HNIs, family offices bet big on startups

Liquidity Rush

- HNIs and Family offices missed previous tech startup opportunity

- Sitting on huge cash reserves, this category keen to explore ongoing startup boom

- It's also coincided with withdrawal of funds from Chinese investors/funds that were actively funding Indian startups till a few years ago

- Indian startups in Q3-2021 raised over $17 bn

- It's greater than annual funding raised in each of the last 6 years from 2014-2020

- Startups raised $28 bn in first 3 quarters

Mumbai: There is an increased participation of high networth individuals (HNIs) and family offices in the startup funding ecosystem in India. Family Offices have invested over $5 billion in the last 5 to 6 years and are estimated to contribute 30 per cent of the estimated $100 bn to be raised by startups in India by 2025.

With startup funding in India rising to record heights, there has been an influx of funds coming in from HNIs and family offices. This category of investors has missed out on the early opportunities of investing in tech startups and given the recent liquidity rush in the sector, it is too good an opportunity for these investors. This increased participation has also coincided with the withdrawal of funds from Chinese investors/funds that were actively funding Indian startups till a few years ago.

Post Sebi's recognition of alternative investment funds (AIFs), the funding landscape has been changed. The likes of angel investors, syndicates, HNIs and family offices have begun playing a significant role in the growth of the startup ecosystem. Family investment vehicles are mushrooming - they have realised the potential of VC as an asset class and the scope of enjoying financial returns of the first order, which has led to them developing a higher risk appetite.

In Q3-2021, Indian startups have raised over $17 billion, which is single-handedly greater than annual funding raised in each of the last six years from 2014-2020. About $28 billion has been raised by startups in first three quarters of this year, which is more than two times of the annual funding raised by startups in the past decade, the most being $13 billion in 2017. This boom has been spurred by mega-deals in growth and late stage startups.

Now, India has emerged as the third largest startup ecosystem in the world after the US and China. Today, India is home to more than 50,000 startups, out of which 16,000 have been added in the year 2020-21 alone, exponentially higher than 750 startups that were recognised in 2016-17.

With high competition, saturation, & government crackdown on Chinese tech companies, India is being perceived as the last emerging market with untapped potential. Modalities of our markets are similar to that of China's, which has led investors to flock towards our shores and away from China. This is also apparent by the fact that funding to China-based companies fell 18 per cent in Q2-2021 from its peak in Q4-2020.

Alongside international funds, Indian startups are now looking at increased funding from angel investors, syndicates, micro-VC funds and angel networks. Sebi, through AIF regulations, made it easier for angel/accredited investors to invest in DPIIT-recognized startups. Also, traditional family offices and HNIs have started diversifying & increasing their allocation to this asset class by taking larger bets. High yields uncorrelated with the public market & the chance to explore business adjacencies have been the gravitating factor in attracting investments in India.

Talking to Bizz Buzz, Ankur Bansal, co-founder and director, BlackSoil, said: "The startup funding frenzy is likely to continue as we enter 2022. Covid has become the new normal and as it strengthens digital adoption, tech startups are expected to continue to boom. Also, the speculation around China tightening rules for companies seeking funding from international investors might lead to Indian startups looking like a more attractive investment. Furthermore, a lot more IPOs are planned in 2022 and as IPOs are proving to become a tangible exit option for investors, Indian startups may attract more foreign funding."

HNI investors seek comfort in the fact that large institutional investors have been deploying funds to startups based on which they take on exposure in such companies. Currently, Chinese investors are pulling out/slowing down their investments not because the businesses of investee entities seem unfavourable, rather due to current regulatory changes, he added.

Therefore, there is no real reason for these HNIs to get worried about their investments in startups. Instead, they are increasing their stakes. Certain companies backed by large Chinese investors such as BigBasket, Byju's, Snapdeal, Dream11, Swiggy, OYO Rooms Ola etc. have various HNIs invested in them. Recently listed startups such as Paytm, Zomato and Nykaa too have large & sophisticated individual investor pool holding the floating stock of the company.