Indian Business: Investing in New Era Businesses: Insights from Indian Family Offices

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For the free spirit, convention is boring. For adventurers, tradition is monotonous. It is only with new thoughts and new actions that change – this eternal constant – has come about, and it is the same with any subject. When it comes to investments in private markets as well, this remains true.

The past decade has shown that India’s entrepreneurial revolution is here to stay, and investors around the world are actively watching and participating. With this influx of cash, India’s hungry young entrepreneurs are ensuring that digital adoption, which has so far been very low in India, changes rapidly.

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

And of course, India is home to the third largest online buyer base of 140 million, second only to China and the United States. India’s internet user base is around 675 million people, and multiple COVID-19 lockdowns have accelerated the pace of this user base coming online. While for the fiscal year ending March 2021, India’s overall retail market shrank by 5%, the online retail market jumped 5% to $38 billion. Significantly, Tier II cities and small towns’ share of new e-commerce customer growth after March 2020 stands at 80%. Clearly, the story of Bharat – written far from metropolitan cities, in rural markets – is only just beginning now.

And Indian family offices – which had traditionally invested in real estate, gold and fixed income assets – don’t want to miss these opportunities and are now actively investing in the private market. In fact, according to 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 venture capital funds accounting for 18% of the overall cake. This is quite aggressive compared to a 15% allocation to other alternatives, 20% allocated to fixed income securities and 36% to listed equities. Additionally, of the respondents, 83% said their overall asset allocation for private markets exceeded 10%. Respondents also learned that their private market portfolio comprised 47% early stage direct investments, 32% exposure to venture capital/PE funds, and 11% to venture debt funds. Fintech and enterprise technology are the main sectors of interest for family offices to invest in, with the massive growth these sectors have seen in recent times.

The same survey also found that an overwhelming majority of family offices chose non-linear returns as their primary reason for participating in seed investments, followed by the motivation to gain direct exposure to technology companies, and third, as a way to achieve strategic alignment with their core business with the ability and drive to add value to a startup entrepreneur’s journey.

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The long game
When evaluating a private technology company, the focus should be on these factors: the triumvirate of user, usage, and monetization; where the company is located, and its moat. Family offices are formalized today and underpin investment committee processes to identify, review and execute new opportunities as well as manage ongoing portfolio needs, internally or otherwise. In fact, our survey found that 50% of family offices surveyed preferred the seed stage over the Series A stage to enter a seed investment, 40% preferred late deals over pre-IPO deals, while 25% said they preferred having a well-distributed portfolio across the stages. . With over 40% of respondents having doubled their allocation to private markets in the last 5 years, the interest of major check writers in participating directly in a startup’s capitalization table is growing.

This trend is set to continue, with quite a number of Indian startups gaining not only a global user base, but unicorn status as well. 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 works – with the title “soonicorns” aka soon unicorns.

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

The bottom line is that value and wealth creation will occur for the patient investor who believes in the story of technology and digital disruption – in private markets more than in public markets over the next few years. It’s just that the private market, due to its illiquidity in place, actually provides great behavioral nudges. When investors aren’t looking at prices daily, they can be more patient with the investment, hopefully realizing its full potential value over a longer time horizon. And family offices, of course, are here for the long haul.

The author is co-founder and CEO, trica – a LetsVenture company

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