Behind The Rise Of Family Offices Changing The Indian Startup Investment Landscape

As far as milestones go, the Indian startup ecosystem crossing the $150 Bn mark in funding in 2024 is a big moment for the investment landscape. The figure by itself may not speak volumes about the maturity of the Indian tech and startup ecosystem, but it does highlight the road taken to get there and the role played by Indian angel investors, global venture capital giants and hundreds of family offices backing Indian startups.

While hundreds of billions of dollars have been pumped into startups to get them to the point of maturity, many of these stakeholders believe it’s time for the next leg of the journey.

The maturity of the Indian startup ecosystem is playing out in terms of exits through IPOs or secondary sales or M&As, but what about backing the next generation of startups?

What often goes under the radar is that most of these exits and returns have gone to foreign investors. The share of domestic investment in India is estimated to be less than 15% over the past decade.

How keen are Indian investors — angels and family offices — to join the next wave? And in particular, are family offices the key to unlocking the domestic capital vault in India?

Behind The Family Office Wave In India

Concerns around foreign capital dominating the Indian market have lingered for years. We have seen founders and Indian fund managers bemoan the lack of domestic investor participation.

But the trigger point came around the end of 2022 when startups realised that foreign VCs were tightening their purses, and the current phase of growth for Indian startups depends on Indian investors. With this foundation laid down, VC firms and fund managers are looking to tap that all-important domestic investor pool for their fundraising.

Recent market trends, particularly around growth expectations and bloated valuations, have highlighted the importance of having domestic investors who know the Indian market and its peculiar challenges, particularly around profits and scaling up.

Domestic investors have learned valuable lessons from the period of FOMO investing and the “spray-and-pray” approach of 2020 and 2021, and now, there’s a lot more focus on value than valuation. Instances of governance lapses at unicorns have also led to some fears about a startup bubble. But fund managers claim domestic family offices and limited partners are more diligent at times because of how well they know the market.

Family offices are also realising that startups need patient capital and that they are best suited to deploy such capital, as they are more familiar with the ground reality, according to fund managers and multi-family office managers.

“So many foreign VCs are now realising that the Indian market does not have the depth for large deals, especially in deeptech. We are not creating an OpenAI or Anthropic yet, so founders need to seek investors that don’t bring the pressure of growing like OpenAI,” according to the family office manager for a Delhi NCR-based real estate giant.

Tech giants in the US and China took advantage of access to patient domestic investors who were willing to make long-term bets on new and disruptive ventures. In India, a similar shift is underway, and it’s vital for domestic capital to actively participate in this transformation to nurture homegrown innovation and create globally competitive companies.

India’s Patient Capital Pool

Startups, especially those led by founders from Tier II and Tier III towns, are increasingly looking to HNIs and family offices helmed by seasoned industrialists and entrepreneurs for funding. Unlike foreign investors, who might be focussed on achieving quick returns, domestic investors often have a more nuanced understanding of the local market and are better positioned to provide patient capital for this very reason.

This type of capital is crucial because it allows startups to grow sustainably without the immediate pressure of delivering rapid returns. Domestic investors bring the added advantage of regional market insights and experience, enabling them to offer more than just financial backing—they can offer strategic support as well.

Gaurav VK Singhvi, the founder of We Founder Circle and SEBI-registered Avinya Ventures, believes India needs a robust base of domestic investors, even those with a lower appetite for investing than global VC giants. Startups are seeing that large cheques come with pressure to grow and scale in a manner that the Indian market does not allow.

Singhvi added that the startup playbooks backed by foreign capital are now mature enough to be scaled up with domestic money. “Family offices are the true patient capital, and if we have to change the direction of Indian tech from established and mature sectors to emerging sectors, we need this patient capital. And the best way to attract more family offices is to have an established track record as a fund manager,” he told Inc42.

In this regard, Singhvi’s background as the founder of We Founder Circle as well as his record of exits as an angel investor have proven to be key propositions to attract family offices. Singhvi pointed out that with exits from the likes of BharatPe (80x returns), Rooter (32X returns), Zypp Electric (28x returns) and Coutloot (22x returns), many family offices are convinced that he is able to find the right deals.

However, bringing family offices on board for funds investing in emerging and new frontier technology is easier said than done.

How HNIs Are Testing The Waters

Waterfield Advisors’ managing director Rohan Paranjpey believes family offices in India are fortunately seeing the right indicators in many of the new AIFs launched in the past year. Fund managers are coming with unique insights and a track record that makes it easier for family offices to invest in funds. Family offices began their startup investments as a hobby, with smaller cheques of around INR 10 to 50 Lakh and limited fund allocations of 2% to 5%. But they are maturing fast.

“We are seeing in Tier II, III and IV that family offices are being created, which we had never heard of before. They are excited to invest in startups, but the first cheque may not be that large. Only when they are aligned more with the startup’s model, they are ready to invest more,” he added.

The focus was on testing the waters rather than making major commitments.

VC fund and family office managers believe there is reticence among older generations of industrialists and HNIs when it comes to such investments. However, millennial and generation Z members of a family office may want to allocate a small portion of the portfolio to such areas and sectors.

“I think with the involvement and the influence of the millennials and Generation Z [in family offices], and with the emergence of a lot of nuanced products in the market, the requirement or the ask is obviously rising,” a Bengaluru-based multi-family office manager said.

Today, family offices typically invest in startups through VC or angel funds, relying on these funds’ reputations. However, when they co-invest or invest directly, it gives them a chance to showcase their business expertise and build their own presence in the startup world.

Even so, founders often prefer to raise from established VC funds or angel funds rather than family offices, due to the perceived brand value of having such a name on their cap table. In some sectors such as insurance, having domestic investors is crucial, so these are sectors where family offices have an advantage over foreign VCs.

Why Multi-Family Offices Are Booming

Of course, running a family office is not unlike running a fund. They need the talent and the structure of an institutional fund. Often, this means hiring lawyers for various deals, getting chartered accountants to vet deals and statements, having a roadmap for the next generation in the family and so on.

This is where multi-family office managers and advisors come into play. Multi-family offices such as Entrust, Cervin Family Office, Legacy Growth, Waterfield Advisors and others are looking to become the pillars for horizontal aspects of running a family office. When it comes to cost, expertise in investments, legal compliances, estate planning and indeed rifts within the family, multi-family offices can be a good option for HNIs to test the waters.

“In a single family office, they prefer to have an in-house lawyer. But one lawyer is not enough, because one would be an expert in VC and startup investments, and another in real estate. So the moment you start adding all these layers, your cost increases.” the multi-family office manager quoted above added.

She added that in a multi office, HNIs can get access to multiple lawyers, registered experts in various investment classes as well as tax related experts.

Sharan Asher who runs Eragon Ventures, the family office for the former promoters of J.B. Chemicals and Pharmaceuticals, points out another challenge: managing family offices isn’t yet seen as a serious career option among fund managers. But having a multi-family office means the HNI family can bank on those with the right expertise and credentials.

One cannot understate the significance of IPOs and the public markets in swaying the domestic LPs and investor base towards the startup ecosystem.

In particular, the massive gains for stocks such as Zomato, TBO Tek, Policybazaar, Honasa and RateGain in the past year, as well as the boom in the SME IPO market have turned heads. It’s not just about the large brand names but also smaller promising IPOs, and with the likes of Swiggy entering public markets soon, startups and funds are likely to see more domestic HNIs and family offices queuing up to back them.

Domestic family offices and investors are more than familiar with the dynamics of public markets — some of the promoters behind these offices lead public companies themselves. For these investors, the IPO-led exit momentum is a massive validation of the maturity of the new-age tech and startup ecosystem.

And it’s creating a virtuous cycle where each wave of successful listing brings gains and attracts more family offices to the investor pool. No wonder then that there’s a lot of optimism around India’s domestic capital finally showing its true colours.

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