“Overall, just 10% of the total HNI base is interested in startup investments. About 90% of them do not invest in startups,” said Rajmohan Krishnan, Principal Founder and MD of Entrust Family Office.
India’s high net-worth individuals and the wealthy set have always supported SMBs and social impact projects, but many startup ecosystem investors believe that this needs to now be geared towards Indian startups to help them move beyond the reliance on foreign investors. Recently Infosys cofounder Kris Gopalakrishnan urged India’s wealthy set to look at startups as a serious investment opportunity and not just a trend. He also cautioned startups about the over-reliance on foreign investors.
“We need to flow the money of high net worth individuals (HNIs) money into startups. Our best late-stage startups are owned by non-Indian entities,” the Axilor Ventures cofounder had said, in order to create the best environment for new business and job creation, which is always something that HNIs have backed.
In 2016, director of Solidarity Investment Advisors, Anriuddha Malpani wrote that experienced investors, who started angel investing about 5-10 years ago, did not get decent returns on their investments, and thus stopped investing. Even today, this sentiment prevails, Krishnan noted. There is a need for more visible exits for HNIs in the startup ecosystem to increase the confidence of other HNIs.
Speaking to Inc42, Entrust’s Krishnan said that there are two types of ultra HNIs who choose to invest in startups. One is a seasoned investor, who is deeply immersed in the startup ecosystem and has a good understanding of the space. These eventually become mentors to their portfolio startups and prefer to exclusively invest in startups. The second set is spray-and-pray type, who are essentially investors that put a small amount of money in a number of startups for example investing INR 25 Lakh among 20 different startups.
While the Indian startup ecosystem has expanded by a magnitude in the past decade (55K startups launched till date), there are hardly any billion-dollar exit other than Flipkart’s $16 Bn acquisition by Walmart. Even among the listed tech companies, the list of public startups is short and the number of mergers and acquisitions too have hit a record low with 35 M&As reported in the first half of 2020, as compared to 59 M&As in H1 2019 and 52 in H1 2018.
Despite being part of the third-largest startup ecosystems in the world, Indian startups have always struggled to attract angel investments as compared to other leading ecosystems. Talking about the reasons behind this trend, Krishnan said India is traditionally not a risk-taking market.
“When people earn money in India, they don’t think it is their money to invest. They consider it as their family’s money (children and grandchildren) and thus, they are cautious of making a risky investment. Because of this, people tend to feel guilty when they lose money on their investments in India,” he added.
Entrust’s Tryst With Startups
Bengaluru-based Entrust Family Office is a boutique multi-family office offering wealth management services to high net worth individuals, customized according to the needs of each client. Some of their services include succession planning, wealth management, real estate property management, accounting, taxation, bookkeeping, and more.
According to Krishnan, the experience is customised because no two families are the same, no two risk profiles are the same, even among the same family two family members can have different requirements. Thus the family office does not pool the assets of all HNIs, Entrust is an individual family account.
Each individual HNI or family office opens their own account with the company and Entrust manages it with the power of attorney. SEBI registered investment advisory firm is currently handling AUM worth INR 10,000 Cr and claims to have HNIs of Forbes top 100 families as its clientele. Even among its portfolio, Entrust does not have too many startups. Some of the startups that have raised investments through Entrust Family Office include ecommerce logistics provider Connect India and Hyderabad-based skincare clinic Olivia among others.
Krishnan believes that the mindset is totally different in markets like the US where people have been making money for the last 40-50 years and also have an individualistic culture. At the age of 17-16 years, people move out of their house to live by themselves so they don’t have the kind of entitlement that people in India do.
However, Krishnan agreed that the Indian market has made a lot of progress in the past few years but it will take some time to reach the kind of engagement that international investors have, unless there is a radical change in the ecosystem.
Giving the example of life insurance, he said that investing in insurance is a popular option today because the government introduced tax deductions on life insurance premiums. Similarly, the government could introduce an intervention with respect to startup investments for example if all startup returns get taxed at a lower percentage than they are currently, it will automatically encourage HNIs to invest in the startups.
Entrust also works with startups and SMEs through its shared CFO(Chief financial officer) services called Entrust Encore, which help startups to get assistance in fundraising, deal structuring, evaluation of deals, accounting policies, review and filing of IT returns, review of final accounts, strategic financial planning, and short term investment decisions among other services.
Shared CFO service is billed on basis the amount of time/deliverables worked on for a particular organisation. Taking this into consideration, shared CFO could cost around INR 12-20 Lakhs per annum, as opposed to an in-house employee, who might end up being 3-4 times more expensive.
Since, the key responsibility of a CFO is to help a company manage and raise funds, they have to be closely connected to the investor community. Given Entrust’s primary focus on offering wealth management services to high net worth individuals, shared CFO services seem to be a natural fit for the organisation. It’s also a win for startups who get to leverage the expertise of a diverse team without giving out a significant salary package.