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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Domestic VC funds tap non-metro HNI investors

Funds are tapping old economy HNIs who usually invest in equities, gold, fixed deposits, real estate

Mohit Gulati, founder of early stage venture capital fund Altius Ventures, is a busy man these days.

He is currently raising capital for his 100-150 crore fund. His work is taking him across the length and breadth of the country, beyond the obvious hunting grounds of Mumbai, Delhi and Bengaluru.

“There is a lot of untapped high net-worth (HNI) population in non-metro and tier II cities. Given the extensive media coverage about start-ups in the last couple of years, there is a lot of awareness and interest from these HNIs to invest in this asset class," said Gulati.

There is a feeling among these wealthy individuals of being left out of the start-up boom that the country is witnessing and that is also driving this interest to some extent, he added.

Gulati is not alone. Domestic venture capital funds are realizing that there is a large untapped pool of investors outside metro cities keen to allocate wealth to this asset class.

Funds are tapping high net-worth individuals from cities such as Jaipur, Ludhiana, Kanpur, Ahmedabad, Nagpur, Indore, Lucknow, Kolhapur, Ahmednagar, Bhubaneswar and Patna to raise money for their funds.

The HNIs that these fund managers are tapping belong to old economy sectors such as manufacturing, textiles, exports, jewellery, tea plantations, leather business and mining.

“We have seen good amount of interest from HNIs from non-metro cities. There is a keen interest amongst HNIs to allocate part of the wealth toward this asset class from an overall asset allocation point of view," said Prashasta Seth, chief executive officer at IIFL Asset Management Co.

In August, IIFL Wealth Management Ltd announced that it will raise 1,000 crore to invest in start-ups and VC funds, as the wealth manager sought to tap rising demand for investing in startups from its network of HNI clients.

“We have a presence across metros and non-metros. We have offices in cities such as Kanpur, Ludhiana and Chandigarh and that allows us to tap HNIs in ways that a lot of other people are not able to," Seth said.

According to Anil Joshi, co-founder of Unicorn India Ventures, an early stage VC fund, while there has been a lot of curiosity among this class of HNIs, lack of access to the ecosystem has been the biggest hurdle for them.

“For these HNIs to make direct angel investments and to identify high potential start-ups is extremely difficult. They can access the ecosystem by getting aligned to angel clubs, but given the already large number of members that most known city-based clubs have, it is a challenge for these platforms. Also, in many cases, a particular city based angel group would not want to add members from other cities," he said.

A large chunk of Unicorn India Ventures’ 100 crore fund is coming from HNIs outside Mumbai, Delhi and Bengaluru, said Joshi, adding there is also interest from tier III cities, but reach is a big problem.

According to Kotak Wealth Mnagaement’s Top of the Pyramid 2015 report released in August, the number of ultra-high net worth households in India rose 17% to 137,100 in 2014-15, compared with 117,000 the previous year. Kotak Wealth defined ultra HNIs as those households that have net worth of at least 25 crore.

Of these 137,100 households, 44% belonged to non-metro cities, the report said.

The report also pointed out that in the overall asset allocation for these HNI households, allocation to alternative investments has more than doubled to 10% in fiscal 2015 from 4% in fiscal 2013.

While these HNIs in cities beyond the big metros might have the money and the risk appetite, fund managers are also having to do a significant amount of education and evangelism around the asset class.

Most of these old economy HNIs are used to investing in asset classes such as equities, gold, fixed deposits, real estate and commodities and some even have large unsecured lending books.

“AIFs (alternative investment funds) are just a five-year-old concept; so at times, there is a need for a lot of education and evangelism," said Gulati of Altius.

However, it is not that all domestic VC funds are trying to tap these HNIs from non-metro cities.

According to Sateesh Andra, founder and managing director of Endiya Partners, the fund is looking at having only 8-10 institutional investors and large family offices as investors in its almost 200 crore fund.

“We feel that venture capital asset class is a risky asset class. It requires investors to have certain experience and exposure to this asset class. Also, managing investor expectations is not an easy task; so if you have a smaller number of investors, it becomes relatively easier," said Andra.

Additionally, the fund wanted to have investors of a strategic nature, said Andra. “We have a strong focus on product startups and startups going global, so we wanted to have institutional investors and family offices who would be able to appreciate the strategy that we are pursuing," he said.

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