Why the ultra-rich are backing startups

We’re halfway through the financial year, and so far, family offices have invested $673 million in startups, according to data from analytics company Venture Intelligence. Family offices — dedicated resources or a private wealth management advisory firm that manage the financial affairs of a single high net-worth investor or family — typically invest for a longer period and pick businesses that have a strategic fit, or at least some common ground, with their core business. They bring management depth and domain knowledge to their investments.Startup founders say that family office investments work well in seed and angel stages and in sectors where the investor has market knowledge. Sankar Dass, CEO of dermatology startup Curatio Healthcare says family offices bring a human touch to fund-raising. “Most family offices are high networth individuals and businessmen. They understand business and connect with the promoter. They tend to look beyond numbers, which a venture fund considers a key parameter,” he says.Since 2015, the boom year for startup funding, the numbers have fallen, but experts say family offices are showing interest in startups again. In 2015, family offices invested a total of $1,739 million, which dropped to $571 million in 2016, but rose to $673 million in 2018, the highest in the last three years, according to Venture Intelligence.Family office investors say they bring a long-term investment view to the table, which founders value. “Many families like ours stay invested even after the startup turns profitable. Family offices take a 20-year view so management prefers us to PEs, which give a time sheet and ask for liquidation preference,” says Gaurav Burman, director of Dabur International and a member of the Dabur family. The Burman Family Office, the family office of the promoters of the Dabur Group, for instance, invested in Ratnakar Bank when it was a private company. Seven years on it remains invested, though Ratnakar Bank is now a listed entity.A 2016 PricewaterhouseCoopers report says 55% of family-run or promoted businesses in India have family offices, and this is higher than the global average of 32%. Over the last few years, Indian family offices have diversified into consumer, fintech, health, education, B2B and enterprise software both in India and abroad. “They tend to stay away from real estate and infrastructure projects,” says Luvkesh Kapur, head of boutique investment bank CAIB (Client Associates Investment Banking).Explaining his family’s investment rationale, Burman says: “We invest in businesses we understand, or back teams with immense domain knowledge, or partner with global brands and create joint ventures.” He cites his family office’s investments in DMI Finance and Taco Bell as examples. “We also look to invest in businesses that are part of the ecosystem of our group companies and can add value to them, like credit information provider Experian. We take a very long-term view and look for many multiples of our original investment over 20 to 30 years,” he says. The Burman Family Office typically makes a single investment of Rs 10 crore to Rs 100 crore.Krishna Ramanathan, CEO of private equity firm Fulcrum Ventures, says family offices work well for a company whose promoters know their business well. “It works at the seed and angel stage. A venture fund, on the other hand, has the advantages of an institutional approach and the ability to write larger cheques,” says Ramanathan. He set up Fulcrum as a family office after his father sold their pharma company American Remedies to Dr Reddy’s Laboratories in 1999. Back then, he was fresh out of Xavier Institute of Management in Bhubaneshwar and made investments focussed solely on pharma and healthcare. In 2012, Fulcrum raised its first fund of Rs 100 crore as a PE firm.Startup founders say family offices are more patient as investors. Dilip Puri, founder-CEO of Indian School of Hospitality, which opened in Gurgaon this year, says, “As an entrepreneur, I realised we needed patient capital that understands the unique needs of education for the Indian tourism and hospitality sector. It therefore made sense for us to reach out to select Indian families with deep understanding of the tourism and hospitality industry.” Puri, former regional vice-president of Starwood Hotels and Resorts, South Asia, raised Rs 25.2 crore ($3.8 million) from a group of high networth individuals, including Lemon Tree Hotels chairman Patu Keswani and Vatika Hospitality, last year to start an institute for undergraduate programmes in hospitality management and culinary arts.Shyatto Raha, founder-director of InnoCirc Ventures (MyHealthcare), says, “Healthtech is relatively nascent in India. We have found great success in terms of investment fit with family wealth funds. In addition to capital, they bring a deep network which is valuable for early-stage businesses.”Investors who run both family offices and private equity funds say the biggest distinguisher is the sector in which investments are made. Serial healthcare entrepreneur GSK Velu, who invests both through his family office and a PE fund, explains this: “Typically, we invest in our core sector of healthcare through the family office. Our PE investments are in technology, healthcare and financial services. On average, our family office investments are in the range of $3 million to $10 million, though it can touch $20 million.” Sometimes the same startup can get both family office and private equity funds, as Velu did with dental lab chain Leixir Resources.What’s stopping family offices from being more aggressive in India, says Dabur’s Burman, is the lack of a Nasdaq-like exchange, which allows companies that are growing but not yet profitable to access the public market. “If the authorities allowed growth-stage companies to access the public market there would be more liquidity in the system,” he says. “The US biotech revolution and even Amazon wouldn’t have happened if loss-making businesses were not allowed to access the public market,” he says.Inputs from Rajesh Chandramouli

By September 30, 2018 at 10:33AM

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