Inc42 spoke to leading Japanese investors to understand how they approach the Indian startup ecosystem
Fintech, healthtech, ecommerce, agritech, gaming and industrial technology are the most attractive categories for them
Including SoftBank, investors and funds from Japan have invested over $12 Bn in Indian startups in the last 5 years
Long before Chinese and Korean products entered India, Japanese brands were household names for most Indians. Be it, for cameras — Canon and Nikon— or TVs from Sony, Akai, Panasonic, Sanyo, or, auto brands such as Honda and Suzuki. There’s been great awareness about the top Japanese tech brands in the Indian market for the past few decades, but the relationship between the two countries runs centuries deeper.
The documented history of India-Japan relations dates back to 752 AD when an Indian monk Bodhisena had first visited Japan in order to spread the message of Buddhism in Japan, and since then the relationship has blossomed from a cultural and business point of view.
Indo-Japan Partnerships For Centuries
In 1903, the Japan-India Association was set up which is today the oldest international friendship body in Japan. Japan also famously supported Indian freedom fighters pre-Independence, even though that period of history has plenty of controversy for Japan. Much of that was left behind in the technological revolution that followed in the decades after, where Japanese brands became bywords for high-quality devices and gadgets around the world and in India.
Cut to 2011, the agreement between India and Japan, dubbed as India-Japan Comprehensive Economic Partnership Agreement (CEPA), covered almost all the aspects of trade between the two countries. This included not only trade in goods but also services, movement of natural persons, investments, intellectual property rights, customs procedures and other trade-related issues.
According to MEA, as of October 2017, there were 1,369 Japanese companies that are registered in India, an increase of 64 companies (5%) compared to 2016. Similarly, the number of Indian companies working in Japan has grown to over 100.
Besides the bilateral trade which was pegged at $4.73 Bn in exports and $10.97 Bn of imports in 2017, Japan is also the largest bilateral donor for India and it has been extending bilateral loans and grant assistance since 1958, critical support for India’s infrastructural development.
SoftBank Leads Japanese Charge In India
Besides the usual trade, Japan is a significant stakeholder of the Indian startup ecosystem too. Led by investment giant SoftBank which has invested over $10 Bn in Indian startups, Japanese investors — Rebright Partners, Dentsu Ventures, BEENEXT, Recruit Holding, Mistletoe Inc, REAPRA Ventures, Asuka Corporation and others — have so far invested over $12 Bn in Indian startups.
SoftBank was the first major investor in an Indian startup when it invested $200 Mn in InMobi in 2011. Japanese investors have backed plenty of other Indian startups recognising the opportunity in the Indian market.
According to Anurag Ramdasan, head of investments at 3One4 Capital, Besides SoftBank, at least eight Japanese VCs have invested over $100 Mn each in India.
Japanese investors are not known for acting in haste and take time to make their decisions, so these numbers are surprising. The pace of decision making and the volumes of the deals are an encouraging start, Ramdasan writes.
Out of the 27 unicorns, over a dozen companies including Flipkart, Ola, OYO, Paytm, Snapdeal, InMobi, Delhivery and Policybazaar, have been a part of Japanese investments, preferably SoftBank.
Indian startup ecosystem, today, provides an unparalleled opportunity to the investors. However, with falling angel investments, policy in development and no home-grown late-stage VCs, the ecosystem is not yet self-reliant and hence the autumn after the long summer — hustle and bustle of investments in startups — is only once in a blue moon.
Then why are Japanese investors so attracted to the Indian ecosystem? What are the major challenges in India, and can they be overcome? As part of the Inc42 and Amazon Web Services’ (AWS) ongoing series, Over The Horizon, Inc42 spoke to Japanese early-stage investors Rebright Partners, Recruit Strategic Partners, BEENEXT, AET Fund and Mistletoe to understand their prospects and synergy between the two ecosystems.
Where’s The Synergy Between India And Japan Startups?
Despite unicorns like OYO, Zoho, Freshworks and Paytm having forayed into the Japanese market either directly or via resellers, the collaboration between the two ecosystems has been largely one-sided and driven by Japanese interests in Indian startups. Mayank Shiromani, VP-Recruit Strategic Partners nodded, “I don’t see it as much of a collaboration between Indian and Japanese startup ecosystem. Though we are very active in assisting our startups in getting access to our group companies for finding strategic synergies I feel the collaboration is led mostly by the interest of Japenese investors in Indian startups which is ok as the Indian startup ecosystem is still in its early phase. With global investors keen to put their money in Indian startups, it’s an excellent time for the Indian startup ecosystem.”
Japan has been a leading partner and stakeholder of Indian startup ecosystem. With a 13-fold increase in investments (startups) in 2017, Japan has left the US and China behind.
Nao Ito, operating partner, BEENEXT which had participated in 29 startup funding rounds with investments in 25 Indian startups in 2017 alone, said, “I think we are having good momentum for more deeper collaboration opportunities in recent data empowered society/economy — facing both each challenge — India to empower the vast population with “digital inclusion” with the strength in “jugaad creation”, and Japan to adapt to the shift in the shrinking population with “digital transformation” with the strength in “Kaizen improvement”.
“As VC, we are also trying to find a way we can contribute to this by bridging our fellow entrepreneurs from our partner companies in India and our friends in Japanese corporations as a go-between role and encourage both parties,” said Ito.
Unlike his elder brother – SoftBank chairman Masayoshi Son – serial entrepreneur Taizo Son has been exploring India opportunities in rather underhyped agritech startups at early-stages. In 2017, he launched Mistletoe an accelerator platform which aims to step up from Taizo’s earlier investment-only-model to help integrate the entire agrifood startup ecosystem in India. By 2017, Taizo’s investment firm Mistletoe had already invested some $160 Mn in 92 startups and ventures across 11 countries.
During the launch of the accelerator platform, Taizo told Inc42 “India has potential to lead the world and become the centre of excellence for new age farming.”
However, while investments could be unidirectional, innovation cannot. SoftBank and many other investors are now enabling a soft launch of Indian startups such as OYO and Paytm in Japan.
Atsushi Taira, Chief Growth Officer, Mistletoe said, “I have started the startup investment in India around 2010 which was a very early era and capital is flowing in from Japan to India nicely, but I like to see more strategic synergies to bring some technologies and services from India to Japan like SoftBank has been started for Paytm.”
Brij Bhasin, general partner, Rebright Partners seconded, “We see a lot of investments from Japanese investors and companies in Indian startups from financial as well as strategic standpoints. There are a lot of old economy Japanese companies who want to partner with Indian startups. There are now conversations of Indian startups launching their products in Japnese market through JV route.”
Which Sectors Look Most Attractive in India?
Being a tech-driven country, Japanese investors’ interest has always been into technology-oriented startups. And, with the rise of Indian tech startups, some of the sectors such as fintech, retail, logistics and healthtech have not only got a facelift but shown huge untapped potential, creating new opportunities for investors.
Ito gave an account of BEENEXT’s investment interests, “We are looking for new opportunities in fintech, healthtech, agritech and industrial-tech where we find more digital inclusion and increase of the new values of serving the society in proportion to the value of data.”
Hitoshi Matsuda, Recruit Strategic Partners, agrees with Ito about the fintech revolution in India, he said, “We see a huge potential in the Indian economy and fintech is going to be one of the key beneficiaries of the growth and an important enabler.”
Recruit Strategic Partners’ Shiromani explained, “Our interest areas of investments are also driven by the potential of the India market. Fintech, enterprise-tech and SMBs are some of the areas where we are interested to invest in.”
Bhasin appears to be agnostic towards investments, “Mobility, space, EV, sharing economy, healthtech and life sciences, tele-medicine, IoT, big data, robotics are some of the spaces which we look forward to.”
Mistletoe has been actively exploring foodtech, agritech, preventive healthcare and logistics/supply chain, informed Taira. He added, “We have investments on crypto, but I’m more interested in blockchain technologies as social infrastructure.”
Zen And The Art Of Investing
Recruit Strategic Partners, which is a corporate venture investment arm, has globally invested in 150+ companies. The company has been primarily focusing on the US, India and Israel markets. In recent years, Recruit Strategic Partners has made around 11 investments in India. This includes online fintech marketplace Open Financial Technologies, Fyle Technologies, Rubique, CleverTap, a mobile app analytics startup, Bengaluru-based logistics management startup Locus and few more undisclosed investments.
Shiromani stressed there’s no one kind of startup they invest in. “Investment mantra varies with every startup. The dynamics of parameters essentially changes with every startup. We invest a lot of time on researching the space, the scaling-up opportunities, the particular startup and existing competition and so on. We also look into the possibility of building a strong moat as the company scales.”
Rebright Partners which usually invest $500K-$1.5 Mn has invested in 11 startups including Medikabazaar, UncannyVision, Flixy Games, Inshorts, and DocsApp. Bhasin says, “We are here for a long term strategic investment partner. We are more interested in collaborating rather than just making a transaction.” The company is looking to invest in another 3-4 Indian startups in the coming quarter.
On investing in India, BEENEXT’s Ito said, “It’s great to have continuous “cases” to be developed in the ecosystem among Founders, Investors and as well as potential Business Strategic partners mentioned above along the journey of creating and expanding the values by the startups step by step. We will enjoy this journey with the founders as long-term investors.”
Going by its track record in other startups, BEENEXT — if it has participated at a very early stage in a company — does like to follow on in the late stage as well. The average size of the initial ticket size for the company is around $500K, with the range from $300K to $3 Mn.
Unlike many other investors, almost all Japanse investors did agree on long term participation without actively looking into the exit policies. For instance, Taira said, “Although the market is huge, it’s a long shot to exit and thus, it takes time.”
Taira added that more than other markets, India needs a little more patience from investors. “That should be understanding for the investors. To see the quick win, one should better stay in Silicon Valley or Japan.”
Mistletoe has been investing $0.5 Mn to $5 Mn per startup. For Mistletoe, it is about the founder’s vision and capabilities, and agile in pivoting that drives their money.
The latest entrant to Indian market is the Japanese Akatsuki Entertainment Technology (AET) Fund. AET Fund is looking to invest in content publishing, online gaming, media and entertainment startups. The fund has already closed 10 deals since last June and has 10 more in the pipeline to close.
“The initial investment made by AET is around $100K-500K, and is agnostic towards participating in later rounds,” said Yuki Kuwamura, partner, Akatsuki Entertainment Technology (AET) Fund told Inc42.
Policy Matters For Japanese Investors
As pointed in the beginning, the Indian startup ecosystem is going through the first generational changes. There are numerous issues which keep its development in back and forth mode. For instance, angel investments have been witnessing drastic fall owing to the angel taxation and other related issues. The country has witnessed the launch of over 49K startups, however, only a small percentage of startups have seen exits with a handful of startups going for an IPO.
There are other drawbacks too in the current state. The lack of friendly policy. Be it, in ecommerce, epharma, cryptocurrency and NBFCs have not helped make investors confident about signing investment deals. Despite the government announcement of various perks and funds, the implementation has been too sluggish.
“When investment into a particular sector is overlooked, policy clarity from Indian government is a must. For instance, we as Rebright Partners didn’t invest in epharma companies as we were not sure about the policy matters then. However, we have invested in B2B medical supplies which is completely allowed. Again, there will always be some grey area, as far as policy matters are concerned. What we actually need to do is to see if the basic policy is there or not and follow all the required legal compliances,” said Rebright’s Bhasin.
Ito is not as concerned about the challenges. He said, “There is not much negative in the ecosystem, to be honest. We are fortunate to have an increased chance to collaborate with more valued, talented and passionate entrepreneurs as well as fellow co-investors from local angel/vc in India, getting more thrilled and excited.”
There are sectors like agritech which needs if not handholding, some sort of policy support from the government. Mistletoe’s Taira said, “Regulatory sandboxes and or special treatment for the small scale experiments must be provided, otherwise startups won’t be able to not handle it.”
Who Should Control The Ship
India, despite being the third largest startup ecosystem in the world, has failed to generate the likes of Jeff Bezos, Mark Zuckerberg and Jack Ma. The most successful startup Flipkart, saw the ‘unwilling’ ouster of its founders — Sachin Bansal and Binny Bansal — soon after it was acquired by Walmart.
Recently, Ola founder Bhavish Aggarwal reportedly turned down SoftBank’s $1.1 Bn offer, and the friction between SoftBank and Ola founder became wide open. While SoftBank wanted to boost its stake in the company to over 40% and gain control over the company, Aggarwal wanted to retain his control irrespective of the shares, according to a Bloomberg report.
During a fireside chat with Inc42 CEO Vaibhav Agarwal at the #42Ecosystem last October, Deep Kalra, founder-CEO of India’s first online travel aggregator MakeMyTrip (MMT), drew an analogy between the Indian and Chinese startup ecosystems in an attempt to explain this friction.
The Chinese startup ecosystem is robust, vibrant, and massive not only because the Chinese govt protected their local companies but also because of the way they structured their ecosystem, said Kalra.
“We need to pull the thread in 5-10 years, else all the startups will be ultimately handled by foreign companies,” Kalra said then.
How do Japanese investors see this debate?
While some of the investors Inc42 spoke to refrained from commenting, Bhasin said, “From an investor’s point of view, we always like to empower founders and their control in the company. As far as founders, dilution of stakes and investors gaining control over the company are concerned, the matter must be looked at case by case. In certain cases, it may not be appropriate for outsiders to have control over founders.”
“Today, each and every sector is getting a digital presentation. And, with Indiatech we are trying to raise voice for an easier, safer, and secure journey of Indian startups in the Indian market. Believe me or not, foreign companies find it easier to list in India than Indian startups,” Kalra had added at the time.
The Road Ahead And The Roadblocks
Led by SoftBank’s push, more Japanese investors are entering the Indian market, and this momentum needs an infrastructural push as well, in order to guarantee the returns over investments.
For instance, the government’s control over the agricultural sector has led to the undemocratisation of investments in agritech sector. While banking companies extending loans to farmers have been encashing most of the agritech funds, farmpreneurs, agritech startups and investors often find the agritech policies as roadblocks.
Similarly, Japan is one of the largest crypto markets in the world, however, the Japanese investors have completely shied away from investing in Indian blockchain or cryptocurrency startups. This is precisely because of the lack of policy clarity and instability due to that.
Overall, as the Indian startup ecosystem is evolving, more Japanese investors are expected to join the bandwagon. Kuwamura agreed, “In the last two years, I think Japanese investors are becoming more interested in Indian startups as they understand the potential in the market. We see good traction in many areas. Besides SoftBank, more small and mid-sized investors are excited to be here.”