The family office problem

Part 9 of 21 in A Guide for the First-Time Indian Angel Investor← Part 8Part 10 →

This chapter discusses the challenges faced by Indian family offices when investing in startups, particularly by the second generation. It offers guidance on creating effective investment policies and governance structures.

A family that has built one real business is not automatically equipped to own twenty fragile ones. The second generation is where this goes wrong.

Indian family capital is the great unused pool, and also the great misused one. A promoter who has lived through a GST raid, a strike, and a bad monsoon has judgement that a pitch evening cannot teach. That judgement is an edge in distribution businesses, clinics, manufacturing, and anything that touches the India he actually knows. It is not an edge in a deep-tech story he cannot interrogate, and it is not inherited by a son or daughter who has been told that angel investing is how modern families stay modern.

The second generation

The pattern is familiar. The first generation made the money in a business with customers, inventory, and a bank limit. The second generation, educated abroad or in a metro business school, wants a cleaner asset. Startups feel cleaner. They are not. They are less liquid than the factory, less governed than the listed mutual fund, and more flattering at a reunion. A family office that gives a thirty-year-old a two-crore “venture allocation” and no written policy has not professionalised. It has funded a personality.

If the next generation is to learn, the tuition should look like tuition. Small cheques. A pass log reviewed by someone who has fired people. A ban on leading rounds. A comparison, after three years, against the family’s ordinary equity portfolio, in cash, not in marks. Learning that costs a defined sum is a gift. Learning that quietly becomes the family’s risk capital is a succession problem.

Strategic cheques versus return cheques

Some family offices invest because the startup sells to their operating company, or because it might. Name that. A strategic cheque can be excellent and still be a bad financial investment: you overpay because you want the relationship, and you cannot exit because exiting annoys a vendor. Keep strategic money in a different envelope from return-seeking money. Maher’s alternative investor is the honest version of this. The dishonest version calls a vendor relationship a venture portfolio.

Governance inside the family

One person should be allowed to say no without a family argument. If every cousin can introduce a deal, you do not have a portfolio. You have a set of obligations. Write a one-page family rule: who can bind the office, the maximum cheque, the sectors that are in bounds because someone in the family has worked in them, and the rule that a markup is not reported as income. Families that cannot agree this page should buy a fund and stop taking meetings.

A family office is not an angel syndicate with a surname. If the surname is the process, the process is a dinner.