silicon Valley by entrepreneurs with Indian origin, cemented the roots of India’s start-up ecosystem by setting up its Bangalore office in 1999. Nexus Venture Partners, founded in 2006, one of the first VC funds to be set up in India, is a US-India cross-border fund3. The cumulative foreign VC funding into India exceeded domestic VC investments around 2008-09 and has since maintained its lead.

Today, a large proportion of major funds active in India have their origins outside the country. For example, Japan-based SoftBank aims to invest $10 Billion in India. According to recent press reports, Softbank has already deployed $8bn in the country, including their investment in the e-commerce giant Flipkart and the fintech unicorn Paytm.5 Similarly, Sequoia Capital, headquartered in the US, is preparing to raise up to $1bn for its sixth India-focused fund6, having already invested in marquee names such as Oyo Rooms, Zomato amongst others. Lastly, Accel Partners, another VC firm headquartered in the US, had raised $450 Million for its fifth India-oriented fund. 

For the Indian start-up ecosystem to continue staying relevant on the global stage, this cross-border activity between India and other countries will need to be sustained. This is because, in addition to mobilising global capital, which in turn helps create jobs, cross-border financing also comes with a number of added benefits for the ecosystem. Some of these benefits include: 

Technological exchange Upgradation of skills

Cross-border technology fund can lead to collaborations at the small-to-medium enterprise level, leading to an enhancement of the competitive strength of the sector

Cross-border funding is a natural and most efficient way of ensuring technological know-how is exchanged at all levels and not just between large corporates. An LSE Business Review article states that “there is strong empirical evidence that entrepreneurial companies funded by a combination of local and international investors tend to outperform those that have only local investors.”

The opportunities for Indian startups are incredible: access to cutting-edge, globally scalable technologies through partnerships will help them scale sustainably, lead to more competitive products, and advance the pace of technological progress in the country. These benefits are being recognised globally where different countries are engaging in the cross-border activity. For e.g. Silk Ventures, a Europe-China cross-border fund backed by the Chinese government, raised $500 Million to invest in European tech companies looking to enter the Chinese market. It claims to provide access to China’s technology buyers, investors, and government resources. 

In order to encourage cross-border funding directed towards India, we would need to make sure that the domestic environment is conducive and attractive to international investments. A growing economy with improving regulatory environment certainly helps. In the 4th Quarter of the last financial year (2017-18), the Indian economy grew by 7.7%10, regaining the title of the fastest growing major economy in the world. Improvements in the regulatory regime are being applauded by international institutions like the World Bank and Moody’s Investor Service. Last year, the World Bank upgraded India’s “Doing Business” ranking to 10011 from the 130s seen in the previous years. Moody’s upgraded India’s sovereign rating to Baa2 from Baa312. The effects of these positive developments can be seen in the increase in Foreign Direct Investments (FDI) in India over the last few years. While OECD data13 indicates that global FDI declined by 18% in 2018, statistics from India’s Department of Industrial Policy & Promotion (DIPP)14 indicate that FDI Equity Inflows into India (in dollars) increased by 3% in FY 2017-18 and by 9% in FY 2016-17. 

While an improving regulatory environment encourages the flow of global capital into India, we must also proactively encourage partnerships between India and leading startup ecosystems around the world. It is encouraging to see now that the Indian government is starting dialogues for different levels of engagements with various countries. This provides for a strong platform upon which cross-border funds can thrive. For e.g. during the India Prime Minister’s visit to the UK in April 201815, more than 20 agreements and MoUs were signed between the two countries. This included 3 India-UK tech initiatives and 4 UK tech initiatives in India. The UK houses cutting-edge tech startups and India is a potentially huge market for these technologies - given the benefits of cross-border funds in enabling technological exchange and in benefiting the ecosystems in both countries, it is imperative that both regulators and investors leverage this opportunity.

The logic for cross-border funds is simple and strong: startups in the world’s most innovative economies that focus on developing state-of-the-art technologies across a spectrum of industries are looking for new sources of sustainable growth, and India is rapidly digitizing, absorbing technological know-how and is ripe for disruption.

The author is Managing Partner, Unicorn India Ventures which runs a cross-border UK India Unicorn Ascension Fund in partnership with UK-based early stage VC Ascension Ventures.