According to Chandgothia, direct startup deals will significantly increase as many family offices are expected to moat their portfolio with high-return startup bets
Family offices may restrict themselves to a few deals but the quantum may be much higher than a micro VC
Unlike any VC or angel fund, equity stakes do not really matter to a family office, as their sweet spot is Pre-series A: Mankind’s Chandgothia
Family offices, the three-decade-old investor class, are betting big on Indian startups. For most family offices, what began as an investment option almost 15 to 16 years ago has now become a fervour to be on startups’ cap table.
What’s more interesting, however, is that the Indian startup ecosystem is in for a treat, given that the trend will only grow by leaps and bounds over the next decade.
Speaking with Inc42, the head of Mankind Pharma’s Promotor Family Office, Ankush Chandgothia, said that the next ten years will be all about family offices betting big on startups, thereby becoming a major funding source for the ecosystem that today is largely cash-starved.
According to Inc42’s latest “India’s Startup Investors Landscape Report”, the number of family offices actively taking part in startup investments will increase from 300+ in 2023 to 700+ by 2030.
Incorporated in 1991 by Ramesh and Rajeev Juneja, Mankind Pharma is a pharmaceutical company that develops, commercialises, and delivers medicines for urgent medical needs. The company offers low-cost generic drugs and counts India as its key revenue-generating market. Private equity firms Capital International and ChrysCapital are two of its major investors.
Ramesh and Rajeev Juneja, Sheetal Arora, Ramesh Juneja Family Trust, Rajeev Juneja Family Trust and Prem Sheetal Family Trust are the promoters of the company. Chandgothia heads Mankind Pharma’s promoter’s family office and 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.
According to Chandgothia, direct startup deals will significantly increase as many family offices are expected to moat their portfolio with high-return startup bets.
“With VC funds taking a backseat and valuations also getting corrected in the aftermaths of the pandemic and the funding winter, we have seen that family offices, which have not invested a large percentage of their corpus in startups are now looking at this space,” Chandgothia said.
Few But High Quantum Deals On The Cards
A major difference between any family office and a VC or angel fund is that family offices have complete ownership and control of their wealth. However, despite having a capital in the range of INR 700 Cr to INR 800 Cr, family offices are yet to become mainstream in startup investing.
The reason is simple: A family office has limited resources, limited value add and a limited bandwidth to invest in deal sourcing and deal-making. So, a family office with 100 Cr corpus may go for 10 deals while a micro VC may go for 100 deals.
This is because family offices are more inclined towards wealth preservation compared to institutional investors who are more oriented towards wealth creation, leading to a key differentiation in the investment thesis of both.
“So, family offices may restrict themselves to a few deals but the quantum may be much higher than a micro VC. It will probably sit somewhere between a micro VC fund and a VC fund, thereby bridging the investment gap between the two,” Chandgothia added.
More Impetus On Gaining Direct Deals
According to Chandgothia, unlike any VC or angel fund, equity stakes do not matter to a family office, as their sweet spot is Pre-series A.
For instance, if a startup has a valuation of less than INR 100 Cr and a family office invests INR 5-6 Cr, they would typically maintain a 4-5% equity stake in the company.
However, if the startup progresses to Series A or B funding rounds and the family office chooses not to participate, it may experience dilution. In a scenario where the family office invests INR 5 Cr in a round with a valuation of INR 500 Cr, its stake would be reduced to 1%.
Therefore, the primary reason to enter into a startup is to make huge returns on the portfolio within a reasonable timeframe of five to seven years.
“If my expectation from public markets is 12%, then unlisted equity markets come with higher risk and lower liquidity, so the expectation is around 20-25% on an annualised basis,” Chandgothia said.
Furthermore, investing directly in startups brings family offices closer to the market. However, the biggest challenge in direct investing is to track investments and make due diligence, which is a lot of work for smaller family offices. Then, there is always a chance of some deals going bust, which can shake confidence in a particular sector. Nevertheless, more impetus will be on gaining direct deals going forward, Chandgothia concluded.
[Edited by Shishir Parasher]
