How Viable Are Family Offices for Start-ups? Since 2014, family offices have backed more than 380 startups. The rapid expansion of UHNW individuals in India has led to a growing appetite for more efficient, effective and prosperous ways to invest money and manage assets, and they are doing it through investing in startups directly.
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Between 2014 and 2023, the India start-up ecosystem scaled at a massive scale. During this period, the startups raised a total of $152.1 billion. Of which a whopping $13.1 billion were raised from family offices alone, according to market intelligence platform Tracxn. But days when family offices used to invest their wealth in stable asset classes like real estate are over. Now, in a growing trend, they are also adding startups to their portfolios.
Since 2014, family offices have backed more than 380 startups. The rapid expansion of UHNW individuals in India has led to a growing appetite for more efficient, effective and prosperous ways to invest money and manage assets, and they are doing it through investing in startups directly.
According to the first edition of Trica's Private Market Monitor report, conducted in partnership with consulting firm EY and law firm AZB Partners, direct startup investments contributed for 47% of the private market portfolio of family offices, while 32% went to VC/PE funds, and 11% to venture debt funds.
There are currently more than 3,000 family offices globally managing money for the world's wealthiest families. (For the uninitiated, a family office is a private office for a family with considerable wealth). And a one-tenth of them are in India alone, including names like Ronnie Screwala's Unilazer Ventures, Ratan Tata's RNT Associates, Azim Premji's PremjiInvest, and Narayana Murthy's Catamaran Ventures, to mention a few.
Each of these family offices have 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. Sharrp Ventures which is backed by Harsh Mariwala has in its portfolio brands like Nykaa and LEAP.
There are several reasons for family offices to invest in startups directly, "Firstly, we are able to have greater control in choosing sectors per our investment philosophy (SHE; S – Sustainability; H – Housing, Healthcare and Hospitality; E – Energy, Entrepreneurship and Environment). Almost all our startups have a female founder/co-founder – another important criteria for a woman owned/ managed family office like ours. We also like to have a more active role in some of the startups especially when they have strategic interest in us. We want to offer more than capital to a startup and thus prefer investing directly," says Lakshmi Narayanan, Managing Partner, Patel Family Office.
Some family offices like NR Narayana Murthy's Catamaran Ventures, take a hybrid approach. "We take LP positions in selective early stage VCs and are focusing on direct investments in later stages. The LP positions give us the opportunity to understand themes and specific companies early. Direct investments in sectors that we understand better help us get potentially better returns and ability to help the company with our ecosystem," says Deepak Padaki, President, Catamaran, the family office that has approximately 60%-70% in direct investments in startups.
Types of Funding
While family office investments can come at any stage of a startup, many choose to offer a seed capital. Others are interested in subsequent growth in later stages, and offer series A or series B funding. "We invest mostly at an early stage – but we prefer proof of concept and some revenue to be in place. We do also invest some angel/seed time investments which are pre-revenue as well – provided they are of strategic interest," adds Padaki. If one takes a look at Patel family office, it has about 20 direct investments in startups. "We entered these investments at various stages of their lifecycle," says Narayanan.
One of the assumptions associated with family offices is that they tend to engage in long-term investment. While this can certainly be the case, it does rely on the family and management involved being well. "In our direct investments as well, we look for opportunities to realize gains at the opportune moments when our target IRRs are met. We align with the portfolio company's plans – for example, when they are seeking more capital or looking to consolidate their cap table. Timely cash returns are important since as a multi-asset investor, we do look at how we can rotate money based on investment cycles," said Padaki.
"We look for the potential to deliver superior cash flows in a steady state. For us, the idea of patient capital is that we can back entrepreneurs who show constant progress for longer. In certain sectors, such as manufacturing, where there are longer gestation periods for investments, this gives the company time to build a strong foundation. Our kind of capital also brings some continuity to cap tables over the lifecycle of the company. But make no mistake that exit planning is very important and we are as impatient for timely, tangible returns as any other smart investor," Padaki adds further.
Narayanan delves deeper, "Unlike a VC/PE fund (which have maybe 5 -10 years of fund life), there is no specific life of the capital given by a family office as a family office is investing its own money (unless its multi family office manages money for others). The degree of "patience" would depend on the size and stage of the investment. Smaller and earlier the investment, the greater the patience. In case the investment is more strategic, the returns and timeline expectations could be significantly different. "
According to Naryanan, while the flexible time frame does appear to provide a breather to the startup, in reality the entrepreneur is still expected to hustle and demonstrate growth and deliver value year and year."
"Our realization to seek family office funding came when we recognized the need for a partner who not only shared our vision but also could provide capital for the long haul. Family offices' alignment with our goals and commitment to nurturing our growth was a natural fit," reminisces Jatin Solanki, Co-founder, Expertrons, a career upskilling platform that raised an undisclosed amount in a strategic funding round, which also included a family office as one of the investor among others.
Advantages beyond capital
A family office scores over a VC on many accounts. It delivers far more value to early-stage startups than a venture capital firm can. "A VC fund at its core is a professional money manager – they take money and invest it based on their defined investment thesis and in-house experienced team. With family offices, there is a lot more on the offer – closer access to a successful entrepreneur – his/her insights, experience, network and connections. There would also be a greater opportunity to extract synergy between portfolio companies," said Padaki. As direct investors, family offices come with a lot of experience in scaling companies operationally, and leveraging ecosystems for growth. "We can be great sounding boards for setting strong foundations for governance. Our focus is as much on partnering to create sustainable high-growth and high-quality companies in India as it is on getting a superior return," adds Naryanan.
"Family offices play a pivotal role in a startup's growth journey beyond just providing capital. Their deep industry insights and long-term approach create a conducive environment for strategic guidance. Personally, our experience with a family office brought mentorship, valuable connections, and a shared vision, which significantly accelerated our expansion," said Solanki. Family offices often emphasize a holistic understanding of a startup's mission, aligning with its long-term vision. They offer patient capital and a personal touch, nurturing relationships that extend beyond boardrooms. This approach fosters an environment of trust, collaboration, and sustained growth.
Approaching family offices
Once a startup has decided upon the need for a family office, approaching them is the next task as family offices differ from connecting with VCs, as it's often less visible. "To reach out effectively, research is key. Identifying family offices with a history of investing in your industry or domain is crucial. Networking within relevant circles, attending industry events, and leveraging personal connections can also help create those initial touchpoints," says Solanki. "Crafting a compelling narrative that resonates with a family office's values and investment thesis is equally vital. Building relationships over time and showcasing the potential impact of your venture can lead to fruitful conversations with family offices interested in fostering innovation and growth," Solanki further adds.
Other things to consider
So while the third largest ecosystem in the world after the US and the China has found a new destination for raising funds the family office, there are some considerations to keep in mind to make the most of it. "Startups should prioritize alignment of values and goals with a family office partner. Transparency and effective communication are crucial. When deploying funds, a well-defined growth strategy and diligent execution are essential to honor the trust placed in your venture," adds Solanki. Besides the infusion of capital, startups should evaluate what they can benefit from in building relationships with family offices – such as ecosystem access, experience of scaling companies, governance processes etc. "Being operators at heart, family offices can usually offer more relevant advice towards building sustainable organizations than others," shared Padaki.
"Having a family office on your cap table means that you have an experienced entrepreneur who can mentor you through difficult business decisions, bring in needed relationships or really any other support needed to take the startup to the next level. It is this time and energy that is most valuable to any startup.," shares Narayanan.
The other aspect to pay attention to is the possible synergies between the startup and family office and their portfolio companies. "Cross Selling, supply chain efficiency, operational support all become a reality to explore under a wellestablished and diversified family office," adds Narayanan.