SUMMARY
According to an Inc42 report, there are 300-plus family offices in India, and this number is expected to increase significantly
Since 2014, Indian family offices have backed more than 200 startups. In the last three years, their favourite bets have been seed stage startups mushrooming from fintech, ecommerce and enterprise tech sectors
People still do not consider this a good professional opportunity. It is another challenge to improve that impression in the startup ecosystem, says Sharan Asher, director, Eragon Ventures.
In the US, Europe or other countries, one may find family offices that have been around for as long as more than 70 years. However, in India, the term family office is quite nascent in comparison to the West.
Despite this, family offices have graduated with distinction in their investing game and are seeking a seat at the Indian startup cap table.
However, this journey has not been smooth. This is because even though they tried to be the early birds in the Indian startup investment arena, they failed to fetch any significant proverbial worms (the ROI). Therefore, by the time they returned to the Indian startup gold rush, a lot had already been missed.
Nevertheless, still, there is a sea of opportunities for this investor class, but the route that leads to the Indian startup cap table is patience and perseverance.
Moving on, while many experts may argue that the concept isn’t new for India, we have endeavoured to decode the entire family office landscape and their tryst with Indian startups, which we found embracing many challenges.
According to Munish Randev, the founder and CEO of Cervin Family Office, “Although the term, family office, may have gained prominence in the last 15 to 16 years, it is imperative to understand that the structure was not absent from India. Back in the 1970s and 80s, while zamindars were considered ultra-high-networth or high-networth individuals (HNIs), their ‘muneems’ can be compared to the fund managers that exist today.”
CERVIN Family Office is a multi-family office, whose founding team has an experience in advising over 105 family offices with collective wealth of more than $4.5 Bn in financial assets, according to Randev.
Fast forward to 2004-05, the Indian market exploded with investment opportunities. It was at this point in time that most companies realised the need to diversify their investments rather than parking 100% of their funds in their respective businesses, said the head of Mankind Pharma Family Office, Ankush Chandgothia.
Incorporated in 1991 by Ramesh and Rajeev Juneja, Mankind Pharma is a pharmaceutical company that develops, commercialises, and delivers medicines for urgent medical needs. It has so far made around eight investments in startups such as Vitraya Technologies, Vahdam India, D’chica, Bellatrix Aerospace, and New Space Research & Technologies, just to name a few.
“During this time, HNIs, too, understood that they needed to create a liquid pool of capital to make sure that their lifestyle does not get hindered in case of an impact on the family business, paving the way for family offices in the country,” Cervin’s Randev added.
300+ Family Offices In India And Counting
According to an Inc42 report, there are 300-plus family offices in India, and this number is expected to increase significantly.
Further, several experts that Inc42 spoke with for this story have highlighted a sea change in the way family offices today manage their wealth versus a decade ago.
While the Indian family offices opted for safer investment bets such as real estate and gold more than a decade ago, they today are more open to investing in emerging new asset classes, including startups, we were told.
Since 2014, the Indian family offices have backed more than 200 startups. In the last three years, their favourite bets have been seed stage startups mushrooming from fintech, ecommerce and enterprise tech sectors.
Further, our estimates show that the number of family offices actively taking part on an annual basis in startup investments will likely increase 5x to 735 by 2030 from 123 in 2023.
“There’s been a significant evolution in the entire family office space in the last 10 years. Being an asset class itself, family offices are now emerging as a new investor class in the startup ecosystem of the country,” said Rishabh Mariwala, managing partner, Sharrp Ventures.
Sharrp Ventures manages the proprietary capital of the Harsh Mariwala family – the founding family of Marico Ltd, an Indian FMCG giant with a market cap of nearly $8.5 Bn.
Family Offices’ Tryst With Indian Startups
The primary purpose behind establishing a family office, formerly known as a family investment vehicle, was to establish a mechanism for succession planning and the equitable distribution of wealth among future generations within the extended family, thereby minimising potential disputes.
Traditionally, families relied on various strategies to safeguard and manage their personal wealth. These included investments in gold, real estate, listed equities, and offshore investments, among others.
But, there were two key reasons, which marked the entry of family offices in the Indian startup ecosystem — rapidly changing global economy, and the rise of VC and PE funds.
Rapidly Changing Economy: The changing face of global economies made individuals recognise the importance of de-risking and diversifying their investments. Furthermore, they realised that liquidating real estate was a cumbersome process, while gold remained largely unpredictable.
This motivated family offices to explore the Indian startup investment route — risky, but high potential.
The Rise Of VC And PE Funds: Over the past decade and a half, the landscape of venture capital and private equity in India has experienced significant growth, providing a strong foundation for the rise of the Indian startup ecosystem.
Between 2014 and 2022, the ecosystem grew to 108 unicorns, 100-plus soonicorns, 60K+ startups, and 9.5K+ investors.
Piggybacking on this growth, family offices developed a keen interest and expertise in securing high-quality deals within the unlisted private equity market, particularly in the startup space.
For example, when Sharrp Ventures was established, 90% of its funds were allocated to public markets, with only 10% invested in the unlisted segment, including venture capital and angel funds. However, over time, this allocation has shifted to a 60:40 split, with 40% now dedicated to unlisted equity investments.
“We are engaged in 23 direct deals and have invested between $1 Mn and $2 Mn in each deal. Additionally, we have allocated $1 Mn to multiple funds, amounting to a total of 17 such funds,” Mariwala said.
Are Family Offices Late To The Startup Party?
Well, not exactly!
According to Rohan Paranjpey, the managing partner at Waterfield Advisors, startups and VC firms are relatively new in India. The initial VC funds emerged in 2005 and 2007, followed by homegrown funds in 2010 and 2012, with an average tenure of eight to 10 years.
“So, you can imagine that not too many funds have actually even completed full cycles of investing. The quantum of capital, both domestic and international, was negligible in the country. Neither there was enough capital nor enough awareness,” added Sharrp Ventures’ Mariwala.
Then in 2010-2012, homegrown VCs first started to capitalise on family offices’ money. But the funding ecosystem was really thin and the private equity fund only looked at more traditional businesses, not new-age tech-driven ventures.
Unfortunately, the first wave of homegrown finance had to deal with a lot of headwinds and may not have performed on par with other LPs.
Furthermore, family offices, known for their risk-averse nature and emphasis on wealth preservation, began exploring startup investments when tech companies like Flipkart, Ola, Uber, and Amazon gained significant popularity in India between 2012 and 2015.
“We may be generalising this, but most family offices started their startup investment journey as a hobby. Before 2015, the cheque sizes were small, say INR 10 Lakh to INR 50 Lakh, and the overall fund allocation was only around 2% to 5%,” Waterfield Advisory’s Paranjpey said.
However, now, several factors have influenced this shift. The country has seen a significant rise in consumer growth, capital flow, GDP, and foreign investments.
The notable acquisition of Flipkart by Walmart in 2018 further intensified the entry of family offices into the startup investing space.
A Shift In Investment Thesis
The Indian startup ecosystem is evolving at an unprecedented pace, thanks to the pandemic boost, and with more and more players entering the space, the new-age companies will soon be seen giving a tough competition to their already-established industry counterparts.
This has opened gates for Indian family offices to deploy their capital in the burgeoning space for meaningful equity at reasonable valuations.
“And that’s why you’re seeing a proliferation of direct startup investments among family offices. Well, it makes sense for them to be there,” noted Anirudh A Damani, the director of Artha India Ventures, which represents the family office of Ashok Kumar Damani.
As of May 2023, Artha India Ventures has supported over 80 direct startups across India, the US, the UK, Africa, and Israel. Its investment portfolio encompasses more than 70 notable companies, including OYO, Purplle, Tala, and Coutloot.
Post-2020, a series of global macro events, including the Covid-19 pandemic, the Russia-Ukraine war, the depreciation of the INR against the USD, and volatility in public markets, prompted family offices to realise the need for diversification beyond traditional investments in real estate and listed equity.
Simultaneously, the Indian startup ecosystem experienced a significant boost in 2021, with an influx of $42 Bn in funding. This pivotal moment compelled family offices to take a closer look at startups as a viable investment option.
Furthermore, the emergence of new-age sectors such as deeptech, fintech, healthtech, climatetech, cleantech, and mobility provided family offices with opportunities to explore the startup landscape with smaller investment amounts.
“While startups may be a risky bet, compared to many other investments, the opportunities they could offer are endless, including taking part in business operations and helping founders pivot,” Damani said.
Can Family Offices Compete With VCs?
Most family offices Inc42 spoke with did not have a concrete answer to this imperative question.
This is because when family offices invest via VC or angel funds, the reputation of the fund precedes that of the family offices. Although family offices have been investing in startups via VC or angel funds for more than a decade, they have failed to build brand value for themselves and have largely been eclipsed by VCs.
However, when family offices go for co-investing or direct investing opportunities, this gives them a chance to showcase their operating business and expertise, thereby increasing the chance of getting a seat at the startup table.
But what if a family office does not have an operating business and is a pure-play investment office?
In this case, it is unlikely that startups will be interested in them, especially when they have VCs’ support.
The family offices we spoke with also agreed to the fact that if given a choice between a family office and a micro VC or an angel fund, startups would make a beeline to get their hands on the latter.
This is despite the value additions that family offices bring to their cap table. For instance, in most cases, family offices put founders’ growth and well-being first. Further, they are much more likely to offer the flexibility to dilute stakes during a follow-on funding round rather than pushing startup founders to dilute their equity stakes.
In addition, given that family offices in India are sitting on a big chunk of personal wealth, they can offer flexible and patient capital to startups. A family office can also hold the investment for as long as needed, unlike VC funds, which focus on overall fund performance and may have relatively smaller investment cycles.
Also, from the distribution network to support business operations and setting up offshore businesses to maintaining compliance, family offices have the potential to support startups on all fronts.
Family Offices: Once Bitten, Twice Shy?
The interest of family offices in the Indian startup growth story is quite young. Their early tryst with startups was largely limited dishing out small cheque sizes or latching on to angel or VC firms.
But, as the capital boom of 2021 arrived, much changed and the Indian family offices began delving deeper into the startup ecosystem for hgh-potential bets.
“The era after 2020 was the key point for family offices to consider startups,” said Mariwala.
This is especially visible when we compare the investment experiences of family offices prior to and after 2015, a period when the homegrown startup ecosystem began to take off.
While the motive of family office investments before 2015 was largely driven by means to diversify, the period afterwards was driven by their fervour to secure a seat on startups’ cap table with VCs and angels.
The transition, however, harboured a few challenges:
Not So Fruitful Past Experiences: When the Indian startup ecosystem was taking baby steps between 2010 and 2015, most Indian family offices were reluctant about the emerging space and rather took solace in smaller ticket sizes and primarily invested through angel networks in young startups.
The experience proved to be not-so-fruitful as the returns, in the past, were meagre. As startups began to steer towards the era of growth at all costs and sought bigger cheques, not every family office chimed in due to the past gone wrong. Once bitten, twice shy, this investor class preferred to miss the bus, while others queued up to extract the Indian startup gold mine.
Fear Of Missing Out: The wariness of the early 2010s gave way to family officers who were too jumpy to invest, and feared missing out on startup investments.
During this period, family offices rarely asked questions, attracting the attention of wealth managers who approached family offices to invest in startups that needed funding either to support their over-valued rounds or alternative investments to float ESOPs.
However, such deals had a catch, as these did not empower family offices with regard to having a say at the table, follow-on funding rounds or even exits.
Lack Of Access To Good Deals: The Indian family offices usually banked on deals skipped by bigger VCs and PE funds. In most cases, they had to enter at a much earlier stage and negotiate ‘hard’ for their rights with large VCs in the following rounds.
As startups climbed up the ladder, many family offices were forced to write broader cheques, just to be on their board. Many were not comfortable with this scenario as there was only a fixed pool of capital and enough deals had to be struck to de-risk the portfolio in the near future.
However, in the last few years, family offices have been able to navigate through these challenges to an extent. Still, there is a multitude of challenges, which hinders them to invest in startups directly.
Piling on to the problems is the entire gamut of allied challenges in making the whole process of investing in startups professional — be it building a team or streamlining their objective.
In addition, family offices have to shell out 2% to 4% of the fund corpus on managing expenses on an annual basis. This may include activities such as maintaining a team of analysts, deploying technology to analyse returns and track investments, and fund management fees payable to angel/VC funds, among others.
Moreover, most VC funds run with a cycle of eight years or 8+2 or 8+2+2. During this period, first, they charge an annual fee of 2%, and then a carry of 10% to 20% on profit earned. This makes it imperative for family offices to earn at least a minimum 20% return on investment to be net profitable on a startup deal.
“However, people still do not consider this a good professional opportunity. It is another challenge to improve that impression in the startup ecosystem,” said Sharan Asher, director, Eragon Ventures.
Eragon Ventures is a single-family office that took off after the founders sold their stake in their family business, J.B. Chemicals, during global investment firm KKR’s acquisition of the company in 2020.
Opportunities And Outlook
The family offices Inc42 spoke with believe that, from a startup perspective, it makes more sense for family offices to invest as LPs (Limited Partners) in quality VC or angel funds.
Further, by working closely with VC or PE fund managers, they can identify startups worth investing in directly.
Additionally, there is potential for family offices to collaborate in running a VC fund, which could establish a smaller, niche-focussed fund aligned with the family offices’ business operations or sector expertise.
In terms of returns, IPOs and consolidations are expected to increase as the ecosystem gets more mature, giving family offices more exit opportunities.
However, these have to be analysed well before family funds demonstrate their ability to outperform VC and angel funds.
Edited by Shishir Parashar
Update: June 28
We have made minor changes in certain sections of the story to present a more clear picture.
