HNIs pivot towards early-stage startups as late-stage entities face correction

Family offices are also looking to balance their portfolios. After investing in growth-stage companies during the heights of the pandemic, they now want to capture the next wave of promising ventures while balancing the risk-to-return profile in their portfolios. Moreover, there have been fewer growth-stage funding rounds in recent times.

“Many of these (growth) startups have deferred timelines to go public - this is another sign that markets are undergoing a correction. Most late-stage companies are still to grow into their valuations," said Syna Dehnugara, who leads the private market expansion for family offices at Trica. “The family offices and UHNIs are thus increasingly realising the importance of building an investment portfolio that straddles stages, especially in an asset class as illiquid as startups."

Also Read: Startups, including early-stage, focusing more on fundamentals than growth

She added that investors are picking sectors they like and understand and placing their bets at earlier stages to ride the “alpha wave" - maximising their returns.

HNIs and family offices also stand to benefit from their ability to lend more patient capital than venture capital or private equity investors that do not enjoy such flexibility. These institutionalised sources of capital function with a fund lifecycle of 8+2 years or 10+2 years by when they are expected to return the capital. This could be challenging because startups may require more time to build a real business and develop their true potential.

Patient capital

Family offices and HNIs also expect their returns sooner than later when they invest directly, but they have a larger bandwidth as they are not bound by contractual agreements like those of VC/PE investors unless they are limited partnerships in these entities where they get returns in the stipulated time.

“There’s no doubt that family offices have more patient capital to offer... We don't mind if the startup takes a little longer than expected to generate returns as long as the business grows sustainably," Rishabh Mariwala, founder of Sharrp Ventures, told Mint in an interview. 

The volume of deals in the broader ecosystem has dropped over the past four years as uncertain macroeconomic conditions led investors to pursue fewer bets in select companies with a well-defined path to profitability.

According to data sourced from Tracxn, single family offices made 31 investments in the first half of 2024 compared with 50 investments in the same period in 2023 and 120 investments in 2022. Examples of recent early-stage deals include Sorin’s investment in the Pant Project, Sharrp Ventures’ investment in SuperFoods Valley, and the JJ family office’s infusion in Astro Motors.

Also Read: Crossing the Death Valley: Startups turn to existing investors for lifelines

To be sure, even as early and growth-stage startups are broadly classified under private market investments, they belong to different asset classes. Early-stage investments are high-risk bets that generate high rewards. As the stages progress, the returns diminish for investors as the risk factor eases. Investors typically expect to get 20-30x returns when they enter the cap table at an early stage compared with 3-5x returns from a growth-stage company.

The transition among family offices mirrors the shift in the broader ecosystem as even typical venture funds see increasing traction among early-stage companies, which typically range from seed to series B funding rounds.

“Most of the active family offices today are prioritising an allocation for the early stage," said Shanti Mohan, founder & CEO of LetsVenture. “One of the reasons is a maturing ecosystem where we are seeing very good early founders with an average experience of about 5-15 years/second-time founders in contrast to out-of-college graduates we were seeing earlier."

Most early-stage bets taken today are towards second-time founders or those with a lot of experience, who have seen closely how businesses are built, and have strong networks with capital allocators, she added.

Capital deficit

The immense potential for disruption has also paved the way for early-stage, sector-specific funds run by family offices. For instance, investment firm Sorin, which counts Sanjay Nayar’s family office as a majority investor, raised a ₹1,350 crore early-stage fund in June.

Nayar, formerly with KKR India and Citigroup, emphasised the huge capital deficit in Indian private markets compared with developed economies like China.

“We need more investor entities through HNIs and family offices to build more local capital that has a high risk-taking appetite to bridge the gap that is currently filled by foreign investors," he said, addressing the missed opportunities for domestic investors to create large markets. Besides Sorin, Nayar has about a 50% share in Peak Sustainability Ventures, which focuses on early-stage climate investing in India.

Besides helping organisations build and scale up their businesses, family offices with affiliations to corporate entities have also become a way to understand and get better insights into a sector and conduct on-ground experiments that they may not be able to do with listed entities. Broadly, their first cheques to early-stage ventures may range from $1 million to $2 million.

Also Read: TVS Capital's biggest fund yet could bet on ‘zero-stage’ startups

For instance, Sharrp Ventures, the investment office of Harsh Mariwala, founder and chairman of consumer goods company Marico, invests in pure-play consumer startups such as Super Bottoms, Bira and Slurrp Farm.

“The next generation of companies is more in tune with the trends and consumer preferences. Through family offices, investors see opportunities which give them a sense of the underpinnings in a sector," Sharrp’s Rishabh Mariwala said.

He added that there are many India-centric problems that are yet to be solved and as the ease of business improves and more entrepreneurs enter the ecosystem, the family office looks to capitalise on the next wave of early ventures.

Startups, which typically grow on the back of high burn rates, are more agile, have a greater tendency to hustle, and take more risks than larger listed companies, which are expected to deliver sustained profits every quarter. While the goal of every business is to become profitable, for startups there is a greater surface area to experiment with and cater to diverse consumer needs, Rishabh Mariwala said.

However, experts also noted that family offices are likely to undertake fewer direct early-stage investments as it demands more expertise, nurturing and time that the owners will be unable to spare from their full-time occupation.

One such example is Mahansaria Tyres’ managing director Yogesh Mahansaria’s family office. The family office invests directly in early-stage entities only when they know the founder closely. In most cases, the family office participates as a limited partner in VC or PE funds. Some of their early-stage investments include edtech firm Grayquest and logistics startup JustDeliveries.