Venture capital activity is considered a necessary starting point to business.

China is ahead of India in terms of startups, which are mostly based on

government incentives, but it is still lagging well behind startups in the
United States.We could place these factors into a second category of human
capital quality that we could name entrepreneurial talent, which has been
found to have a decisive role of entrepreneurship in economic growth .
Studies provided evidence that countries that reward more entrepreneurship
activities than rent-seeking individuals grow faster. Recent studies using
panel data on have not only confirmed those early findings but have
highlighted the role of entrepreneurship as a mechanism that facilitates the
spillover of knowledge promoting economic growth. Although we do not have
statistically significant information of the relevance of this factor in India and
China, we provide in the text examples that suggest that this quality factor
operates on Indias side. Moreover, India has not only the advantage of
language (English) but also a long tradition of young people doing graduate
studies abroad, especially in Qualitative analysis suggests that India has a
slight advantage over China in venture capital activity, as Indian firms
appear to be more attractive to U.S.-educated and -trained scientists and
engineers. Google has launched a $100 million startup incubator that is
intended to stimulate startups in the mobile IT sector.

According to Global Venture Capital Country Attractiveness Index Study, the

six key factors that shape a countrys VC markets are:
Economic activity

Entrepreneurial culture

Depth of a capital market

Taxation

Investor protection and corporate governance

Human and social environment

BRIC VC overview
Currently, much institutional capital flows into emerging venture capital
markets, notably to India and China. Without any doubt, the expected
economic growth and the resulting opportunities justify exposure there.
China and India have developed strong capital and M&A markets recently,
which creates encouraging prospects for VC activity.

The figure below provides the key driver scores for the BRIC countries
Brazil, Russia, India and China to provide more insight into the prospects
for VC activity in the largest emerging regions.
Comparison of BRIC countries

Source: Global Venture Capital and Private Equity Country Attractiveness

Index 20092010
This figure benchmarks the BRIC countries and also implicitly benchmarks
the US, which represents 100 points in every individual key driver. The
results show the strength of Indias and Chinas capital markets (relative to
the German market, for example, from Figure 2). In these BRIC countries, a
wide variety of market opportunities have arisen as a result of rapid
economic growthdepth of talent and capital markets.
However, despite their relatively strong economic activity, some important
ingredients for a vibrant VC market are lacking in BRIC countries namely,
entrepreneurial cultures and investor protection/corporate governance. BRIC
countries achieved disappointing scores for the key driver, entrepreneurial
culture, which mainly captures countries capacity for innovation and the
ease of starting and running businesses.
In other words, few disruptive technologies and little intellectual property
from VC-backed corporations are likely to emerge from these countries.
Rather, investors focus on capitalizing the expected growth of established
business models or on infrastructure requirements.

Additionally, the scores for investor protection and corporate governance

also remain disappointing. Unlike strategic investors that form joint ventures
and contribute managers to their remote partners, VC funds usually rely fully
on their investees managers and need a reliable domestic partner and a
management team that is attuned to the demands of government
In the July-September quarter 2014, India significantly narrowed the gap with
China, and now, in the final quarter, with $837 million already committed by
Japan's Softbank to Snapdeal and Ola, it is possible that the amount of
investments committed to India will be higher than that to China.
Research firm CB Insights, which put together the data, notes that Softbank's
initial commitment is part of a $10 billion investment that it plans in India,
and goes on to ask: "With all the attention India is getting from investors, is
the technology balance of power shifting within Asia from China to India?"
In the first two quarters of 2014, investments into China were three times
more than that into India. But in the third quarter, India's stood at $1,397
million, compared to China's $1,965 million, says CB Insights. Much of India's
figure was on account of one deal -- the $1 billion funding that Flipkart raised
in July. But the subsequent announcement from Softbank suggests that the
Flipkart deal may not be a one-off, and the coming quarters might see an
acceleration in investments.

In an article in September, CB Insights had noted that Sequoia, one of the

biggest investors in the region, has over the past two years stepped up its
investments in India and Israel while becoming relatively less active in China.
It said that in 2012 & 2013, India accounted for 38% of deal volumes and
China 36%; in 2010 & 2011, the deal volume was dominated by China, with a
54% share; India was 29%.
Venkatesh Peddi, VP in IDG Ventures India Advisors, said funding activity in
India had increased tremendously in the recent past. "Many limited partners
are investing in India funds. Even international funds are making huge
allocations towards India that shows renewed investor confidence in the
technology space. So far, we have seen a sizeable interest in the seed and
angel rounds, but we expect it to percolate into Series B, C and E rounds.
There is willingness from global funds to increase the India allocation as
consumer internet companies are leading the charge," Peddi said.

Sharad Sharma, co-founder of software product association iSpirt, noted that

a large number of Chinese companies had gone public. "They can do an IPO
very easily, like Alibaba did recently, so they may be less reliant on private
capital," he said.
CB Insights data finds that India dominates the seed/angel rounds, with 113
deals being made since the first quarter of 2013 compared to the 48 made in
China. But China dominates across the other rounds --Series A through Series
D (mid-stage). "India has slightly more deals in Series E+ rounds, with
notable deals including Myntra, Quikr, and Snapdeal," the report says.

Sources:

http://www.rand.org/content/dam/rand/pubs/monographs/2011/RAND_
MG1009.pdf
http://timesofindia.indiatimes.com/business/india-business/India-maypip-China-in-venture-capital-investment-thisquarter/articleshow/45104154.cms
http://www.ey.com/GL/en/Services/Strategic-Growth-Markets/Globalventure-capital-insights-and-trends-report---What-makes-a-countryattractive-to-VC-investors-