Family offices eye startups for a piece of the digital pie

What started five to eight years ago in family offices as investing the loose change in tech startups, is now becoming a more organised and systematic business. Wealthy families are allocating up to 20% of their personal, investable assets to the younger generation to see how businesses in the new economy can be run.

Family offices are beginning to play a role in preserving, nurturing, enhancing and transitioning wealth across generations. There are now more than 140 family offices in India.

“The younger generation in wealthy families are educated overseas and they have exposure to new, tech-driven businesses and because of that they are more open to investing in these companies than the earlier generations,” says Rohit Sarin, co-founder of Delhi-based multi-family offices firm, Client Associates.

The younger lot can get up close for a good view of the growth of a startup.

Sarin says he knows of a family that had given a $5 million purse to their son to build a portfolio in startups. That’s a lot of money. If you invest half a million in one startup, then you can invest in up to 10 startups. That is the kind of approach that is probably being followed in other families also, he says.

Old businesses are looking to learn new ways of doing traditional businesses, that is to say, become tech-driven. “An FMCG or a B2C family business is used to distribution channels, such as selling through wholesalers to retailers and so on, now this can be done through the internet,” tells Sarin.

“Oyo, in 2019 was valued at about ₹75,000 crores—which was more than the value of all the hotels and restaurants listed on the Bombay Stock Exchange combined, including companies like Trident, Oberoi, etc, that have built businesses over decades or even three or four generations, and this kid with no college degree in eight years is valued more than all of them combined. So, they realised that it was time to get inside the ecosystem rather than watch it from the outside,” says Anirudh A. Damani, director at Artha India Ventures, a Mumbai-based family office.

But old wealth brings experience having run the course for a long time. Now they want the know-how of new business models. The product is the same, the consumer is also the same, it is just how to reach consumers that is changing with technology. So, a combination of these reasons gets old businesses interested in participating in startups. They have an inherent risk-taking appetite and are used to seeing the ups and downs of a business.

Damani says investors enjoy some amount of control investing this way rather than investing in the listed market, “I can write a ₹200 crore cheque to Reliance, but there is no way I'm getting a call from Mr Ambani. But for writing even a ₹25 lakh cheque into a ₹200 crore value start-up, I have the opportunity to work with the founder, interact with him and have the opportunity to be a part of their journey as well.”

“Investing in startups is not about investing money and forgetting about it. It’s not a passive investment. Startups don't just expect money. Many of them are early in their journey, right? But many are growing very, very fast. And they may collapse on themselves. That is why they want our help and why we want to help them. It's about more than just the cheque,” says Damani.

“They'll get access to data which they otherwise won’t have and since they are coming from a business family background, they are used to running and growing businesses, that is their strength. They now want to learn what is happening in the new economy, what’s on the horizon,” says Sarin.

As for the risk appetite, family offices know that there is a lot of investment risk in a startup, but there may not be in a portfolio of startups. “We have been investing in 10 to 12 deals a year. We’ve invested in 100 startups and the returns are three to four times that of the NIFTY in the same period,” says Damani.

But as for returns, it is a mixed bag in Sarin’s mind, “to my knowledge they have been mixed experience. Take Ratan Tata, for instance. He was the first mover from the old wealth businesses and invested in Snapdeal, Ola, etc. His idea is just to participate, learn. By meeting new entrepreneurs, you learn, by investing in new businesses, too. When investors listen to new entrepreneurs’ pitch, that is exposure. Every interaction is exposure. When you exit, you make money, you don't make money, that is learning.”

He mentions the early movers, Premji, and the Infosys family offices. Both Premji and Murthy invested in companies they did not have great experiences with but there was something to be learned from them and the experience. They have matured as investors with time. Everyone is learning on the job, says Sarin.