Saturday, September 23, 2023

Cash-rich family offices of small towns buy the startup story in India

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  • HNIs from tier 2 cities of industrial belts are now placing their bets on new-age companies, VC and PE fund managers say.
  • Wealth advisors from Indian HNIs and family offices have played a role in popularizing select investments in AIFs.
  • Second generation family members are more aware of the startup opportunity as they lead the charter to diversify family businesses.
  • Small entrepreneurs from wealthy industrial belts and tier 2 cities with core activities that generate free cash flows actively deploy funds in startups through AIFs.

The Indian startup story has not only gone global, it also goes deep into the hinterland. And it is the high networth individual (HNIs) investors in tier 2 cities of industrial belts that are driving this rush of investment in new-age companies.

A number of private equity (PE) and venture capital (VC) companies India spoke, said these HNIs, especially second-generation ones, had discovered the value of the alternative investment ecosystem and steadily put money into these investments.

“With continued exposure, the startup ecosystem has become popular among potential investors across India. We see investors coming from cities like Nagpur, Vadodara, Surat, Bhubaneshwar, Cochin, Coimbatore to name a few. The list is long,” said Anil Joshi, managing partner at Unicorn India Ventures, an early-stage technology fund.

Over the past two years, domestic HNIs have invested more in the PE and VC ecosystem due to the growing popularity of the alternative ecosystem. The first flow of domestic HNIs came from metros like Mumbai, Delhi and Bangalore. But cities and towns on level 2 have also quickly caught on.

Small towns have a lot of depth in terms of investments to be made, say VCs. For example, the rich industrial belts of Ludhiana, Kanpur or Surat have family offices that are fond of alternative investment funds or AIFs.

“The core activities of these family offices generate free cash flow of a few ₹100 crores per year and they actively leverage that on startups through AIFs,” said Rahul. ChandraMD of Arkam Ventures, an early stage technology fund.

A vibrant alternative ecosystem

Srini Sriniwasan, director of Kotak Investment Advisors, said in early August that the many large fund managers were inaccessible to domestic investors because they had either only raised offshore capital or had high minimum ticket requirements. That is no longer the case.

“The Indian alternative ecosystem has become vibrant with PE/VC fund managers delivering consistent returns and outperformance against public benchmarks,” Sriniwasan said in early August.

Wealth advisors from Indian HNIs and family offices have also played a role in popularizing select investments in AIFs. Moreso, the growth in digitization has made them “buy in” into the tech startup story and many of them have become IPO investors, Chandra said.

“The question in their minds is why not contribute financially to this growth story. Their investment in the public market has grown over the past two years and they consider it wise to diversify their capital into AIFs. The second-generation family members are more aware of the startup opportunity and they are leading the charter to diversify family ownership into AIFs,” Chandra added.

The trend has become even more apparent in the past two years, according to VCs.

Second generation businessmen

Ankur Mittal, partner of Delhi-based VC Physis Capital, said the youngest members of large family businesses in small towns are directing their families to these investments.

Physis claims never to have looked for domestic investors – most of their investors had found them online, filled out a form on the website and became investors. Many of these investors have a similar profile: Most have multi-million dollar family businesses in small towns.

“They are the ones who see an opportunity and realize that something is happening in this asset class and want to dive into it,” he told India.

Mittal said one of their investors was an IIM graduate who went back home to run his family businesses — and convinced the family to invest in AIFs.

“The idea of ​​investing in AIFs is also spreading word of mouth. Once the initial investors see consistent returns, they bring in friends and family as these successful businessmen are thought leaders of that region,” Mittal said.

No financing for winter yet

Venture capitalists say the interest of these investors has remained intact despite the current economic pain points – high inflation, slowing growth and worries about a global recession, which could also have a cascading effect on India. They believe that India offers good opportunities for wealth creation. Since most of these investments are long-term, the economic turmoil has had less of an impact on investment decisions.

According to VCs, the natural correction in valuations has not affected early stage investment as much as growth stage companies. “Overall, both domestic and foreign investors seem to be confident, but we are seeing some valuation corrections, which is reasonable given the nature of the economy and the business cycle,” said Unicorn India Ventures’ Joshi.

Many VCs are optimistic about the growth story of Indian startups, saying there is a steady supply of foreign capital despite talk of winter funding.

“The financing winter has not been visible until now, as it were, although the (financing) sources are certainly less. There is a reduction in the size and valuation of fundraising, but the rounds for quality startups will continue to close,” Chandra said.

“Domestic investors will continue to supplement this foreign capital flow and diversify their exposure to ventures by investing in both early and growth VC funds,” he added.


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