How Indian family offices can tap into the startup opportunity with the right VC

Traditionally, family offices in India have always been risk-averse.

A 2018 estimate by Pricewaterhouse Coopers revealed that family offices in India allocate 1 percent or less of their portfolio capital to startups. This is a stark contrast to their peers in China or other developed countries that allot up to 15 percent.

But things are changing. Family offices are slowly becoming a vital source of funds that startups are tapping into. Many are keen to bet on the ever-growing opportunities in the technology ecosystem, but often don’t know how to select the right venture capitalist (VC) to manage their money.

This issue took centre stage at a webinar organised by 256 Network on ‘Choosing the right VC for your Family Office’’.

The 256 Network is an exclusive, invite-only network that brings together global decision-makers investing in the Indian startup ecosystem. Membership to the group is exclusively curated to include managing directors, presidents, and partners across investment vehicles like VCs, PEs, CVCs, sovereign funds, endowments, fund of funds, and industry affiliates. The group currently has 400+ members from Asia, EU, and the US.

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A question of capital

Sudhir Sethi, Founder and Chairman of Chiratae Ventures, said the general thought is India “does not have capital, but the truth is there are enough family offices that have invested in venture funds”.

The fact, however, remains that numerous family offices, who have built their money through the old economy, are yet to fully participate in the new economy.

The defining characteristics of VCs are that they are able to spot the right opportunity, given their screening processes, and know how to handle capital.

Rajan Navani, CEO, JetSynthesys, said, “We need to strengthen the bridge between the VC and family office.”

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However, most often than not, there is an element of apprehension, confusion, and even mistrust among family offices when it comes to the role of VCs. It has been traditionally noticed that family offices in India looks into three investment avenues – gold, real estate and stocks. The awareness about putting their money into a VC fund is not widespread.

Investing in the startups through VC funds is an unchartered territory for many a family offices as there is longer lock in period and they are putting money into businesses which is expected to create an asset unlike other investment modes where one is already buying into something which is already valuable.

The bottom line is simple: do family offices have enough confidence and trust in VCs?

Chirantan Patnaik, Manager – Venture Capital, CDC Group, said, “As an asset class, VC funds offer an important tool for investors as VCs offer invaluable expertise and access.”

Data shows that top tier VC funds have outperformed the public markets in terms of investment returns. However, awareness still needs to be created on the kind of pivotal role a venture investor can play.

The technological evolution happening across the world and resultant opportunities are much more in India, given its size and population. The growing number of internet users and small businesses coming online means the opportunity size is only increasing.

Chirantan said, “VCs have been quick to spot the tech trend and are better equipped to take early-stage risks.”

Sudhir pointed out the massive investment opportunity in India. “There are real problems to be solved in India and technology can solve them. Venture investment is about solving these issues through startups, and it is possible for LPs to get outsized returns,” he said.

There are risks associated with VC investments, but it’s “like any other business”.

What to look for

Startup funding started out strong this year, but investors grew risk-averse April onwards as the coronavirus increased its stranglehold in India, funding trends in the first six months of 2020 show. Even though more startups got funded in the first half of 2020, the deal sizes shrank, pointing to the fact that investors put in less money in more startups to spread their risks.

The involvement of family offices could change things for startups.

The three participants at the webinar offered valuable insights on the ways and workings of family offices. The ways may differ, but they agreed that these houses are keen to access these new-age companies.

But, how can family houses choose the right VC?

Rajan said, “It is a question of having the right skillset and track record.” Chirantan advised that the best way to begin was to “have an investment objective in mind.”

That said, the task of selecting the right VC is not a straightforward path as there are a lot of discussions and debates, and the need to build trust between the two parties.

Rajan said family offices take much longer for evaluation as they are “keen on mitigating risk”. The key is to select a VC or fund manager with strong characteristics when it comes to team building and stability.

For any family office, the path of partnering with a VC is a high-risk strategy, but Sudhir remains confident. “This is an opportunity for Indian family office to invest in venture funds in India,” he said.

It is important for the family office and the VC to have a “comfort factor” as it is a high-stakes venture due to the high mortality rate among startups.

Family offices keen to invest in this new space need to understand the dynamics of venture investing.

“The key is to put in enough diligence, and understand the fund's strategy and how it aligns with your own,” Chirantan said.

(Edited by Teja Lele Desai)