Investing in new-age businesses: Perspectives from Indian family offices

For the untrammelled mind, convention is tedium. For the adventurous, tradition is monotonous. It is only with new thoughts and newer actions that change – that eternal constant – has happened, and this is the same for any topic. When it comes to investment in private markets too, this remains true.

The last decade has shown that India’s entrepreneurial revolution is here to stay, and investors all over the world are watching, and participating, actively. With this inflow of money, India’s young, hungry entrepreneurs are ensuring that digital adoption, which has hitherto been very low in India, changes rapidly.

A whole host of India-based SaaS startups are creating products that are being adopted by a global customer base, resulting in high-value companies with strong revenue streams. These companies start generating revenues almost from day one too. In fact, India is home to about 1,000 SaaS startups, and collectively, they boast of an annual revenue of $3 billion right now according to a McKinsey report.

And of course, India is home to the third-largest online shopper base of 140 million, only behind China and the US. India’s Internet user base is approximately 675 million people, and the multiple COVID-19 lockdowns have accelerated the pace of bringing this user base online. While for the fiscal ending March 2021, India’s overall retail market shrunk by 5%, the e-retail market surged by 5% to reach $38 billion. Significantly, the share of tier II cities and small towns to new customer growth in e-commerce post March 2020 stands at 80%. Clearly, the Bharat story – being written far away from metro cities, in rural markets – has only begun now.

And India’s family offices – which had traditionally invested in real estate, gold, and fixed income assets – do not want to miss out on these opportunities and are now actively investing in the private market. In fact, as per a survey of family offices conducted by trica last year, private market investments remain the alternative investment of choice for family offices, with allocations to startups and VC funds comprising 18% of the overall pie. This is quite aggressive when compared to a 15% allocation to other alternatives, 20% allocated to fixed income and 36% to listed equities. Also, among the respondents, 83% said that their overall asset allocation for private markets cross 10%. Respondents were also learnt to have had their private market portfolio comprising 47% direct startup investments, 32% exposure to VC/PE funds and 11% to venture debt funds. Fintech and enterprise tech are the top sectors of interest for family offices to invest, with the massive growth the sectors have seen lately.

The same survey also found that an overwhelming majority of family offices chose non-linear returns as the top reason for participating in startup investments, followed by the motivation of getting direct exposure to technology companies, and thirdly, as a means of gaining strategic alignment with their core business with the ability and willingness to add value to an early-stage entrepreneur’s journey.

The Long Game

When evaluating any private tech company, focus must be on these factors: the triumvirate of user, usage, and monetisation; where the business stands, and its moats. Family offices are formalised today, and ensure investment committee processes to identify, vet and execute new opportunities as well as manage ongoing portfolio needs, in-house or otherwise. In fact, our survey has found that 50% of family offices surveyed preferred the seed to Series A stage to enter a startup investment, 40% preferred late to pre-IPO transactions while 25% stated a preference for having a well distributed portfolio across stages. With over 40% respondents having doubled their allocation to private markets in the past 5 years, the interest of larger cheque writers to have a direct participation in a startup’s cap table is increasing.

This trend is expected to continue, with quite a large number of Indian startups gaining not just global userbase but also Unicorn status too. In fact, 33 of India’s 74 unicorns were created in 2021. Startups like Dunzo, Shiprocket, Zepto Cleartax, Smallcase, and many more are in the pipeline – with the title of ‘soonicorns’ aka soon-to-be-unicorns.

Add to this, category leaders like Nykaa, Zomato, and Policybazaar have already gone to IPO, and many more are expected to join them this year.

The bottom line is that value and wealth creation will happen for the patient investor who believes in the technology and digital disruption story – in private markets more than the public markets in the next few years. It’s just that the private market because of its incumbent illiquidity actually provides some great behavioural nudges. When investors don’t view prices daily, they may be more patient with the investment, hopefully realizing its full potential value over a longer time horizon. And family offices, as they should be, are here for the long game.

The writer is Co-founder & CEO, trica – a LetsVenture company