Decoding Family Offices Landscape For Startup Funding

The Indian startup ecosystem has been scaling at a massive pace in the last few years. India has seen over 57K startups launched till date. Inc42 calculations put the value that Indian startups have created to be over $450 Bn. The first three months of 2022 have already seen 13 startups enter the coveted unicorn club taking the total to just one shy of a century of unicorns.

The Indian startup scene has been continuously evolving. With new categories of investors joining the startup bandwagon and over 950 M&As being recorded between 2014 and January 2022, India has emerged as the third-largest startup ecosystem in the world after the US and China. 

The Funding Scene

Indian startups raised over $112 Bn between 2014 and 2021. While most of the action has been in the venture capital funding and angel funding space, family office investments have seen an uptick. They have emerged as a sound and strategic investment choice for Indian startups. Though, the role of Indian family offices has still not fully evolved to meet that of its USA and Chinese counterparts.

What Is A Family Office?

Family offices are private wealth management advisory firms that ‘manage’ the wealth of an affluent family. In other words, they are privately held companies with a singular goal to grow and transfer family assets across generations. A single-family office firm manages the wealth of one family while a multi-family office directs the wealth of multiple rich families. 

The Rise Of Family Office Investing

With new generations coming in that are more tech-savvy and more exposed to the latest trends, family offices have started warming to the idea of investing in startups. With the recognition of startups as a viable asset class, the otherwise traditional family offices have opened up their wallets and started dedicating a part of their portfolio, typically 10-20% to the investment in startups.

Startups too are leveraging this opportunity by exploring investments from family offices as a viable investment source. These family offices offer the new age ventures benefits that come along with brand recognition and a global network. 

Investment in startups is high on risk. But with high risk comes high return, which cannot be afforded by traditional investment classes. The evolving trend in the Indian startup scene is attracting more and more family office investment.

The Indian startup space has seen some big names investing in them — Narayana Murthy’s Catamaran Ventures, Ratan Tata’s RNT Associates, Azim Premji’s PremjiInvest, and Ronnie Screwala’s Unilazer Ventures to name a few. Each of these family offices has been associated with a marquee company or brand in the past.

Catamaran Ventures has invested in startups such as Paper Boat, Udemy, Yebhi, and Acko, among others. RNT has made investments in ventures such as Car Dekho, Ola and Snapdeal. PremjiInvest’s portfolio includes brands such as Flipkart, Snapdeal and Lenskart.

According to a joint report released by 256 Network and Praxis Global Alliance India, family offices have invested in excess of $5 Bn in Indian startups during the last few years. It is expected that the family offices in India are going to account for 30% of the total $100 Bn of startup funding by the year 2025. The report puts the number of unicorns to grow to 150 by 2025. Inc42’s soonicorn tracker though forecasts that this number will be achieved much earlier. 

The report further estimates that ultra-high net worth individuals (UHNIs) are likely to invest up to $30 Bn+ in tech startups in India by 2025, reiterating the growing investment opportunity for home-grown tech ventures.

India is expected to have 10K UHNIs including business leaders, celebrities, cricketers, NRIs, and digital entrepreneurs with a cumulative wealth of $700 Bn by 2024. Currently, India has around 140+ family offices catering to Indian UHNIs. They have been pro-actively involved in 50+ such deals every year since 2015, according to the report.  

Family Office Investing V/s Angel & VC Investing

Angel investors or venture capital investors usually invest in a startup with an exit time frame in sight. Family office investment, on the other hand, is typically for a longer term with no defined maturity. They may also end up buying higher stakes in the business at a later stage.

Though some traditional Indian businesses are still not fully comfortable with the idea of the risk involved with investing in startups, many businesses are warming up to the idea with a high-risk appetite. One of the factors that has attracted the UHNIs to this asset class is the ability to generate superior returns even during times of crisis like the COVID-19 pandemic.

During the period from 2014 to 2019, family offices have made over 1,700 investment deals in startups, many of which have gone on to generate lucrative returns for the investors.

Investing in startups has emerged as a viable investment alternative for the UHNIs who have till recently been investing in traditional asset classes like real estate and public equity.

Startup investing is giving family offices exposure to high growth portfolios which use technology to solve real-life problems and go on to become big companies in a relatively short period of time.

Why Are Family Offices Suitable For Startups?

Family offices differ from venture capital investors mainly in terms of investment horizons. VCs have a focus on an investment cycle of 10-12 years, and they look to create a portfolio of early-stage growth companies. On the other hand, the capital provided by the family offices can be seen as a perennial source or evergreen capital, as family offices do not work with investment horizons. This is beneficial for the founders of the startups as they are not under pressure.

Another factor is that venture capitalists tend to compete for deals with a slew of public activities that draw public attention. On the contrary, family offices often end up bringing confidentiality and discretion to the table. Additional benefits of family offices include industry expertise, Indian markets expertise, and a well-rounded network, all of which are crucial for the success of a new business.

How To Reach Out To Family Offices For Funding

To raise funding from a family office, you need to have a crystallised business idea in your hand preferably with a pilot project already running. As a founder, it is vital that you do your own due diligence about the family office you are thinking of approaching. Most family offices have a speciality or a preferred domain in which they invest a major chunk of their funds in. 

You may approach a family office of a UHNI through any common platform where both of you are present. You can also contact the family office directly and present your idea in the form of a well-drafted business plan. The business plan should be clear in the scope and potential for the business, how you are going to utilise the funds received and the indicative return within a targeted time frame.

The startup scene in India is maturing with family offices expected to play a key role in its development. So if you are a startup founder looking for funding, approaching a family office of your domain with a clear and concise business plan could be a good idea.