In India, the term “family office” gained recognition in the last 15 to 16 years, but it’s only recently that this class of investors emerged as a sounding board, making its mark in the Indian startup ecosystem. This unconventional yet robust group of investors, armed with strengths like business acumen, extensive networks, and patient capital, now stands at more than 300, as per Inc42 data. They have already made more than 200 startup investments between 2014 and 2023.

One of the notable figures in this realm is N. R. Narayan Murthy, the founder of Infosys. In 2010, Murthy laid the foundation for his family office, Catamaran Ventures. Since then, Catamaran Ventures has diversified its investments across venture capital, private equity, public markets, and joint ventures with global multinationals.

Within their venture capital portfolio, they have backed more than 19 startups across high-growth sectors, including manufacturing, deeptech, electric mobility, ecommerce, AI, financial services, consumer goods, and healthcare. Some noteworthy names in their portfolio include Acko, Paper Boat, Log9, Dailyhunt, Josh, Udaan, Loco, NSE, and SpaceX.

Sharing the core vision of the firm with Inc42, Deepak Padaki, president, Catamaran Ventures, said that the family office invests in innovative ideas from passionate entrepreneurs and collaborates with them throughout their journey to establish successful enterprises.

Padaki, who joined Catamaran in August 2022, has given 30 years to Infosys, managing various roles, including setting up an M&A function and working with Infosys’ Innovation Fund to invest in startups outside India.

He is of the view that Indian entrepreneurs today need to provide original solutions, deferring from just copying business models from their Western counterparts, in a bid to stay abreast of the global competition.

“During the initial wave of entrepreneurship, many ideas were essentially copies of successful models from other markets. While this approach may work well in India or Southeast Asia, it may stagger on a global scale. In such cases, there’s often little differentiation from the original product, and that’s a significant red flag. We inquire about the true uniqueness of the offering,” the industry veteran said.

So, how does Padaki identify such startups? What is Catamaran Ventures’ investment philosophy, key focus areas and targets, and how has it evolved in the last 14 years of its existence? Let’s find out in this latest edition of Moneyball.

Edited Excerpts…

Inc42: Family offices typically lean towards philanthropy and prefer safer investment choices. How does Catamaran strike a balance between preserving and generating wealth?

Deepak Padaki: In Silicon Valley, family offices often concentrate on philanthropy or high-risk ventures. In India, family offices traditionally invested in angel investments or within their family businesses where they felt comfortable. However, this is now changing and a lot of Indian family offices have started looking at Series A and beyond for investments.

At Catamaran, we believe that for companies to thrive in a globally competitive landscape, they must have a strong potential for scaling. They should also set their sights on benchmarking themselves against the best global companies, including those that are publicly listed.

Therefore, our investment philosophy revolves around identifying ideas that can not only compete on a global scale but also contribute to job creation and wealth generation within India. Additionally, we are focussed on operating like an investment firm, driven by the instinct to generate returns and capital.

I consider myself fortunate that we don’t need to seek external funding, as we are essentially a multi-family office. In a way, we create capital for our clients, who can then decide how to utilise it for impact or philanthropic purposes.

Inc42: Catamaran Ventures has been an integral part of the ecosystem for over a decade now. What shifts have you observed in your investment thesis during this period?

Deepak Padaki: This is our 14th year of existence, and we can categorise our journey into three phases. In the early years, Catamaran primarily focussed on the private sector, with a relatively concentrated presence in the public sector. Most of our investments were directed toward early stage companies. If you look at our portfolio, companies like Hector Beverages (now Paper Boat) and Deeksha Learning were mere ideas when we invested in them, and we have been nurturing them ever since.

Then, there was a phase when high-quality global companies started entering the Indian market. In 2014, we formed a joint venture with Amazon for Prione, which ended in 2022. In 2016, we formed another joint venture with Aon in the insurance broking space.

By 2018, we recognised that the early stage startup ecosystem was becoming increasingly competitive. With our large balance sheet and experience in scaling businesses, we then steered our focus slightly towards late stage investments, Series B and beyond in particular.

Inc42: What are some of the key sectors Catamaran Ventures is bullish on?

Deepak Padaki: We have been primarily focussed on technology-enabled businesses and financial services. We have stakes in the National Stock Exchange (NSE) and Marcellus Investment Managers. Additionally, our experience during our JV with Amazon has allowed us to develop substantial expertise in ecommerce, leading us to make investments in companies like Indian unicorn Udaan, a B2B trade platform.

As of today, we have expanded our investment thesis to encompass the manufacturing sector in India. Over the past few months, we’ve engaged with various companies and regulators to gain a deeper understanding of the unfolding developments in this space.

We firmly believe that manufacturing holds significant promise for both the country and our investments in India. We’ve made two pivotal investments in this domain – Log9 and Cyient DLM. Another area of focus for us is AI.

Inc42: What is your key area of interest within the manufacturing and AI segments?

Deepak Padaki: In the coming year, you can expect our heightened interest in the manufacturing sector, particularly in electronic manufacturing and medical supply chains. We recognise the need for global expertise in these areas, as India has a substantial market for high-quality export-oriented products.

While AI is a buzzword in the industry, we are currently observing a growing trend in companies specialising in AI tools for data and algorithm management. However, we haven’t yet encountered many companies that demonstrate a clear business-to-business (B2B) or business-to-consumer (B2C) model in AI.

We are seeking unique situations and not merely service companies with an AI label. We aim to develop truly distinctive and innovative algorithms in this sector, which is why we are optimistic about its prospects.

Inc42: What is your perspective on investing in VC funds?

Deepak Padaki: Our approach towards VC funds shifted about three years ago when we began taking positions as limited partners (LPs) in early stage funds.

When we invest directly, we focus on sectors that we understand well. However, in the early stage, being sector-agnostic is necessary to maintain a diverse portfolio that can generate returns. That’s why we invest in early stage funds and almost 40% of the reserved funds for startup investments are parked as an LP in multiple funds.

However, over the last couple of years, a surge of capital has flowed into funds, leading to inflated valuations. On paper, the returns may seem appealing, but in reality, especially in terms of cash returns, the results have not been lucrative. Even some of the top-performing funds in India have struggled to deliver returns.

Inc42: So, what are the key metrics you look at while investing in a VC fund as an LP?

Deepak Padaki: Our focus when investing in funds revolves around understanding the fund managers’ exit strategies and data, such as entry valuations and their discipline in managing them.

We see if the fund has a dedicated team for exits, a pool for potential acquisitions, and collaboration with investment bankers. Additionally, we consider the composition of LPs.

We believe that while the historical performance of the fund is important, fund managers’ approach to selecting companies plays a pivotal role in the success of a fund. In recent months, our emphasis has shifted towards understanding how fund managers plan exits and generate cash from their portfolios.

So, it’s easy to say that the fund manager will try to sell out the long tail and keep the winners, but in our experience, you have to start taking money off the table even from winners. That’s an unemotional way of looking at the portfolio.

Inc42: What are the key things you watch out for when investing in startups?

Deepak Padaki: Firstly, we look at the ability of the founders to accurately gauge the addressable market. Often, the impact of disruptive technologies, geopolitical issues, and competition is underestimated. Consequently, valuations may become inflated because there’s an assumption of a massive $100 Bn opportunity. However, when you dig deeper into what the product truly offers, the market reality can be vastly different. During our diligence process, we thoroughly investigate the market landscape, weighing what others in the industry are doing versus the claims of founders.

Secondly, and this is an evolving trend in India, during the initial wave of entrepreneurship, many ideas were essentially copies of successful models from other markets. We had our own versions of Uber, CRM systems, etc. While this approach may work well in India or Southeast Asia, it may stagger on a global scale. In such cases, there’s often little differentiation from the original product, and that’s a significant red flag. We inquire about the true uniqueness of the offering.

The third red flag revolves around whether it’s simply a business model innovation or if there’s substantial intellectual property (IP) involved. We have a preference for IP-based businesses that are doing something distinctively different.

Finally, governance is a topic of paramount importance, as it encompasses factors like risk management, early implementation of risk assessment measures, and adherence to principled company operations. For example, we scrutinise how companies handle their audits, how quickly they produce financial results and whether they have established controls to ensure ethical conduct, particularly when scaling rapidly. These controls are vital because setting them up after a company has grown significantly can be challenging.

Inc42: Which is the most significant challenge that you face while deciding when to invest?

Deepak Padaki: One of the challenges that we have faced in the past is that we had to let go of many deals, even though we were genuinely interested in the companies. This happened because there were often lofty expectations regarding valuation growth. We anticipate that this issue will be less prevalent in the near future. We are open to paying a fair price and aren’t necessarily seeking discounts. We have also frequently encountered competition from larger players, who offer higher prices when we identify promising companies.

Our approach will continue to be disciplined in terms of valuation. We have a clear understanding of what we seek in a company and what we can bring to the table. Ideally, there will be some alignment from the other side as well.

As the role of family offices or domestic capital is likely to become more pronounced, we hope that entrepreneurs will recognise the value of strategic insights and growth support over-inflated valuations. This is because investors like us offer more than just financial backing.

Many companies in which we invest appreciate the fact that we’ve all been entrepreneurs or operators ourselves, so we understand the intricacies of running a company. We can assist them with recruitment and guide them through processes, including the path to an IPO at a later stage. This operational perspective sets us apart from purely finance-focussed investors.

To sum it up, the valuation frenzy of 2021 has subsided now, and the investors who entered during that time are today finding it hard to secure exits due to frequent market corrections.

Inc42: What are your plans for FY24? Are there any specific investment targets on the cards? 

Deepak Padaki: Of course, we have plans because we need to keep our capital in circulation. However, we’re not solely driven by targets, especially on the private investment side. The reason is that we understand capital infusion is a long-term commitment, often up to seven years before you see any returns. We prioritise investing in the right companies rather than rushing to meet specific deployment targets.

While we do have targets, which serve as key performance indicators (KPIs) for us, we are strongly focussed on the quality of the companies we invest in. This sets us apart from firms that face pressure to deploy capital quickly, as they raise funds without clear exit strategies from their previous investments and may end up managing double the size of assets under management (AUM), which can be challenging.

As a multi-asset class investment firm, we can reallocate funds to different asset classes to generate returns when the timing is right. Earlier this year, we allocated funds to the public markets, which performed well. When the right opportunity arises, we can transition these funds from public to private markets, as we’ve done in the past with successful institutions like the NSE.

[Edited by Shishir Parasher]