galatime.com - Kaushik Gala

Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.

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Pune

Technology Venture Investors in Pune

 

Technology Entrepreneurship in India - Teams

Entrepreneurial traits

Picking cofounders

 

Technology Entrepreneurship in India - Generating Revenue

Is your business model well-defined?

Your industry's value chain

What is your value proposition?

Which distribution channels will you use?

Who will drive business development?

 

Technology Entrepreneurship in India - Raising Capital

Venture capital & venture capitalists (VCs)

Corporate venture capital

Angels & angel networks in India

Government support for Indian startups

Proof-of-concept funding

Do you need a business plan?

How much money should you raise?

Startup valuation

Pitching to investors

Figure out the term sheet

Negotiating with investors

Due diligence - A necessary evil

Time to sign the investment agreements

 

Equities, ETFs, F&O

› Oct 2011: Equity Risk Premium for India

› Jun 2011: Investing in Indian equities

 

Technology Enterprises in India

› Nov 2010: Technology investment in India - WATER

› Aug 2010: Technology enterprises in India - 3 avatars

 

Risk Capital for MSMEs

› Mar 2010: Risk mitigation for investors in MSMEs

› Mar 2010: Why don't (Indian) MSMEs get risk capital?

› Feb 2010: Angel investing - Will it work for Indian MSMEs?

› Feb 2010: What's so special about innovative MSMEs?

› Feb 2010: Where do Indian/NRI (V)HNIs invest?

› Feb 2010: Funding options for innovative MSMEs in India

› Jan 2010: Innovative MSMEs in India

Where do Indian/NRI (V)HNIs invest?

(Last revised 9-Feb-2010, Send comments to galatime@gmail.com)

While considering various sources of funding for innovative MSMEs, let us look at (very) high net-worth (HNI).

Who is a (V)HNI? A high net-worth individual is defined as one with net assets of at least $1 million (~ Rs 5 crore), excluding his primary residence. Ambani is a mega-ultra-giga HNI.

How many are there? Estimates vary, but average over 100,000 (1 lakh) HNIs in India. That does not include non-resident Indians (NRIs). There are ~ 30 million Indian diaspora, many of whom remit money to India for investment.

Investible capital? At the minimum, this translates to 1 lakh HNIs * $1M each in investible capital = $100B. That's big. And there are projections of a $1T market soon. No wonder, a horde of domestic & foreign wealth managers have been salivating over making '2 & 20' on this pile of dough.

Not so fast! Don't forget that a very large % of this wealth is locked up in real estate, as well as in fixed deposits, gold & equity investments. Let's figure out how much of HNI wealth is allocated to risk capital.

Remember that there are few 'true' hedge funds in India. We do have portfolio management services, but there are just mutual funds in drag. They can't leverage, are usually tied to brokerage houses (read: love to churn) and focus on public markets. Similarly, Indian HNIs do not usually have access to venture capital funds. Most VCs bring in money from abroad, or raise it from domestic institutions. The local angel networks does consist of HNIs, but they are < 200 all put together.

The bottom line is that for most HNIs in India, risk capital = investments in stocks, futures & options.

Real Estate: This is an asset class that gives wet dreams to all investors & speculators in India. The mega-boom in land & building prices since 2002 has created a lot of (paper) wealth, and made real-estate everyone's favorite investment. The 2008-2009 global bear market did cause double-digit corrections across India. But 2001-2003 investors are sitting pretty on 300%+ returns, and wanna-be HNIs are praying for another boom.

Stocks, mutual funds, ULIPS, etc. The 2003-2008 bull run did pull in a large number of HNIs, but even at the peak, less than 8% of India's household wealth was invested in stock markets. Averages can be misleading - it is possible that among HNIs, the amount allocated to stocks was more. But the scandalous busts in Indian markets during 1990s, and awareness of price manipulation keep most people away from the markets. The latest generation of 'investors' (aka day-traders / suckers) learnt their lesson in 2008. Futures, options, exchange rate derivatives, interest rate derivatives, etc. remain far out of most HNIs radar.

Gold, FDs, Insurance, etc. These are traditionally 'safe' asset classes for Indians. But as interest rates trend lower, and gold's appeal recedes, and insurance companies push ULIPs, younger HNIs are investing much less in these assets than their parents.

Where is the $$ coming from? No discussion of Indian HNIs can be complete without a look at the source of wealth. These are your options:

  • Black money, earned from undeclared business income
  • Black money, earned from political affairs
  • Black money, earned from land deals
  • Black money, earned from assorted crimes (eg. smuggling, theft, etc.)

Joke? Yes, but only partly. Estimates of the parallel (black) economy in India range between 30% and 50%. Add to that the $1T+ of Indian wealth held in overseas bank accounts.

There is a relatively new, interesting source of risk capital - the growing number of high-earning 'yuppies' in India. Look at the range of cars, fancy apartments, upscale restaurants, expensive vacations and glitzy malls being lapped up by these professionals! I'll expand this to include 2nd generation entrepreneurs from family businesses, Indian-origin expats, R2Is (returned to India) and NRIs wanting to 'give back' (= invest) as well.

Quantifying their investible net worth is not easy. My guesstimate: in the range of Rs 25 lakh - Rs 1 crore, excluding real estate investments. I would venture that a large % of them are from the IT/KPO/BFSI world. And some of them have already started funding - or launching - new ventures, with personal risk capital.

The $1M question then is - Can Indian HNIs (and expats/NRIs) be tapped for providing risk capital to innovative MSMEs (not just 'tech startups')?