Cash-rich family offices of small towns are buying into the India startup story

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Cash-rich family offices of small towns are buying into the India startup story
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  • HNIs from tier 2 towns of industrial belts are now placing their bets on new-age companies, say VC and PE fund managers.
  • Wealth advisers of Indian HNIs and family offices have played a part in popularising select investment in AIFs.
  • Second-generation family members are more clued in to the startup opportunity as they lead the charter to diversify family holdings.
  • Small businessmen from rich industrial belts and tier 2 towns with core businesses that generate free cash flows are actively deploying funds in startups via AIFs.
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The Indian startup story has not just gone global, it’s going deep into the hinterlands too. And it’s the high networth individual (HNIs) investors in tier 2 towns of industrial belts who are driving this rush of investments in new-age companies.

A number of private equity (PE) and venture capital (VC) firms Business Insider India spoke to said that these HNIs, especially from the second generation, had discovered the value of the alternate investment ecosystem and were steadily deploying funds into these investments.

“With continuous exposure, the startup ecosystem has got evangelised among potential investors across India. We are seeing investors coming from cities like Nagpur, Vadodara, Surat, Bhubaneshwar, Cochin, Coimbatore to name a few. The list is long,” says Anil Joshi, managing partner at Unicorn India Ventures, an early stage-focused tech fund.
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In the last two years, domestic HNIs have been investing more into the PE and VC ecosystem due to the growing popularity of the alternate ecosystem. The initial rush of domestic HNIs was from metros like Mumbai, Delhi and Bangalore. However, tier 2 cities and towns too have caught on, very fast.

Small towns have a lot of depth in terms of investments to be deployed, VCs say. For instance, the rich industrial belts of Ludhiana, Kanpur or Surat have family offices that are keen on alternate investment funds or AIFs.
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“The core businesses of these family offices are generating free cash flows of a couple of ₹100 crores a year and they are actively deploying that in startups via AIFs,” said Rahul Chandra, MD of Arkam Ventures, an early-stage tech fund.

A vibrant alternate ecosystem

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

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

Wealth advisers of Indian HNIs and family offices too have played a part in popularising select investments in AIF. Moreso, the growth in digitalization has made them ‘buy into’ the tech startup story and many of them have become IPO investors, said Chandra.
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“The question in their mind is why not participate financially in this growth story. Their public market investments have grown over the last two years and they find it prudent to diversify their capital to AIFs. The second-generation family members are more clued in to the startup opportunity and they are leading the charter to diversify family holdings to AIFs,” adds Chandra.

The trend has become even more pronounced in the last two years, as per VCs.

Second-generation businessmen

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

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

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“They are those who can spot an opportunity and realise that something is happening in this asset class and want to take a plunge in it,” he told Business Insider India.

Mittal said that 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 also spreads word of mouth. Once initial investors see consistent returns, they bring in friends and families, as these successful businessmen are opinion leaders of that region,” Mittal said.

No funding winter yet

Venture capitalists say that the interest of these investors has remained intact in spite of the current economic pain points — high inflation, slowing growth and worries of recession globally that may have a cascading effect on India too. They believe that India offers good opportunities for wealth creation. Since most of these investments are long term, the economic turmoil has had less impact on investment decisions.

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The natural correction in valuations has not affected early-stage investments as much as growth-stage companies, as per VCs. “Overall both domestic and foreign investors seem confident, just that we are seeing some corrections on valuation, which is fair, considering the nature of economy and cycle of the business,” said Unicorn India Ventures’ Joshi.

A lot of VCs are bullish on the Indian startup growth story and say that there has been a steady supply of foreign capital in spite of the talk of funding winter.

“The funding winter, so to speak, is not visible so far although the sources (of funding) are certainly fewer. There is a reduction in fundraise size and valuation but the rounds for quality startups will continue to close,” said Chandra.

“Domestics investors will continue to supplement this foreign capital flow and diversify their exposure to venture by investing in early as well as growth VC funds,” he added.


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