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Family Offices in India are Increasingly Exploring Direct Startup Investment Opportunities

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Family Offices in India are Increasingly Exploring Direct Startup Investment Opportunities

Over the past 3 years, India has witnessed a proliferation of Family Offices with a five-fold jump in the numbers crossing over 200 from a meagre 40.

Family offices are privately held wealth management advisory firms responsible for managing, growing and preserving the wealth of an ultra-rich family and transferring family assets across generations. While a single-family office manages the wealth of one family, a multi-family office handles the wealth of multiple wealthy families. Today, family offices are the fastest-growing investment vehicles across the world and are playing a crucial role in the revival of a country’s economy.

Not so long ago, the majority of Indian family offices preferred to invest in start-ups indirectly by investing their money in venture capital (VC) or private equity (PE) funds or through a limited partnership. However, there has been a visible shift in this trend since 2019 when family offices, grown professionally with higher skills and expertise, are increasingly seen investing in startups via direct stake holding or co-investing with VC/PE funds.

The emerging trend of Indian family offices with soaring participation in direct private investments in the market can be attributed to several reasons including high returns, exposure to innovation and technology, diversification, involvement of younger family members, and value additions. It also made sense for family offices to acquire smaller businesses that can be scaled up more easily without much interference from the founders.

While choosing startups for direct private investments, Indian family offices are mainly focused on professional management, high growth and consistent compounding opportunities and the presence of a strong business moat.

A portfolio survey of family offices revealed that almost half of their investments are made through direct startup and the remaining through VC/PE and debt fund routes. Survey also showed that Indian family offices mostly chose to invest in a startup either during the early seed stage or just before the IPO issuance.

With new tech-savvy members joining Indian family offices, startups are seen as lucrative and viable asset classes offering myriad business opportunities with high-risk adjusted returns. The huge returns recently accrued through startup investments during 2021 also raised the confidence of family offices.

India today has the world’s third largest startup community just after the USA and China and the Indian startups are now exploring fundraising opportunities through Indian family offices.

Though investment in startups involves high risk, it also offers incredibly high returns on investments that can never be realized through the traditional investment classes. The fast-evolving Indian startup ecosystem is attracting more and more family office investment and seeing some famous and large names including Narayana Murthy’s Catamaran Ventures, Ratan Tata’s RNT Associates, Azim Premji’s Premji Invest amongst many others.

In a recent forecast on family office funding in Indian startups, nearly 30% of the total USD 100 billion of startup funding by the year 2025 has been predicted.

Fundraising through family offices can offer an added advantage to the Indian startups compared to VC funding as investments made by family offices, as opposed to VC investments, are not done for any fixed investment cycle and can greatly relieve startup founders of any undue financial stress. Secondly, the investment made by VC involves public knowledge whereas family office investments offer confidentiality and discretion.

There are also several other benefits of being associated with family offices including access to the network of wealthy and high-net-worth individuals, industry expertise and knowledge that are vital and often decide the success and failure of a new business startup.

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