Reinvention Of The Scion

In a society obsessed with surnames, Indian entrepreneurship stands at the crossroads of the traditional and the modern. The long tradition of business families is under stress from the start-up ecosystem.

Rising concurrently with the nationalist leadership of the freedom movement, the legacy business houses in India have risen to the challenge of each generational change, matching the political and economic climate of the country with adaptation and agility peculiar to those eras. Not losing sight of new opportunities in a changing India, legacy business families managed to increase their wealth after each generational interval.

Till the rules of the games were rewritten with technology and foreign capital.

Long before the unicorn explosion happened in India in 2021, a new tech-driven business climate had firmed up in the country for even traditional business houses to conclude that digital was the future. Their scions, educated in top management schools in the West and lured by the dominance of tech-driven products and services in those societies, wanted to chart a course which would be radically different from what their parents or earlier generations had imagined.

Thus began a rivalry of sorts between scions of business houses and first-generation start-up founders, both playing to the strengths of legacy, ability to win trust of venture capitalists, knowledge of target audience and product development and covering up weaknesses in the same areas with other factors.

But, India, and the world, changed to an extent that the old ways of doing business have been disturbed by a combination of technology, formalisation of the economy, consolidation in the middle class and a globalised, wired business environment. Even in non-technology sectors, like tourism, automobiles, sports or even governance, the organisational culture has changed beyond recognition and given way to a “start-up culture”.

Legacy business has never been under stress like this before. Is this the reason why its scions are moving to explore the immense potential of start-ups? Or, is it that the glamour of wealth has changed its stripes in favour of a start-up outlook?

The Outliers of India

In 2008, US-based wealth management firm GenSpring Family Offices, which had over $15 billion worth of assets under management from rich families, developed a game Shirtsleeves to Shirtsleeves, which allowed the wealthy to teach their children the value of family fortune and how to safeguard it. The game had a reference to the proverb “Shirtsleeves to shirtsleeves in three generations”, which means that the first generation earns wealth, the second consolidates it and the third splurges it on wasteful expenditure.

Wealth historians have spotted the trend globally that business families tend to lose steam by the time they hit the third generation. India is a different territory though. A study on family businesses conducted by KPMG and the Indian School of Business (ISB) as part of the STEP Project found that Indian business families buck the shirtsleeves-to-shirtsleeves trend and have more tenacity going into the third and fourth generations. It found that the management of Indian businesses with the third and fourth generations stood at 25% and 8% respectively out of the 53 firms surveyed, while the corresponding global averages were 14% and 4%.

Nupur Pavan Bang, associate director of the ISB’s Thomas Schmidheiny Centre for Family Enterprise, which conducted the survey in India, says that the Indian firms show a higher emotional attachment of Indian family business leaders to their family firms in comparison to their global counterparts. “A greater proportion of Indian businesses is being managed by the third and fourth generations when compared to the global averages. This is an indication of the longevity of family firms in India. However, the Indian firms lag behind the other global family businesses on the key aspect of involving women at the leadership level,” she says.

A possible reason for the continued appeal and success of family businesses in India could be that multiple generations work together in India due to cultural reasons, while globally the trend is that when the young take charge, the older generation exits.

Reluctance to Change

In 2021, India received $45 billion in foreign direct investment, according to a report by the United Nations Conference on Trade and Development. The Ministry of Commerce and Industry puts the FDI figure between April and November 2021 at around $39 billion. A significant number as it may be, they pale in comparison of the valuation and investments Indian start-ups have been managing of late. The National Investment Promotion and Facilitation Agency claims that India saw the birth of 44 unicorns in 2021 at a joint valuation of $93 billion and added another 19 in 2022 at $24.7 billion.

There are multiple reasons why legacy businesses in India do not want to or cannot adapt to the momentum shifting towards start-ups. A Bain & Company report finds that 75% of all venture capitalist investment in start-ups in 2021 was made in consumer technology, fintech and software-as-a-service (SaaS) sectors. The last two of these sectors are completely software driven, in which legacy businesses in India have not shown much interest, while the consumer technology sector is anyway dominated by existing foreign players or the companies involved in importing gadgets from China and other Asian markets.

Amit Gupta, an associate professor at the Indian Institute of Management, Amritsar, feels that the heavy investment business families have made in their current businesses makes them reluctant to look at newer avenues. “It takes many years to start and establish a business. The orientation, experience, competencies, technologies, employee skills and relationships with partners and customers of business houses are all in their current business. The changes that they are making in terms of incorporating technologies and digitisation are all geared towards improving and modernising their current business,” he says.

Legacy businesses in India are close-knit family units, where shareholding is rarely diluted to outsiders. The KPMG-ISB report found that the core family holds 92% of shares in its enterprises in India against the global average of 89%. This is where the schism between the two cultures of legacy businesses and start-ups is the widest. The family holdings in India are divided, on an average, among 9.08 members or 10.13% per shareholder, according to the survey.

On the other hand, founders of start-ups tend to have between 5% and 10% stake left with them by the time they turn unicorns. Francois Botha, founder and CEO of Simple, a global family office intelligence platform, says, “All start-up founders eventually leave their companies. It is just a matter of when and how. Any start-up founders that have achieved success along with some kind of liquidity event might either want to repeat this and invest in their next start-up or consider becoming investors to help other founders with capital and experience.”

The Scion in Start-Ups

The family history of scions and their global education give them an understanding into how the family maintains its wealth and control over enterprises on the one hand and what compromises are made while starting up on the other. The ones who choose to start up want a pure start-up trajectory which passes through rounds of interaction and funding through VCs rather than banking on family fortunes.

Some years ago, one of the most successful scions entering the start-up space was Airtel CEO Sunil Bharti Mittal’s son Kavin Bharti Mittal. Though he started up with more than ample support from the family in the form of funding from Bharti SoftBank, he kept innovating and raising money the way start-ups do with Hike Messenger and other products. By the time Hike became a unicorn in 2016 in a Series D round of $175 million, Hike had Tiger Global, Foxconn Technology and Tencent Holdings on board apart from Bharti SoftBank. In subsequent years, WhatsApp decimated Hike and, understandably, junior Mittal was unable to raise more money.

By the time India was in the midst of a funding party for start-ups in 2021, Mittal had reimagined the company as a gaming platform and retired the messenger. He won an undisclosed amount from the likes of Tinder’s co-founders Justin Mateen and Sean Rad, SoftBank Vision Fund’s Rajeev Misra, Cred’s Kunal Shah and Snapdeal’s Kunal Bahl and Rohit Bansal among others. Its new flagship product was the Rush Gaming Universe. In May, Hike raised more funds for the gaming platform, this time from Jump Crypto, Tribe Capital and Republic Crypto, making it amply clear in which direction the once chat messenger is going.

Unlike Mittal, there are wealthy scions who go to angel investors directly, bypassing the family route. When Ameve Sharma from the family of the famous Ayurveda brand Baidyanath wanted to launch a related brand in the wellness segment, he preferred support from T.V. Mohandas Pai, Sahil Gilani of Gits Food and former Reliance Capital top gun Madhusudan Kela. In subsequent rounds, many individual investors, like actor Malaika Arora, and VCs like Rishabh Mariwala’s Sharrp Ventures, Fireside Ventures and Trifecta Capital came on board.

The Scion in the Office

Under pressure from the unicorn founders’ success and the slow destruction of earlier-era business models, the contemporary scion of an Indian business house is exploring in other directions as well. Armed with family wealth and ambition, their next important stop is family offices. An established Western concept, the Indian scions’ interest in it is recent, which has understandably grown parallel to the growth of the start-up sector. Bang says, “Most business houses have understood that they cannot do everything on their own and are happy to be an investor and mentor to other entrepreneurs and help them scale up. The business houses have set up family offices that are being managed by next-generation members of the family in many cases.”

The primary drivers for establishing family offices are a realisation that reinvesting profits into existing business activities does not necessary lead to a growth in wealth and creating successful start-ups is tough. In December 2021, an EY report counted “over 200 formalized family offices that invest, grow and transfer Ultra High Net worth Individual (UHNI) wealth” in India. Another report jointly written by 256 Network and Praxis Global Alliance projects around 10,000 UHNIs with a collective wealth of around $700 million in India by 2024. It says that UHNIs will invest up to $30 billion in tech start-ups by 2025, largely through family offices.

Family offices turn to VCs for exploring investment options in Indian start-ups, though some of them, especially the ones that want to make significant investments, invest directly too. This is where the combination of age, surname, global education, exposure and network strength takes the contemporary scion ahead of previous generations. “Many scions have been educated internationally. They have exposure to international markets and new technologies and business models. They have formed connections with businesses across the world that enables them to tap into new areas of business,” says Gupta.

EY claims that 40% family offices it surveyed had doubled its allocation in family offices in the last five years. This enthusiasm is mainly meant for tech-driven sectors, particularly fintech and enterprise tech, according to the survey. Both these factors gel with the preferences of the scion in the tech-driven world. “The next gen [of business houses], that is the millennials and Gen Zers, have grown up with technology, studied in the best educational institutions, are exposed to the global business scene either directly or indirectly and have a natural inclination towards everything digital. They are contributing to the start-up ecosystem in a big way,” says Bang.

The first-generation founders of start-ups are the toast of entrepreneurship today, and rightly so, but they are often pitted against the youngest of legacy business houses, who fight the shirtsleeves-to-shirtsleeves disadvantage, even if delayed by one generation. Bang says that is still early days in the lifecycle of the entrepreneurial environment in India, and family offices have not missed the bus. “They are rather driving the bus, though cautiously. But, it will not take them much time to speed up,” she adds.

The reinvention of the scion is taking place at a rapid pace. They have the dual abilities of beginning a new enterprise all on their own and being investors in others’ start-ups going for them, while start-up founders have the backing of the mighty ecosystem of global VCs. Where and how this duel ends will shape the business history of modern times in India.

With input from Sneha Kanchan