Beyond tradition: How Indian family offices are embracing startups for wealth creation

Indian startups have been able to raise an estimated $130 billion since 2014 and the Indian startup ecosystem has grown to be the third-largest in the world. The country’s startup culture is so sprawling that 49% of the startups are from Tier II and Tier III cities. This remarkable growth, led by support from the government, has seen capital flow from institutional and individual investors.

India’s prowess in technology has once again proved to be the catalyst with most startups using cutting-edge technology to provide solutions across the spectrum of agriculture, healthcare, education, micro-finance, defence, capital markets, grocery, food, clothing, entertainment, human resources, accounting, travel, logistics, and many more areas.

Over 99,000 startups have been officially recognised by the government’s Department for Promotion of Industry and Internal Trade (DPIIT) as of May 2023. Apart from tax incentives, the government also provides for faster processing of patent applications along with mentorship and guidance assistance from a panel of local and global experts. The government claims to have simplified over 57 regulations for startups. There are guidelines for easy closure of businesses within 90 days of applying for winding-up.

The troika of government support, skilled manpower, and access to capital has created an environment for ease of forming and doing business. The funding into these startups has attracted keen interest from large business families and their family offices. The younger generation in these families understand this space better and are using their family wealth and business acumen to invest in startups.

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While business families continue to pour in capital to expand their current businesses, they are conscious of the changing environment wherein competition comes not from the existing and established players but from disrupters with a new idea that uses technology to scale up in record time. An easy way to keep an eye on such developments is to get your feet wet in the same ecosystem from where such competition could arise. Apart from that, the newer generation in the families are glued to the happenings among startups and regularly network with the ecosystem.

Family offices do not want to miss out on this opportunity that the Indian economy is offering. It is like investing in tech companies in the late 1990s and early 2000s. From a negligible contribution before the 1990s, the IT sector now contributes to over 8% of India’s GDP. When the stock market indices give an average growth of 12-15% p.a., good quality companies in the IT sector have given a CAGR of 18-24%.

Assuming a 20-40% success rate among startups, the valuations on exit can be mind-numbing. A small Rs 10 lakh investment at a pre-seed or seed funding stage can easily see a 5-10X jump on exit to the Series A or Series B stage for investors. This gives a 2X to 4X return on the original capital invested. With the Indian economy expected to grow from $3 trillion to a $10 trillion economy in the next 11 years, such startups and unicorns are likely to be major contributors to this growth.

Family offices are part of various forums that provide opportunities to meet with and invest in startups. Among these forums, some specialise in angel or seed funding while others look at relatively more mature businesses at Series B and Series C stages. Family offices have a large basket to choose from and basis their background, interest and ability to fund, these forums help family office managers to interact with startup promoters who share their vision and progress.

A lot of research and analytics go into such decision-making, apart from the comfort level the family offices have with promoters. Numerous meetings to understand the business, competition, technology, and the scope of growth are held before talks on valuations and exit strategies. Hence, like in traditional listed investing in stocks and bonds, family offices are using their expertise in evaluating businesses before they make financing decisions.

The startup ecosystem is here to stay and grow. The HNI (high-net-worth individuals) fraternity is not lagging in participating in India’s wealth creation story and family offices are actively engaging with wealth advisors who have the relevant experience and network to bring them such investment opportunities.  

(Nimish Shah is Managing Director—Family Office & Portfolio Analytics at LGT Wealth India Pvt Ltd.)