Why HNI investors are flocking to startups

Predominantly, only institutional investors like pension funds, etc, have invested in this asset class, mainly through more late-stage private equity funds and venture capital funds. However, the landscape is changing very fast. We have angel investors, syndicates, micro-VC funds, and angel networks playing a significant role, especially in the early-stage seed rounds.

So why the sudden interest and increased activity in the sector? A few reasons are:

• SEBI has evolved with the industry and, through AIF regulations, makes it easier to invest for angel/accredited investors in DPIIT recognized startups.
• Big corporations like Tata, Reliance, and others have started to invest and buy out scaled startups. For, e.g., Tata Digital’s investment in Cultfit, 1mg, and Bigbasket.
• Primary market activity has increased with many IPOs of tech startups like Zomato, Paytm, Policybazaar, Nykaa being successful. Goldman Sachs reportedly predicted that over 150 private companies could go public within the next 3-4 years, making India’s public market the fifth largest in the world in terms of market cap. Indian equity indices could see a more significant representation of the new-economy sectors like e-commerce, internet, and media as more tech companies could go for IPO. There are ~71 unicorns (companies valued at $1B+) already in India, and many are still not publicly listed.
• Secondary transactions have increased in many pre-IPO companies where large lots are available in the private market. They are generally circulated by wealth management firms to their UHNI clients and provide pre-IPO liquidity to the shareholder. In most cases, these are vested ESOPs sold by employees or an early angel investor.
• Global companies have increased their M&A activity in India and are buying solid tech companies to enter India or as a global competitive advantage.
• Some traditional PE funds have also started to look at investing in tech startups, which increases the activity levels in the ecosystem. In addition, ESOPs and exits have created significant wealth for employees and founders; this money is again coming back to the ecosystem as they become either LPs in VC funds or directly invest as angels in startups.
• Traditional family offices have also started increasing their allocation to this asset class. They are more diversified now and willing to take larger bets as well. Their rationale for investing is outsized returns uncorrelated with the public market, the opportunity to provide strategic inputs to the startups, stay updated with the latest trends in technologies, and explore business adjacencies.

But is it worth all the hype?

India ranks 3rd with 71 unicorns, trailing the US (396) and China (277). In less than a year, 2021 broke all records and added 34 new unicorns. This is almost equal to all unicorns added in the entire decade in India. It’s not just paper returns, but real cash exits have started to happen.

We are ushering in a new era of ‘Tech empowered India.’ We are only getting larger and more vital from here. VC as an alternative asset class is poised favorably, and most early-stage micro-VC funds should outperform public market indices, similar to what has happened in the US. Now is the time to invest in India.


(Adith Podhar is Founder, Gemba Capital. Views are his own)