Are Family Offices Fueling Startup's Growth in India?
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The Indian startup ecosystem is blooming. Interesting ideas, head spinning innovation, sustainable business and lately some high profile exits has helped the country gain attention from all sorts of investors.
One such line of investors is the family offices. Apart from real estate, public equity, luxury items, etc. family offices in recent times have shown a very keen interest in startups.
Take an example of Harsh Mariwala’s family office SharrpVentures which has invested in Revofit and Mama Earth or even Amit Patni Group’s RAAY Global Investment which supports companies like Bombay Shirt Company, Velvetcase.com and White Owl Brewery.
Similarly, Ratan Tata’s family office RNT has not shied away and invested in unconventional companies like a Bombay Hemp Company, which produces hemp-based products. On the other side, Azim Premji, through Premji Invest, supports some of the promising startups such as ID Fresh.
After looking at the spree of funding announcements from family offices, one of the questions that arise in all of our minds is this a fad or just a phase?
Interest to Invest
It is worth to note that family offices have always interested in investing their capital in other business, but most of these companies were publicly listed. However, globally family offices are investing in startups since decades and it was until recently the trend started picking up in India.
Peshwa Acharya, a Senior Management Executive who has worked with several FMCG, Retail, Telecom and Consumer Internet businesses, feels that several generational business families think that they have lost out a huge opportunity in the startup valuation game and are now playing catch-up. However, these families are looking at maximization of wealth and the appetite for risk seems to be really low when compared to some of the professionally managed funds or the Silicon Valley investor.
“While startups do give disproportionate returns it is not every startup that will hit home. Right now family offices are trying to find a middle ground between risk and a reasonable rate of return,” he shared while adding that, “The younger scions are keener to invest in startups as they connect with the startup culture and are looking to get into newer businesses.”
While on the other side, investors deem the family office’s funds as patient capital, wherein the need for liquidity is very low while they can follow an asset allocation model.
In fact, Rajmohan Krishnan, Managing Director and Principal Founder, Entrust Family Office compares this model with that of institutions as their capital are long-term in nature and have very low liquidity requirements. This one aspect is the key for any investment in a startup as against the seed, venture and PE funds have a definite time frame for investments and are bound to return capital for their investors which puts pressure on the startups to give timely and profitable exit.
However, he says, this may not be the case with family offices as the need for capital is not there, the percentage allocation for this asset class will not be more than 10-15 per cent of their overall corpus and hence there would be no pressure on startups to force an exit for their family office investors. This is a boon for any startup entrepreneur.
“From the family office perspective, the entrepreneurs have made these windfall gains by existing their businesses and at some point had got support from PE and venture funds. They understand the difficulty when the startups are funded by these funds, as they have a definite timeline for exits. This realisation has made the Family Offices invest into startups in a much larger way than before,” Krishnan added.
Fad or Phase
For a lot of us, this looks like a change in outlook as family offices transit form the old tried and tested way of business to the new startup's investment. Having said that, one can ignore the role of risk appetite, the rate of failures among startups playing a huge role in this trend
Shantanu Awasthi, Head of Family Office at Karvy Private Wealth, whose thoughts echoes with Acharya, says, “as we see Family businesses becoming more startup sensitive there will be more money and impetus that the startup sector will get as a whole. The only problem as of now is their risk appetite is not all startups succeed some may fail but that one unicorn more than makes up for the failures by erasing the losses and ensuring profits.”
Additionally, exits will also play a huge role. Even though the country has witnessed high profile exits like that of Flipkart, there is not enough meat that the startup ecosystem can boast of.
Rahul Gupta CEO & MD Radar Capital, discussing if this is long term or short term trend, elaborates that “this totally depends on the ROI and exit quality of their investments. This wave is largely initiated by the new generation of the families rather than the old guard.”