High net-worth individuals (HNIs) and family offices in India have clocked windfall gains this year. A report surveyed HNIs (UHNIs)-those whose net worth exceeds ₹ 500 crore and 100 family offices and showed that over 40 per cent had doubled their allocation to private markets in the past five years. Instead of being limited partners (LPs) or sponsors in venture and private equity funds, cash-rich individuals preferred to cut larger cheques and directly participate in a startups’ capitalisation table. About 10 per cent of the total funding mopped up by Indian startups so far this year came from domestic capital, constituting Indian funds, family offices and UHNIs and angel investors, said Nimesh Kampani, cofounder and chief executive of trica.

According to Venture Intelligence data, domestic startups this year pulled in a record $ 31.9 billion as of December 10. “Private market investments remain an alternative investment of choice, with allocations to startups and VC funds comprising 18 per cent of the overall pie, compared to a 15 per cent allocation to other assets such as real estate, infrastructure and art,” the report said.

Direct investment a good alternative

The changing face of the startup ecosystem has created a new category of first-generation UHNIs that are exploring the family office route to manage their wealth. Sensing the opportunity, over 140 family offices have mushroomed this past year. Adar Poonawalla, chief executive of vaccine Serum Institute of India, said his family office has increased its allocation to the private market and is actively pursuing more deals. “In the private market, the valuations of these startups have not been priced in, whereas some of the listed companies in the stock market are already overvalued…therefore, private, direct investment acts as a good alternative to back companies that are not fully valued at the moment,” Poonawalla said.

Falguni Nayar, founder and chief executive of Nykaa, said that the capital she had raised from HNIs and family offices came with fewer conditions. “I was looking for pure equity investment and that came more from high net-worth family offices, and we got enough of those. I didn’t want to raise money for the first few years as I didn’t want to show a spreadsheet and get my assumptions questioned. High net-worth capital is good capital, they understand the risk profile, they support you on your decisions as they have done it themselves…,” she had said.

The big gainers:

After Nykaa IPO, HNIs and Family Offices like Sunil Kant Munjal of the Hero group, the HS Banga family and Narotam Sekhsaria of Ambuja Cements, have been big gainers. Exposure to Western markets especially of the younger generation of Indian business families, better understanding of the digital and tech sectors and a string of IPOs of domestic tech sectors, have boosted the participation. About 25 per cent of the Om Kothari Group’s portfolio is invested in startups, said Siddharth Kothari, chief investment strategist of the family fund. The family office has bet on 30 companies including Arata, GoodMylk, Eat Just, ClearDekho and Klub. “I have invested aggressively this year. We feel like we understand this game a lot better than we did five years ago when we started with smaller cheques,” Kothari said. “It is an amazing time because we are getting exit offers and up rounds on portfolio companies. But it is also a very tough time when it comes to striking deals because there's so much competition and there’s more money chasing fewer deals.”

Year of personal wealth

2021 has been an unprecedented year in terms of wealth creation for professionals through employee stock ownership plans along with frenetic fundraising by Indian startups. Since July 2020, nearly 40 Indian startups had bought back ₹ 3,200 crores worth of shares from employees who had been given stock options. The confidence among family offices and UHNIs was also boosted by the fact that consumer tech startups such as Nykaa and Zoamto have tapped the public market. The big-bang public market debut of food delivery app Zomato spawned about 18 dollar-millionaires. As the highest conviction opportunities, 75 per cent of investors will see direct startup investments in the next 3-5 years. For participating in startup investments, family offices were attracted to a non-linear route.

Since 2011, founder and partner at micro-VC fund 100X.VC, Sanjay Mehta has invested through his family office. Their family portfolio has birthed four unicorns in the last decade, including 280x exit in budget hospitality chain Oyo in 2016. This year, the family office-sponsored another early-stage fund, 2AM VC, besides 100X.VC and Mehta Ventures. “There is no sign of slowing down. Investing in a startup by family offices or family-owned businesses is a well-understood opportunity. These startups can be directly or indirectly strategic to their businesses for pure-play investments in alternative asset classes,” Mehta said. “Earlier, it used to be up to 2-3 per cent of the overall portfolio, but today we are seeing families crossing 5 per cent and looking to touch 10 per cent by 2025. We believe the startup investments are compounding in India,” he added.